Am I ready to buy a house?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
IAmJustAnAverageDude
Posts: 39
Joined: Mon Oct 28, 2019 1:20 pm

Am I ready to buy a house?

Post by IAmJustAnAverageDude »

Hi all, I am 26 years old married and we have been wanting to buy your first house in Bay Area, CA. My ideal first house is about $750k, condo preferably in East bay somewhere.

Current household income = 200k per year
Current combined (me+spouse) net worth = 250k
Breakdown:
Cash = 55k
Brokerage account holding stocks and index funds = 130k
401k and Roth IRA = 65k

I am expecting a windfall from a liquidity event in the order of about 150k post taxes in few months, and another 150k post taxes in the next one year as stock vesting continues. I am planning to sell off a concentrated position in my company's stock and first get cash, and think about what to do with it.

I am very inclined to buy my first home in the Bay area, while my spouse isn't and thinks we should wait it out. I guess this is personal decision, but I'd like some help from you all in forming my thoughts on whether:
1. Am I ready to buy a house at my net worth and 26 years of age? Career wise I am happy where I am until I have vested all stock options as I think I am being paid well above market rate for my age and experience. Also I'd like to be in Bay area to continue being in tech long term.

2. My spouse is undergoing a job transition, and as a result of this her risk tolerance is low. She is more of a "rent by choice" person, while I am "buy a home to build home equity" person.

From my understanding pros and cons of home buying is:
Arguments for buying - build home equity long term, own a premier asset class in Bay area, and have a space of belonging and homeownership pride, and possibly rent it out in the future to generate income, ability/satisfaction from home remodeling projects in the future (although I don't know if I have the spending mindset for it)

Arguments for renting - keeps us 26 year olds mobile and lets us do more with our life in terms of relocating, can travel more, downpayment money of 150k will not be tied up in an illiquid asset, and landlord can take care of all repairs instead of us paying for repairs

So my question is:
1. Should I be thinking of home ownership at all? Is it wise to wait for more months after I actually see the windfall come through, and take my time to get into home ownership an year later?
2. I am conflicted into thinking - I would like to buy a home eventually, then why not now? Is it too soon to get into homeownership at this age, and net worth? If I didn't luck out with the liquidity event, I probably would never dream of buying a home in the Bay area.
3. I have read the bogleheads wiki on managing a windfall. What else should I do with the windfall if I don't buy a home? Options I see are, save money away for taxes, and put the rest in US broad market+international market stock index funds.
Last edited by IAmJustAnAverageDude on Mon Jul 26, 2021 1:19 pm, edited 1 time in total.
jarjarM
Posts: 2502
Joined: Mon Jul 16, 2018 1:21 pm

Re: Am I ready to buy a house?

Post by jarjarM »

You probably need to list your income for better answer. In my view you're a bit early to look into homeownership in bay area until you're fairly certain that you'll be here for the long term. Given the housing market in bay area right now, you maybe better off renting (of course no one knows for sure where the market is heading). But maybe start looking around a bit to get the feel of the market and location until you're ready for the decision. Congrats on your liquidity event and good luck.
Topic Author
IAmJustAnAverageDude
Posts: 39
Joined: Mon Oct 28, 2019 1:20 pm

Re: Am I ready to buy a house?

Post by IAmJustAnAverageDude »

jarjarM wrote: Mon Jul 26, 2021 1:17 pm You probably need to list your income for better answer. In my view you're a bit early to look into homeownership in bay area until you're fairly certain that you'll be here for the long term. Given the housing market in bay area right now, you maybe better off renting (of course no one knows for sure where the market is heading). But maybe start looking around a bit to get the feel of the market and location until you're ready for the decision. Congrats on your liquidity event and good luck.
Updated the post with household income thanks!
BenjaminEsq
Posts: 14
Joined: Mon Jul 26, 2021 12:52 am

Re: Am I ready to buy a house?

Post by BenjaminEsq »

How long do you two plan to stay in the home and/or Bay area? In the areas you are looking, are prices going up, flat, or down? Likely up but the Bay Area has had an exodus so I wouldn't be surprised if flat.

