Should we buy a starter home now or rent until we're ready for a forever home?

[alexgodden]

Current situation

We are a married couple with one SAHP who had our first baby 6 months ago and plan to have another within 2 years. I work at a tech company in Silicon Valley and we currently rent a 1100sqft split-level, 2-bed, 2-bath apartment in San Francisco. We've been here 5 years and it is rent controlled so we pay an amazingly reasonable (for the area) $2500 per month. Currently I have a 45-90 minute commute on a comfy, wi-fi-enabled shuttle bus. This would go up to 1-2 hours if we moved to Berkeley, but it is possible I could work from home or from the SF office 1-2 days per week.
We have around $900k in assets (no debt) and earn around $300K per year, and have saved $220K annually for the past few years. I expect to be able to retire in 3-5 years depending on promotions, bonuses and how kid-related expenses play out. We want to live in Berkeley/Albany/El Cerrito in the East Bay long-term: it has great schools, we love the area and weather, my husband used to work at the University and may want to go back one day, we fit in well there socially, politically etc.

Decision to make:

Now we have the baby (and want another) we would really like a house with a yard, and be able to get some pets and just generally have our 'own home'. Our landlady is a bit difficult, gets very overprotective about having her guys do any maintenance, and won't let us get any pets or do any decorating - e.g. it was a fight to let us put up our own curtains in the baby's room instead of the existing cheap blinds that let light in. Also, it's a 3rd floor split-level apartment with open-riser stairs, weird wide doorways, old sash windows and it's looking like it will be pretty hard to baby-proof the place.

Can you guys help me think through the options:
1. Stay where we are for 3-5 years until I retire, and deal with no yard, no pets, and possibly 2 toddlers in our current apartment
2. Rent a small house (2 bed, 1 bath - around $3K) in Berkeley until I retire, then look for a "forever" home
3. Buy a small (2 bed, 1 bath) house in Berkeley, maybe upgrade when I retire or when kids are older

Pros of buying: 

• Get a low mortgage rate while I have a high salary, pay that down while getting a better return on investments
  
• Rentals are expensive as it is a college town: $3.5-4K per month for a house we could buy for $700K. That is 6-7% compared to a 3% mortgage, 1% property tax and 1% maintenance
• If housing continues to rise we are somewhat hedged against it: renting we risk runaway house prices being out of our reach when I come to retire
• We have more flexibility to redecorate/remodel/get pets/re-do the yard etc
• We can practice being homeowners, get a sense for maintenance costs etc before we buy our "forever" home so we can be realistic about what we want/need and can afford
• We may love living in a tiny house, or figure out how to convert an attic or remodel the space and not need to upgrade to 3-bed
• Small house is easy to rent out if we want to upgrade later but the market isn't right to sell

Cons of buying:

• If housing market drops we may end up underwater just when we can afford a bigger house
• Transaction fees of ~5% seem a lot to spend if we plan to move within 5 years
• Renting means we don't have the hassle of maintenance/yardwork etc and don't have to worry about big sudden bills
• If we hate the area or my commute goes crazy or I need to switch jobs we have more flexibility renting

I know an obvious solution might be to rent nearer my work for a few years, but we really don't want to: my husbands hates the suburbs and as a SAHP wants to be within walking distance of parks, libraries, grocery stores etc. Also we don't have a car and would have to get one (or even two!) if we moved to a suburb in Silicon Valley, the cost of a high-walkscore place in central Palo Alto or Mountain View is too high.

What am I missing? Do I need a face punch for even considering moving at all? Is renting throwing money away? Is a house a money pit? Also, to any Bay Area people who have insights on specific areas - I'd love to hear from you!

[Grizzly Dad]

First. It sounds like you're in a pretty good position. So the first thing I would say is simply - you'll be fine no matter what choice you make here! Early retirement is just around the bend. So don't stress!

There will probably be some that chime in and say "OH NO HORRORS! REAL-ESTATE IN SF IS CRAZY!! DON'T BUY! DON'T BUY!". And I'll admit that there is a possibility they could be right. But they could also be wrong. So I'll highlight a few things to think about.

1. There are signs pointing to the Bay Area being overvalued right now. This is not a guarantee, but there are indications. So it's important to realize that we could under certain circumstances face a correction in prices.

2. On the flip side, they could just keep going up. The Bay Area is most likely a good place to buy over the long term. It's rapidly becoming (really it already is) just another of a small group of select 'global cities' that command very high prices for land. Sure it's expensive but so is NY, London, Paris, etc. Demand for houses or apartments in these places is not going to dry up anytime soon. There will be dips and valleys as economic cycles happen but the overall trend for these places is up and I don't see any good indication that this will change.

