Author Topic: Buy, or stay in rent controlled rental?  (Read 5484 times)

smap

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Buy, or stay in rent controlled rental?
« on: September 04, 2013, 10:03:12 PM »
After years of frugal living, my husband and I are in a really good place financially and are able to finally buy a place. We've been looking and met with a mortgage broker who looked at our salary and finances and cleared us for about 1.2 mil with a 20% down. We crunched the numbers and we can Continue our same lifestyle without problem If at least one of us remains full time employed.

But... We are still comfy in our 1 bedroom, even after the birth of our daughter, and with a little bit of tweaking the layout we could be comfy here till she hits her tweens. i myself shared a room with my parents till around 11, so its not such a strange thing to me (we were poor and they rented out all the rooms to college kids). we currently can save about 2500 post tax a month after maxing out 401k, and we throw most of that into diversified index funds, which has had ups and downs, but has gotten net gains in the 7 years since we stared. Buying would mean savings in the hundreds on a good month and no savings on a bad one.

We rent, but we rent from an aunt with whom I am really close with, so I don't feel like I'm throwing money away, it's just going to a dear and close family member.

I'm really torn- on the one hand, borrowing money to buy will definitely increase the returns of our investment, but its only realized if we sell. Whereas, the money we are saving is more or less liquid when we need it, since we can sell the funds anytime, but the growth will be based on money we actually have, which is way less than what we can borrow.

Any advice out there? Should we buy or should we stay?

unpolloloco

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Re: Buy, or stay in rent controlled rental?
« Reply #1 on: September 05, 2013, 11:12:08 AM »
What's your current rent and what are your long-term goals?  How much would you spend on a property if you bought (doesn't have to be that 1.2mil number!)?  Could you find a smaller place that better meets the needs of your family without impacting your cash flow as much?  Is there a reason to act now instead of waiting longer?

freelancerNfulltimer

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Re: Buy, or stay in rent controlled rental?
« Reply #2 on: September 05, 2013, 05:57:40 PM »
After years of frugal living, my husband and I are in a really good place financially and are able to finally buy a place. We've been looking and met with a mortgage broker who looked at our salary and finances and cleared us for about 1.2 mil with a 20% down. We crunched the numbers and we can Continue our same lifestyle without problem If at least one of us remains full time employed.

But... We are still comfy in our 1 bedroom, even after the birth of our daughter, and with a little bit of tweaking the layout we could be comfy here till she hits her tweens. i myself shared a room with my parents till around 11, so its not such a strange thing to me (we were poor and they rented out all the rooms to college kids). we currently can save about 2500 post tax a month after maxing out 401k, and we throw most of that into diversified index funds, which has had ups and downs, but has gotten net gains in the 7 years since we stared. Buying would mean savings in the hundreds on a good month and no savings on a bad one.

We rent, but we rent from an aunt with whom I am really close with, so I don't feel like I'm throwing money away, it's just going to a dear and close family member.

I'm really torn- on the one hand, borrowing money to buy will definitely increase the returns of our investment, but its only realized if we sell. Whereas, the money we are saving is more or less liquid when we need it, since we can sell the funds anytime, but the growth will be based on money we actually have, which is way less than what we can borrow.

Any advice out there? Should we buy or should we stay?

You don't have to buy a  $1.2 million house, unless you're in some insane real estate area. If you have 20% to put down, you could just pay cash for a ~$200,000. Or you can rent a bigger place for a little bit more. Or you could buy an investment property and rent that out. Or buy a duplex and live in one, rent the other. With your income, savings and down payment amount you have so many options. I don't think you have to chose between being able to continue to save and buying a home.

smap

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Re: Buy, or stay in rent controlled rental?
« Reply #3 on: September 05, 2013, 08:25:16 PM »
Oh we are in a crazy real estate area. as well off as we are, most people here bring in the same kind of money we do.

We live in San Francisco, to give you some idea, these are the places we've lost so far

House 1: listed at 699k, offered 800k, sold for 1.15mil
House 2: listed 699k, offered 900k, sold for 1.2 mil
House 3: condo, listed and offered 650k, didn't get but don't remember what it sold for, prob 700+
House 4: duplex listed at 900k, thought about offering 1.25mil but didn't, sold for 1.34
House 5: listed at 900k, offered 900k, countered 1.025 mil, we didn't take, sold for 1.035 mil. I'm still regretting that one but my husband thought it was overpriced.

