Am I nuts for thinking of buying in LA?

[Eastsider]

Hi Moustachians,

Would love to get your advice. Here's the deal: we (me, wife, 1 year old) currently rent, and we're exploring first time homebuying in LA. We're looking to buy a home primarily b/c our apartment isn't the ideal place we want our baby to grow up in. Little natural light, energy inefficient, 850 sq feet but poorly designed, no yard, etc. With Covid, wife currently works from home and may do so for another year. Caveat: we do pay well below market rent - $1450/mo.

Of course the LA market is insane, but w/ my wife's roots and my job in entertainment, we feel like we'll be here for a while and we'd love our daughter to grow up in a diverse, multicultural place. The region of LA we currently live in and where we're looking is Northeast LA: Highland Park, Eagle Rock, Glassell Park, etc. Ideally, we want a 3BR and a backyard where baby can get her hands dirty. Places we've seen, mostly online, that meet our criteria, range between $750k-$900k (I can see your heads explode in unison). Homes tend to go 10-ish percent above listing right now.

Financial picture below. Note too that based on my research, despite the insane price-rent ratio in LA, there don't seem to be many, if any, homes available to rent that match what we see on the sale listings. Those that do have rent similar to mortgage. Recent spin on NYT buy/rent calculator says it's better to buy based on "if you can find a similar home for $X" basis.

Here's where we are:

Me, 42. Wife: 38. 1 year old and possibly another but who knows?

Debt: $0

My retirement: $280k
Wife retirement: $60k
Wife CAL teacher pension: $55k
1 year old's 529: $4.5k

Liquid cash on hand: $80k (we know we'd need a buffer for emergency fund and closing costs of about $12k per a lender we spoke to). So realistically we have $60k down as of today.

Combined salary: $265k/yr. Both wife/I got new jobs within the last 4 months that pay us far more than before, so we're just now starting to aggressively save for a downpayment

Yearly expenses: We know we need to massively cut down on fancy groceries, take-out, booze (damn you Covid!) "stuff" from Amazon (everything from baby stuff to scissors, etc). Biggest non edible/material expense, other than our low rent, is our nanny ($21k/year). We anticipate preschool will be a bit cheaper, and we'll do either public or charter school once she's 5 ish.

We know we don't have enough for a big downpayment. And even with a purely moustachian life, it could take a while for us, even with aggressive savings plan, to reach 20% for a home in our area. (Note: we both love our jobs so we're not interested in pure FIRE, but we do want to be as FI as possible.) A lender said we could get approved today for a 30 year at $825k with 7% down at a 2.85% interest rate. That interest rate is the only thing making me think this could work. But Moustachians, tell me: is this nuts? Could it work? Do we prioritize recently-remodeled places with nice kitchens and HVAC systems (both very important to us), or get a better deal on a fixer-upper even though we're not the handiest people - especially me. Thanks so much in advance for any help you can provide.

[FINate]

TL;DR - You're nuts.

You don't have enough saved for a down payment.

For the sake of this discussion let's assume we're talking about a $800k house.

20% down is $160k, yet you only have $60k.

A 30 year loan, 60K down, plus taxes, PMI, etc. is going to run at least $4k/mo (probably more!)

You're currently paying $1450/mo rent, which is $2550/mo less than a mortgage on a $800k house.

So you need an additional $100k for 20% down, which means you should be able to save this amount in about 3 years (100000 / (2550*12)). If you *cannot* save this amount in 3 years...well... this just is another way of saying you'll default on the mortgage.

And don't worry about interest rates going up. Why? Think about it... what do you suppose will happen to prices if/when rates go up?

[waltworks]

If you are 100% sure you are staying in LA forever AND you are 100% sure your jobs are secure forever, go for it.

Otherwise, very stupid move. If you put effort into saving, you could be FI and leave LA to do whatever the heck you want in a few years. It looks like you've done a moderately terrible job of saving money so far (even at a fraction of your current salary, if you'd been saving/investing the last decade... you'd already be FI) so it might be worth posting a case study.

-W

[theoverlook]

At $265k/year your take home pay is probably about $162k/year. You should be able to save $100k inside of a year, paying $1,400/mo for rent and having reasonable living expenses. Add that to your $60k and you've just saved yourself about $190/mo in PMI.

Edited to add.. I think spending time outside with kids is so important. Just having a yard doesn't mean you will do so, but I think kids need outside space to play in safely and frequently.

[MissPeach]

I am in CA so I get the real estate being nuts price-wise but I wouldn't feel comfortable committing to that sort of payment. I would want it comfortable at the very least if you had to live on just one income.

[LWYRUP]

You can do it if you want, it will slow down time to retire early and you are pretty much committing that both of you will continue to work long term (e.g., doesn't seem comfortable on one income) which means you need to factor in day care costs.

Depends on how bad you want to be in LA vs. how bad you want to FIRE.  Only you can decide. 

[clarkfan1979]

You can do it if you want, it will slow down time to retire early and you are pretty much committing that both of you will continue to work long term (e.g., doesn't seem comfortable on one income) which means you need to factor in day care costs.

Depends on how bad you want to be in LA vs. how bad you want to FIRE.  Only you can decide.

+1

[Cb1234567]

At $265k/year your take home pay is probably about $162k/year. You should be able to save $100k inside of a year, paying $1,400/mo for rent and having reasonable living expenses. Add that to your $60k and you've just saved yourself about $190/mo in PMI.

IMHO, this is the crux of it: you just started making “a lot” of money, and now you are seeing stars (forgive the pun). I’ve no problem with the house price and your income especially with no debt (keep it that way!)  ... parallel to a $50K income and a 125K house... but you two are not in control of your finances...yet. Fix that, and you’re golden. 

The cost isn’t just the interest rate, it’s also can you upkeep the house and/or get out of the house if you need to (what if major maintenance issue, market downturn, realtor’s commissions to sell, etc). Real estate is too volatile for us to be comfortable with less money in it (ever been upside down in a loan? cost to sell if you need to move?)

Suggestions: Stop buying crap, and for Pete’s sake stop looking at houses. Finish getting your acts together, life-wise. What if one of you loses a job? How long can you go with the bigger payments and less income? Do not listen to the bank if they say you can afford it. The bigger the loan amount, the more they make money off of you.

Pretend you already own the house and have the bigger payment plus higher expenses on utilities etc. plus buying all the nice new things for your new house...oh, plus a bit extra for maintenance and upkeep/repairs. Add all that up, and save THAT amount each month. It will not be yours to spend on scissors on Amazon or toys or baby clothes or hoity-toity food selections. ;-)

THAT amount in “extra” will show you the lifestyle you can afford with the house. Save even more aggressively to get the 20% down payment. 20K nanny +20K living expenses +20K extra crap is only 60 K of after tax money. You should be able to save the rest, even in LA.

Take the next 6 months until end of Q1 and save like crazy people. Then house and loan shop the middle of next year ( or whenever you can make a real down payment). Interest rates will still be insanely low.

[4tify]

How much would it be to rent a similar home?

[JoeV914]

It sounds like a bad idea. Stick with the very reasonably priced apartment