Author Topic: Buying strategy for a young couple in Silicon Valley (incredibly expensive)  (Read 1768 times)

CalmSeas

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My wife and I are living in Silicon Valley and are fortunate to have a very high combined household income. I am a physician and she works in tech. Combined we should make approximately $500,000 per year pretax (this is an estimate because I just finished training and need to see how much my total compensation works out to). With her income we have paid off most of my medical school debt ($30k left at low interest), saved approximately $180,000 (mostly in stocks and index funds), and have $90,000 in a 401k.

We rent a two bedroom townhouse right now ($4250 per month)  and are interested in buying. The trouble is, to get a three bedroom place in the areas that work for us costs around $1,500,000. Presuming a 20% down payment, we need $300,000 on hand. In this area, with overbidding and the general craziness of real estate, it would be better to go into bidding with more than just that minimum amount, though. I anticipate we can save something like $200,000 per year of our income, even without investing gains, meaning we could reach $500k on hand in about a year and a half (probably enough to start serious bidding).

The real estate market has also been going up drastically here, with an expected 10% increase total this year alone. In two years, the $1.5 million places may well be $1.8 million.

I'm curious about what strategy makes the most financial sense, if we plan to buy. Should we try to get a loan with the smallest down payment possible and try to buy ASAP (if someone will even give us such a loan)? Should we save a few years, even though prices may well go up by that time? If we do save a few years, and if we really intend to buy in 2-3 years, should we invest that money in something like an index fund or should we let it sit in a bank account? I feel bad missing out on the investing earnings, but I worry that if the market turns down we will either have to forego buying or risk selling at a large loss. I also think that if, as MMM recently posted, a recession comes soon then we would be extremely well-positioned by having cash in an account that would be unaffected by a downturn.

Thanks all for any advice you have! We are finally making money, but our educational paths have been long and for the first ~29 years of our lives neither of us had even a positive net worth, so we're interested in hearing some more experienced perspectives!

sequoia

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Do you need 3 bedroom? How much is rent for 3 bedroom?

Seems that if the choice is between $4250 per month renting vs ~$1.5M buying, I would just stay renting and put that extra money somewhere else. But I would make sure that I can pull that money on short notice (lets say the market crashed and that 1.5M house become 1.1M). Unless suddenly the price drops, I would just keep on renting. But I could be totally missing something here...

former player

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A very high proportion of doctors leave their first job after residency within about a year, and the advice on sites such as Student Doctor Network and White Coat Investor is not to buy a house in your first year after qualifying just for this reason.  So I would say take that year to settle into your new job and grow your stache, then look to buy from a position of financial and employment strength.

waltworks

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$4k a month is a freaking steal compared to spending $1.5 million.

Keep renting. Maybe forever. Certainly don't buy anything anytime soon.

-W

Tuskalusa

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I've lived in the Silicon Valley all my life. I would recommend that you continue to rent and accumulate cash until the next downturn. At that point, you'll be in a good place to purchase something in your target area without the bidding war. Homes will still be expensive, but the premium and competition tends to drop a bit with the economy. We've done this twice. Both times, our property values rose fast as the economic cycle improved.

This also gives you time to finish off paying off thosecstedent loans, and you can confirm that you like your location.

Another Reader

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I've lived in the Silicon Valley all my life. I would recommend that you continue to rent and accumulate cash until the next downturn. At that point, you'll be in a good place to purchase something in your target area without the bidding war. Homes will still be expensive, but the premium and competition tends to drop a bit with the economy. We've done this twice. Both times, our property values rose fast as the economic cycle improved.

This also gives you time to finish off paying off thosecstedent loans, and you can confirm that you like your location.

Lived in the Bay Area for almost my entire life.  Been a seller's market since WWII, except for severe recessions/tech bubble bursting.  It will never be cheap, but it will be cheaper.

CalmSeas

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Good thoughts all!

Re: a three bedroom, in this area I think around $5,000 to $6,000 per month could be realistic (having just checked on Hotpads). We are planning to expand the family soon, so within the next three years I anticipate wanting to move up to a three bedroom place whether we are renting or buying.

As for moving on to other jobs, I agree that it could happen. My wife's job will keep us bound to roughly this area, though admittedly having the freedom to move within a radius of her work could help if I end up changing jobs.

As for renting forever, I admit that thought is tempting. Basically stack up cash in index funds or other relatively safe investments and keep renting. I worry, though, that if housing prices and rents keep shooting up we could find ourselves needing to move to less-expensive outskirts of this area, and I hate commuting! Any thoughts on getting priced out as a renter, whereas the payment would be "locked in" as a buyer?

Finally, if I do wait for a downturn to buy (which is appealing), any thoughts on what to do with the money in the meantime? Not investing seems painful, but if it's invested and there is a downturn then pulling the money out would be even more painful. Thanks again for any thoughts, it helps to talk through a purchase that is larger than any I thought I would ever make.

waltworks

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You're young and you've watched rents and RE prices go up your whole adult life. You *probably* weren't thinking about/noticing RE in 2005-2007 or so, the last time "prices will never go down".

That won't continue for much longer (IMO) and it'll probably reverse at some point in the near future, no matter how ridiculous that possibility seems right now.

At the rate you can save money (assuming your jobs are both recession-proof or recession-tolerant at least) you don't have to worry about sitting on a cash downpayment. Just invest. If it's too painful to sell anything when the time comes, just save up money for 6 months and you're there anyway (even if you need 20%).

-W