Let's assume you and your spouse agree to buy a home but in a "safe" way -- 20% down, fixed rate 30yr loan, etc. In the Bay Area, this would cost $1m+. The down payment alone is at least $200k, which can be paid for with the cash from your liquidity event, and your cash savings. You won't have to sell stocks.

Next, use a mortgage calculator to determine your monthly payments. Figure out if your current salary can support such payments.

I think the main question is how long you plan to be in the Bay Area and this home specifically. My guess is if you plan to stay in the home for greater than 8 to 10 years, then definitely consider buying.

Since you have a few months before the 150k hits the bank, consider setting up Zillow alerts in the area you are looking. CC your wife to see if she sees any she likes.

ps - I also had a liquidity event this past year... don't forget about taxes! Make sure to hold your stock for 1+ year if you aren't getting just cash.
Building software for 🏡 homeowner's to manage their mortgage and home finances — DM me to learn more! 💰
Somethingwitty92912
Posts: 490
Joined: Mon Sep 14, 2020 9:43 pm

Re: Am I ready to buy a house?

Post by Somethingwitty92912 »

Maybe run a rent vs buy calculator. It may give you a better idea.

Where I live the idea of paying 750k for a condo is insanity, but you are going to have that with places like the Bay Area. It seems like real estate there, and other places like that have disconnected with intrinsic value. So, as you have noticed it’s hard to tell if you should buy or not.
User avatar
LadyGeek
Site Admin
Posts: 95466
Joined: Sat Dec 20, 2008 4:34 pm
Location: Philadelphia
Contact:

Re: Am I ready to buy a house?

Post by LadyGeek »

This thread is now in the Personal Finance (Not Investing) forum (house buying decision).

BenjaminEsq, Welcome!
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
EnjoyIt
Posts: 8244
Joined: Sun Dec 29, 2013 7:06 pm

Re: Am I ready to buy a house?

Post by EnjoyIt »

You are going to get several opinions regarding home ownership on this forum. Here are some facts I can share that can help you make your decision.

1) Your household income is $200k/yr. Most would not recommend you buy a house more than 3x your income. This recommendation appears to fall apart in the Bay Area due to the elevated home values and some are willing to go as high as 5x in the higher income groups.

2) Another way to try and make this decision is to try keep your mortgage less than 2x income which can be accomplished by paying down your mortgage with a higher deposit.

3) Your spouses income may be uncertain which can drop your ability to afford this house in conjunction with your other expenses.

4) The less you pay for living expenses, the more you can invest and build wealth.

5) If you want a comfortable retirement, most here would recommend you save at a minimum 15-20%. If you make $200k, you should be saving $30k-$40k a year. have you been doing that thus far? Will you be able to continue to do that after you purchase the house? How will that change if you plan on having kids? If you want earlier financial independence, then you should probably save more.

6) If you plan on putting down your expected $150k as the downpayment, your investments assets will be about $200k with $150k in home equity making your home a very large portion of your net worth. Some on this forum would find that a bit on the risky side.

Long story short, you want to buy a $750k house. You can probably put down close to $150k and getting a $600k mortgage which is well over 2x income and maybe more if your spouse loses her job. To me this is a risky proposition though plenty here would go for it in a VHCOL area.
Last edited by EnjoyIt on Mon Jul 26, 2021 1:53 pm, edited 2 times in total.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Dottie57
Posts: 12349
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Am I ready to buy a house?

Post by Dottie57 »

I would really build up my war chest. 26 is fairly young to buy. Wait several years andthen decide dwhat to do.
runninginvestor
Posts: 1795
Joined: Tue Sep 08, 2020 8:00 pm

Re: Am I ready to buy a house?

Post by runninginvestor »

IAmJustAnAverageDude wrote: Mon Jul 26, 2021 1:08 pm
Not to turn this into a marriage advice, but it sounds like you are ready to buy a house, but your spouse may not be. I'd make sure both of you are on the same page with whatever you do. I point it out because there's a lot of "I" and "My" for joint decisions such as this. I especially would make sure both of you are 100% on the same page for these matters whole in a community property state such as CA.