3. Happiness is important. More so than money. Shocking I know. See my original point about you being okay no matter what choice you make. So there's definitely something to be said for moving into a place you enjoy, can fix up, etc.

4. If you really know you want to settle down long term buying is a pretty good option. However, I would avoid buying a house you know you'll want to exchange in a few years. Transactions costs are steep and best avoided.

All that said, here's what I think I would do in your situation.

1. Keep doing all the great things you're doing now.
2. Save up until you can buy a house you want to stay in. Look for the best deal you can get, avoid trying to second guess and time the market, but also don't rush, get scared, or be greedy. Do your homework.
3. Buy a great little house.
4. Retire in a few years.

My wife and I are also bay area residents. We bought a house a few years ago. We personally plan on leaving the Bay Area to move back to Kansas for my family. We also figured that we could retire earlier by moving. But it would only cost us a couple years to say. The destination of early retirement would be the same.

But if we were staying in the bay I would say that getting a piece of the real-estate market here is probably better than waiting. The long-term trends suggest that waiting has been somewhat of a fool's game over the past decades. Even with a temporary market correction, I don't think that fundamental path upward is going to change. Essentially, you'd be playing the rental market, living in a place you know you want to settle into, praying for a housing bubble to pop. A bubble that might not even exist.

[deborah]

I think that option 1 is a good one. Pets are probably things you don't want until the child(ren) are older than babies - similarly with playing in a yard. These sorts of things can wait three to five years. It's good to be settled somewhere once children are at school, but really, before that, they don't need much room, and you want to concentrate on them rather than yard work.

[letired]

My best friend's baby just turned 1 year, so here are a few thoughts from that perspective.

 - You baby will not be walking enough to play in a yard for about a year. There is no rush.
 - It might be easier with a SAHP, but I cannot imagine trying to integrate a new pet into the family with an infant. This can probably also wait, unless you're thinking  a goldfish or something.
 - Being able to baby-proof is pretty important, and how difficult it is really depends a lot on your furnishings. If your landlady really is that crazy, this may or may not take on more weight. I guess I'm not really understanding why she had to know about the new curtains at all?
 - My friends pretty much had no time for anything except keeping the baby alive until very recently. Taking care of a house and yard can be  a huge timesuck.

But I agree with the above, you don't really have any bad choices! And lots of time to do your research and find exactly what you want in the house/yard/neighborhood/schools department!

[Frankies Girl]

I'd stay put until you're retired and then go find your dream home.

I'm not even talking about the cost of a house vs. renting. I'm just looking at the time you have and the things you say you want and weighing them against delaying or doing it all now.

So my opinion:

Children do not need back yards. Hundreds of thousands of children grow up every day in apartments or without access to yards and turn out just fine. I imagine there are lots of greenspaces and parks within a mile or two of your property. SAHP can walk or drive with child/ren if they need to go out and run around. If you wait for your time line to FIRE of five years, and then move to a house with a yard, your first child will just be old enough to really enjoy it at that point. Before that, they'll have fun as long as the parent(s) give them attention and do fun things with them - no matter where they are. Kids are very easy to entertain and you're not going to be depriving them in any way if you wait a little.

Getting a pet while you have small toddlers is probably not good timing anyway. Babies will mess with food/water bowls, be aggressive with animal (and could hurt them or get hurt by them), and you're already dealing with small ones in diapers - do you really want to have to clean litterbox/pick up yard poop if you could wait just a little and not be dealing with them at the same time? Wait until your kid(s) are over the age of 5, and they'll enjoy having pets more, you'll enjoy them more and the kids can help with the care too. And it's kinder to the animals too since small children can unfortunately be stressful for a dog or cat to deal with as well.

Do you really want to sink money and time into house maintenance and yard work with small kids right now? I mean, sure lots of people do it no problems, but you are retiring in 5-ish years (could be less). That's a very short time-frame and you can do all that stuff together once you're out of the workforce MUCH easier. And who knows, you might end up with twins or there might be issues and you end up with an only child. Or 5 years from now, you both might be sick of the area and want to move elsewhere. Wait until you're free and able to properly assess your family's needs and you and your spouse's real feelings about where you want to be at that point.

Seems like trying to find a decent house, move with a baby/small child and possibly pregnant, and then working full time while also having to deal with house stuff and all the crap that comes with is taking on more than you have to...

And if you bought a house now, how does that help or hurt your FIRE time line? Cause I kind of think today money is worth more than 5 years from now money, and would worry it might push the FIRE date out another year or two.

