First Post, Buy House in CA or Wait?

[ThirstyBeard]

Hello everyone!

First post on here, but I've been lurking for about a year now.  I live in California, born and raised, so I've gotten used to the increase in prices.  I'm 27 and make about 85-95k per year at my job (depending on OT).  I'm trying to decide if it's worth it to purchase a house in the town I live in.  It's also a town with a well known university and limited student housing.  The way I see it, even if I don't settle down here for 7 years the rental opportunity is strong.  For the next year or two, some of my good friends could be convinced to live with me and help deal with the estimated 2-2.5k/month in mortgage payments for a 3-4 bedroom house.  I'm currently spending $1300/month in rent for a 1 bedroom, and thats a good deal.

My alternatives are holding $$ (not ideal), investing in stocks/bonds, potentially taking some equity stake in out of state real estate, or paying off my car loan with 1.99% interest on it. I already max out my 401k contributions for the year and half of my HSA account (wasn't as savvy during out benefits enrollment).

Any thoughts on this are helpful.

[theazdealhunters]

It totally depends upon your income and how much you afford. Waiting does makes much difference as the real estate wont change much.

[Slow2FIRE]

Out of state real estate would probably be the least desirable option.

With your friends, make sure they sign a standard lease.  I recommend making it month to month so either you or them can easily end the landlord/tenant relationship if it isn't working out.

However, $2500 mortgage costs (does this include Tax and Insurance?) on $85K income is pushing affordability after you max out 401K, Roth IRA and HSA, but doable.

[ThirstyBeard]

Out of state real estate would probably be the least desirable option.

With your friends, make sure they sign a standard lease.  I recommend making it month to month so either you or them can easily end the landlord/tenant relationship if it isn't working out.

However, $2500 mortgage costs (does this include Tax and Insurance?) on $85K income is pushing affordability after you max out 401K, Roth IRA and HSA, but doable.

That does include tax and insurance, based on estimates from zillow and other mortgage calculators.  I've got good credit (last time I checked it was a little over 720, no reason for it to have dropped), so that might make for a slightly lower payment.

Yeah, the month to month isn't a bad idea.  I've known the two of them for 4+ years now and we regularly hang out still.  I haven't maxed out my Roth yet this year and was debating on using this years $5500 towards the down payment.

 I'm just starting out my journey for financial independence, not sure if I want to go full FIRE or something a little more tempered.  I enjoy working ( I work in the brewing industry for a large brewing corp.) and wouldn't mind going back to craft beer, which pays closer to $20/hr, if I had passive income to help support it.  The house could help serve that purpose, but also secure me some land in CA for the future.  Am I thinking about this wrong?

[Slow2FIRE]

Out of state real estate would probably be the least desirable option.

With your friends, make sure they sign a standard lease.  I recommend making it month to month so either you or them can easily end the landlord/tenant relationship if it isn't working out.

However, $2500 mortgage costs (does this include Tax and Insurance?) on $85K income is pushing affordability after you max out 401K, Roth IRA and HSA, but doable.

That does include tax and insurance, based on estimates from zillow and other mortgage calculators.  I've got good credit (last time I checked it was a little over 720, no reason for it to have dropped), so that might make for a slightly lower payment.

Yeah, the month to month isn't a bad idea.  I've known the two of them for 4+ years now and we regularly hang out still.  I haven't maxed out my Roth yet this year and was debating on using this years $5500 towards the down payment.

 I'm just starting out my journey for financial independence, not sure if I want to go full FIRE or something a little more tempered.  I enjoy working ( I work in the brewing industry for a large brewing corp.) and wouldn't mind going back to craft beer, which pays closer to $20/hr, if I had passive income to help support it.  The house could help serve that purpose, but also secure me some land in CA for the future.  Am I thinking about this wrong?

I would frame it as get to "Financial Independence" quickly and in a manner where you still enjoy life.  FIRE isn't necessary at all.  Consider FIRE AFTER you get to FI, don't really think too hard about retiring early today, just the goal of financial independence.

[Habilis]

I would recommend evaluating the home purchase as an investment like any other.

Does it pass the 1% rule test?
$500,000 purchase price, it should rent for 1% or more per month. $500k x 1% = $5,000 per month.

1. Does it cashflow?
Estimate expenses
Gross rent: $5,000
Fixed Expenses (electricity, water, sewer, trash, garbage, HOA, insurance, property taxes):
Variable Expenses (vacancy 5%, repairs/maintenance 5%, capital expenditures 10%, property management 10%):
Financing Expenses (interest, principal, PMI):

Cashflow = Monthly Rent - All Expenses (including principal and interest) a gool rule of thumb is a property should cashflow at least $200/mo, you might be comfortable with less

2. Financial Metrics
Net Operating Income (NOI) = Annual Rent - Annual Expenses (not including principal, interest, PMI)
Net Income After Financing Cost (NIAFC) = NOI/12 - (Monthly Interest + PMI) (a good rule of thumb is this should be at least $100 per property per month)

Cap Rate = NOI / Total Purchase Price. A good rule of thumb is this should be at least 7%
Cash on Cash Return: NIAFC / Total Cash Invested (down payment, closing costs, repairs, loan fees). A good rule of thumb is this should be at least 12%
Gross Rent Multiplier = Total Purchase Price / Annual Rent. lower is better, 8.33 or less meets the 1% rule
Debt Coverage Ratio: NOI / (Annual Principal + Interest payments). a good rule of thumb is this should be 1.25 or better

Run these numbers for the property and you will have a good idea if it is a good investment even if you don't choose to live there in the future.

[clarkfan1979]

If you can put 20% down and get 3 roommates, I would do it. CA will rarely get close to 1%. If you were waiting for a 1% deal, you will be waiting for a very long time, like forever.

[Kash101]

In Southern California, to get a CAP rate of 7% is a challenge to say the least. I am looking and regular see " good deals" at a cap rate of 5%.