Financially, with a $250k income, $750k is the traditional 3x gross income for max amount of affordability. The potential uncertainty of your spouse's job transition may reduce (or increase) that limit if incomes change. You'd also have to almost deplete your liquid assets to come up with 20% down at the moment. I would personally wait until those liquidity events happen to bolster savings.

You're young with a great income. If it's cheaper to rent than own, and you both aren't convinced towards ownership, you are blessed to be able to save a good amount if you chose for a few years.
User avatar
JoeRetire
Posts: 15381
Joined: Tue Jan 16, 2018 1:44 pm

Re: Am I ready to buy a house?

Post by JoeRetire »

IAmJustAnAverageDude wrote: Mon Jul 26, 2021 1:08 pm I am very inclined to buy my first home in the Bay area, while my spouse isn't and thinks we should wait it out.
It seems like you are ready, but your spouse is not.
Listen to your spouse if happiness is important to you.
This isn't just my wallet. It's an organizer, a memory and an old friend.
Mr.Chlorine
Posts: 258
Joined: Fri Sep 13, 2019 9:17 am

Re: Am I ready to buy a house?

Post by Mr.Chlorine »

3.75x salary to home value ratio is a little higher than I would be comfortable doing, but plenty of HCOL homebuyers are ok doing this. The obvious advice is do not buy anything unless you and your partner are 100% on board. The other thing I would look at, is HOA fees for a Bay Area condo.

Find a potential home, in your price range, and map out what a typical month of expenses would look like. How much more is that than what you currently pay for rent?
Topic Author
IAmJustAnAverageDude
Posts: 39
Joined: Mon Oct 28, 2019 1:20 pm

Re: Am I ready to buy a house?

Post by IAmJustAnAverageDude »

BenjaminEsq wrote: Mon Jul 26, 2021 1:26 pm ps - I also had a liquidity event this past year... don't forget about taxes! Make sure to hold your stock for 1+ year if you aren't getting just cash.
Very curious what do you mean hold on to the stock for 1+ year if you aren't getting just cash? I am getting stock options as well as RSUs, and I do plan to hold some for eternity. How do you come up with how many units to hold long term, vs sell short term and pay taxes?
Zeno
Posts: 1042
Joined: Wed Sep 12, 2018 10:44 am

Re: Am I ready to buy a house?

Post by Zeno »

IAmJustAnAverageDude wrote: Mon Jul 26, 2021 1:08 pm Hi all, I am 26 years old married and we have been wanting to buy your first house in Bay Area, CA. My ideal first house is about $750k, condo preferably in East bay somewhere.

...

2. My spouse is undergoing a job transition, and as a result of this her risk tolerance is low. She is more of a "rent by choice" person, while I am "buy a home to build home equity" person.

So my question is:
1. Should I be thinking of home ownership at all? Is it wise to wait for more months after I actually see the windfall come through, and take my time to get into home ownership an year later?
2. I am conflicted into thinking - I would like to buy a home eventually, then why not now? Is it too soon to get into homeownership at this age, and net worth? If I didn't luck out with the liquidity event, I probably would never dream of buying a home in the Bay area.
3. I have read the bogleheads wiki on managing a windfall. What else should I do with the windfall if I don't buy a home? Options I see are, save money away for taxes, and put the rest in US broad market+international market stock index funds.
Thank you for posting, OP.

With the caveat that all of these real estate discussions are inherently local, subjective, anecdotal and based upon a host of personal factors, I offer the following. YMMV may and will vary, of course.

I was always a "buy a home to build home equity" person, too. We jumped on the RE bandwagon early (circa age 24) in HCOL, never looked back, and -- more than 30 years later -- don't regret it. Would that repeat for you in SF today and going forward? I have no idea.

Our first purchase was a condemned duplex (it was a crack house in a "neighborhood in transition", and condemnation was the only way the prior owner, who was renting out the place, could evict the tenants) which we then renovated via personal labor, then flipped into a single family dwelling that we then lived in for another 25 years in the same HCOL area. Both the duplex and single family dwelling appreciated nicely and nearly uniformly year after year in HCOL. Looking back, I can trace about 20-25% of our current NW to the appreciated proceeds of that first condemned duplex we bought so many decades ago now; the bulk of those proceeds are now in the market when we cashed out of HCOL and moved to LCOL later in life.