[FINate]

I think (1) is your best option.

You are in a rent controlled apartment, a pretty sweet deal. There's a reason the landlady is difficult, she wants you to move out so she can jack the rent up to market rate for the next person :) I get that the layout of he apartment is not ideal for kids, but a 2/2 is very doable in your current and future situation.

I would not worry about what interest rates may do in the future. Housing prices in the Bay Area are based almost exclusively on what people can pay rather than some notion of intrinsic value. There are so few homes relative to the demand that prices get bid up to the level participants are able to pay. So if interest rates go up, this will put downward pressure on prices, and vice versa. And if you buy during a time of higher interest rates then you can potentially refinance later on if rates go back down.

As Grizzly Dad points out, the transaction costs on buying something in the short term make (3) an expensive option.

My advice: Keep doing what you're doing and stay put. While it may not be the yard/pets/layout you had in mind with kids, you can enjoy the city and all it has to offer. Add up how much you're saving by living in a rent controlled apartment and appreciate the shorter commute (though 45-90 min is still insane to me!).

[BuffaloStache]

Everyone else has already given some great rationale, so I'll be short:

I'd vote option #1 unless you find it absolutely unbearable. And as others have said, you can always proceed with option #1 and change to 2 or 3 if you find it unbearable down the road.
Keep up the good work!

[ysette9]

There are a lot of parallels between your situation and ours, to point that it is helpful for me to consider yours as it gives me distance from my own and the ability to look at it with a fresh perspective. We live on the peninsula and rent a house that is within $100 of what you pay. Quite the steal for this area. We have a toddler and have talked a lot about buying or just moving to someplace nicer with insulation and central heat. Ultimately we would like to stay somewhere in this area when we retire in 3-4 years. The exact timeframe is dependent on what housing choice we ultimately make.

So far we have considered the same question you have and each time concluded that it is worth it to stay here in this place, warts and all, because we are saving so much each month on housing. The real estate market will do what it will do. We need to buy when it is right for our personal situation, without trying to second-guess what prices will do.

8 am very interested in your take though since we do question this decision all the time.

[alexgodden]

Thank you everyone for the input, especially the advice (from various people) that toddlers/infants won't appreciate a yard or pets yet anyway.

Also - big thanks to the person who pointed out that the landlady is being difficult on purpose to get our rent-controlled asses out of here. Somehow knowing that makes it easier to stay to spite her. It also makes me feel better about maybe paying a little more for special baby gates and possibly new baby-proof-able furniture - the $1000 per month we save in rent is worth it.

You've really helped me pinpoint that I'd be risking having to work another 6 months to a year, and having to go through the hassle of moving twice, in order to fulfill a vague feeling of "wanting our own home" and in order to get away from the irritating landlady. It probably isn't worth it, and we can revisit the decision if/when I actually get pregnant with baby #2 anyway.

[ysette9]

We worried about baby-proofing our house once our baby started to get mobile. It was going to be hard because of the weird, unpermitted addition to the house we rent, including BRICK stairs inside. As it turned out, she just isn't the type of kid to get into everything, so we didn't baby proof much at all. My husband taught her how to go down the stairs safely, we put cabinet locks under the sink where the bleach is, and just taught her what not to touch. It helps that we have old furniture that isn't worth much so we don't care too much if it gets messed up. Wait and see what type of kid your baby grows up to be. You may be surprised.

[Dicey]

Bay Area homeowner chiming in. I agree that #1 is your best bet. Real Estate is always subject to ups and downs. The current wave is highly dependent on Silicon Valley. What happens when high tech figures out that Silicon Valley is not the center of the universe? Or how about the next Loma Prieta? Prices rise, prices fall. You're so close to FIRE, I'd take a wait and see approach. FWIW, I am very pro-real estate, but in your circumstances, waiting might be the smartest move.

[Another Reader]

Bay Area homeowner chiming in. I agree that #1 is your best bet. Real Estate is always subject to ups and downs. The current wave is highly dependent on Silicon Valley. What happens when high tech figures out that Silicon Valley is not the center of the universe? Or how about the next Loma Prieta? Prices rise, prices fall. You're so close to FIRE, I'd take a wait and see approach. FWIW, I am very pro-real estate, but in your circumstances, waiting might be the smartest move.

I'm with Diane on this one.  My neighbor's house in Silly Valley sold for $785k in 2011.  It would have sold for $1.1-$1.2MM in 2006 and would sell  for $1.3-$1.4MM today with some remodeling the buyers did.  Real estate is cyclical and prices will go down.  Stash enough cash to be in a good position to buy when they do.  Then buy the house you want to live in long term.