There's no reason to buy now, just seems like it should be the next step in our investment strategy- it's a bit of a frenzy out there right now, people with their Facebook stock and developers offering all cash for houses. I do want more room, but we also live walking distance to a dozen parks, playgrounds and museums, so it's really just sleeping rooms I'd like a little more of.

There's nothing at 200k range, unless its in a high crime area or below market rate units reserved for lower income people.

Our rent is 2250 a month (2500-250 by renting out our parking space).

smap

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Re: Buy, or stay in rent controlled rental?
« Reply #4 on: September 05, 2013, 08:29:25 PM »
Oh and all of these places are between 1300-1500sqft, 2 bed, 2 bath

olivia

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Re: Buy, or stay in rent controlled rental?
« Reply #5 on: September 05, 2013, 08:32:22 PM »
YIKES.  How much would it cost to rent a larger place instead of buy a larger place?  Would it still be less than a mortgage of the size you'd have to take out?

smap

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Re: Buy, or stay in rent controlled rental?
« Reply #6 on: September 05, 2013, 09:01:46 PM »
Average rents are $3875 according to this:

http://sfist.com/2013/07/19/another_sf_rent_map.php

We also live in soma which is the most expensive neighborhood. So our rent is a really good deal right now.

pattertall

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Re: Buy, or stay in rent controlled rental?
« Reply #7 on: September 05, 2013, 11:22:15 PM »
It seems to me that renting instead of buying may be the best choice in your area.  It doesn't make a lot of sense to me to buy when renting is so "cheap" (relatively speaking) unless it is very important to you to have the perks of owning (such as being able to remodel to your taste, never being forced to move, no limitations on pets, etc.).  But just be aware that you will be paying big time for these perks based on the numbers that you have shared.  Almost to the point that it seems you might run some risk financial insolvency if an unfortunate situation prevents you or your spouse from working, you have all your money tied up in the house, and your cash flow is no longer positive each month.

Assuming that you keep renting, it sounds like you have the choice to keep your current 1 bedroom at 2250 or to move into a 2 bedroom for the mid 3000s.  One good thing about renting is that you don't necessarily have to make your choice right away.  You could stick with the 1 bedroom, saving a bundle of money, until your daughter gets a little bit older and then revisit the decision.

Also, you seem to be viewing buying a house as an investment rather than as a place to live.  While housing prices have obviously gone up a lot in San Francisco recently (my parents live in the area), there is no guarantee that they will do so indefinitely.  It is possible that you could make half a million bucks in paper profit in just a few years, but just as possible that your house could take many years to appreciate enough to even cover the transaction costs of selling.  I'm not necessarily saying it's a terrible idea to buy in SF for all people, but I certainly wouldn't consider it for myself and I'd encourage anyone to think very careful about the full financial trade offs between renting and buying in such an area.

For a rather provocative counter-point to your optimistic view on buying, you might start with Jim Collins' article on the subject.  While you may not agree with everything he says (and clearly I don't since I'm a homeowner :)), I find it to be a great thoughtstarter.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/


 

JohnGalt

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Re: Buy, or stay in rent controlled rental?
« Reply #8 on: September 06, 2013, 10:21:49 AM »
We've been looking and met with a mortgage broker who looked at our salary and finances and cleared us for about 1.2 mil with a 20% down. We crunched the numbers and we can Continue our same lifestyle without problem If at least one of us remains full time employed.

...

we currently can save about 2500 post tax a month after maxing out 401k


...


Our rent is 2250 a month (2500-250 by renting out our parking space).


Would you be able to save anything besides 401k after taking on the mortgage?  I'm guessing payments would be around $5,000/mo.  This is your current rent + your current post tax savings.  To get this approval, you must be making somewhere around a minimum of $200,000 which means you're still spending a decent amount on your other living expenses.  Saving just the $35,000/mo maxed out 401k and principal portion of your mortgage is not going to make for a particularly great savings rate.  Of course it all depends on what your goals are - but it sounds like renting (either your current place or a larger one if that's what you need) is by far the better option. 

honobob

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Re: Buy, or stay in rent controlled rental?
« Reply #9 on: September 06, 2013, 12:21:22 PM »
You probably won't find a better investment than SF real estate.  Good properties double in value about every ten years.  It's very hard to pay rent AND save an amount that keeps up with that kind of appreciation.
« Last Edit: September 06, 2013, 03:11:15 PM by honobob »

pattertall

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Re: Buy, or stay in rent controlled rental?
« Reply #10 on: September 06, 2013, 05:50:13 PM »
You probably won't find a better investment than SF real estate.  Good properties double in value about every ten years.  It's very hard to pay rent AND save an amount that keeps up with that kind of appreciation.

I'd be curious to see more information about this.  I did a few quick searches (admittedly not a thorough investigation) and it looks like SF real estate has not been very close to doubling every ten years, at least over the past 2 decades.  The info I found (see link below) shows that home prices have gone up just under 200% (whereas they would have to be up 300% to have doubled twice in that time).  In addition, the Dow and S&P both have substantially higher returns over that time without even counting dividends.

http://www.paragon-re.com/3_Recessions_2_Bubbles_and_a_Baby/ (SF real estate)
http://goo.gl/PXVDyP (Dow jones over last 20 years)

Of course, this is all ignoring the ability that real estate provides to heavily leverage one's investment and to potentially make these gains while providing a roof over your head as well.  If real estate does continue to grow in the same way as it has in the past in SF, I agree that the OP's home could turn out to be a great "investment"  But there is certainly a level of risk involved--one that I might not be willing to take in the OP's case--and that's mostly what I wanted to point out.  If there were no risk (and doubling every ten years were truly guaranteed), every single home in SF would already be owned by an investor.  I know that I'd happily buy a 1MM dollar property as an investment if someone were willing to insure me against any loss due to the housing market not doubling in the next 10 years!

smap

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Re: Buy, or stay in rent controlled rental?
« Reply #11 on: September 06, 2013, 08:37:43 PM »
Well here's an example of a "bad" month of spending. We net about 9600 a month:
July 2013 - total spending around $8400
Transportation - $450
Rent - $2250
Utilities - $80
Household items - $309
Eating out - $500
Groceries - $240
Booze- $182
Clothes - $24
Health - $40
Toiletries/haircuts - $30
Entertainment - $25
Travel $3000
Childcare and baby related expenses - 1500
Misc - $22

A "good" month would be similar, minus the travel. We travel twice a year, and I usually aim to spend around $5000 a month and bank the rest.

smap

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Re: Buy, or stay in rent controlled rental?
« Reply #12 on: September 06, 2013, 09:01:01 PM »
Now that I think about it I guess we save more than $2500 a month. Every 2 or 3 months we each pull $5000 each into our own brokerage accounts to invest using our own strategy, so I forgot he also saves $2500 Every month.


Looks like together we save around $4-5k per month

Dicey

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Re: Buy, or stay in rent controlled rental?
« Reply #13 on: September 20, 2013, 06:11:20 PM »
Hi smap,
I'm a homeowner and live in the Bay Area. When I lived in The City (Noe Valley) I was a renter. When I decided to buy, I moved to the East Bay. I think I just got tired of looking for parking (company car-no haters, please) and wanted my own garage and driveway. So my first question would be: Are you 100% positive that you will want to stay in SF for at least ten more years?

Contrary to myth, property values in SF have gone down in the past. After the earthquake, for example, there were lots more opportunities for buyers than usual.

Second, would you be happy that you bought a home (anywhere) if it reduced your ability to travel twice a year?

Third, the current inventory is still artificially low due to pending and incomplete foreclosures. While it's never wildly high in SF, you might get something better once inventory levels are closer to "normal" for SF. In the meantime, you could continue beefing up your down payment account and create a new house fund for all the things you might require when you move into a larger property.

Finally, if you do continue to shop for a house, create an appealing cover letter. It's surprising what a difference it can make in a multiple-offer situation.

Kumiswati

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Re: Buy, or stay in rent controlled rental?
« Reply #14 on: January 30, 2014, 05:40:27 PM »
If I were you, I'd consider buying outside of SF, especially that you have a child (schools in SF are not the best).
I did that many years ago - I lived in a rent controlled apartment although I didn't really understand the benefit of it at the time, which turned out to be  great thing since otherwise it would have prevented me from buying. I bought in the East Bay (San Leandro), 2 blocks from the Bart station so I could commute to work in SF easily. I sold the SL after 3 years and pocketed a profit of $164K and bought a TIC unit in SF. OK, I probably wouldn't suggest anyone to buy into a TIC since it really is a complicated process which I am still currently dealing with (converted to condo, one partner can't refi and I am left hanging here and will probably need a lawyer to get her to sort out her credit), BUT that newly converted condo gives me an option either to live in it, or sell it and almost double my purchase price.
That was just my personal story, but bottomline is, you don't need to buy in SF. You can buy somewhere else and build your equity and you can always move back to SF if you love it here.