Instinctively, we disliked the idea of making a landlord wealthy; we wanted to be building our own wealth. So with the exception of the first year or two after college, we always opposed renting no matter what a specific rent v. own calculator indicated. And we wanted to be building home equity up as early in our lives as possible.

We also like working on old homes, so home ownership has always been our main hobby, too. We're sweat equity people: buy the most miserable house in the best neighborhood with the best schools, then get to work with a hammer during the evenings and weekends.

My only question may be a condo versus other properties. I gather a condo is the first RE step in SF. Anecdotally, I don't think condos appreciate the same way as other properties, but that is likely a dated view; it certainly is a market-specific view, and I don't know the SF RE market.

Good luck!
Topic Author
IAmJustAnAverageDude
Posts: 39
Joined: Mon Oct 28, 2019 1:20 pm

Re: Am I ready to buy a house?

Post by IAmJustAnAverageDude »

Mr.Chlorine wrote: Mon Jul 26, 2021 1:56 pm Find a potential home, in your price range, and map out what a typical month of expenses would look like. How much more is that than what you currently pay for rent?
Our current rent is 2k/month. Projected monthly mortgage after HOA will be closer to 3k/month at the very least. We have been high savers so far with 40-50% of the monthly paycheck being saved, but yes I expect it to go down if we are able to buy a home/spouse loses job.
mervinj7
Posts: 2496
Joined: Thu Mar 27, 2014 3:10 pm

Re: Am I ready to buy a house?

Post by mervinj7 »

IAmJustAnAverageDude wrote: Mon Jul 26, 2021 2:05 pm
Mr.Chlorine wrote: Mon Jul 26, 2021 1:56 pm Find a potential home, in your price range, and map out what a typical month of expenses would look like. How much more is that than what you currently pay for rent?
Our current rent is 2k/month. Projected monthly mortgage after HOA will be closer to 3k/month at the very least. We have been high savers so far with 40-50% of the monthly paycheck being saved, but yes I expect it to go down if we are able to buy a home/spouse loses job.
Financially, I think you will be fine to start looking in a few months. However, since your spouse is not on board, I would wait till your second liquidity event and then revisit the question. Your rent is cheap and your savings rate is high enough that I'm not concerned whatever your decision is.

As far as all the rules of thumbs that folks mention, they are just that (rules of thumb). What's strange to me is that most don't even take into account property taxes, HOA fees, and current mortgage rates. Personally, I like the approach of using rent vs. buy calculators (at least the more comprehensive ones that include realistic expenses). Once you do that, then you can just say screw the financials, we are going to buy a house anyway for non-tangible reasons. At least, that's what we did and we have accepted that the decision is not purely financial.
Ron Ronnerson
Posts: 3559
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: Am I ready to buy a house?

Post by Ron Ronnerson »

BenjaminEsq wrote: Mon Jul 26, 2021 1:26 pm How long do you two plan to stay in the home and/or Bay area? In the areas you are looking, are prices going up, flat, or down? Likely up but the Bay Area has had an exodus so I wouldn't be surprised if flat.

Let's assume you and your spouse agree to buy a home but in a "safe" way -- 20% down, fixed rate 30yr loan, etc. In the Bay Area, this would cost $1m+. The down payment alone is at least $200k, which can be paid for with the cash from your liquidity event, and your cash savings. You won't have to sell stocks.

Next, use a mortgage calculator to determine your monthly payments. Figure out if your current salary can support such payments.

I think the main question is how long you plan to be in the Bay Area and this home specifically. My guess is if you plan to stay in the home for greater than 8 to 10 years, then definitely consider buying.

Since you have a few months before the 150k hits the bank, consider setting up Zillow alerts in the area you are looking. CC your wife to see if she sees any she likes.

ps - I also had a liquidity event this past year... don't forget about taxes! Make sure to hold your stock for 1+ year if you aren't getting just cash.
This is good advice. By the way, in the area where the OP is thinking of buying (the East Bay), home values are up around 40% in the past year. The median value is up over 50% in the past year in my East Bay zip code. Much of the exodus from the Bay Area has been to other parts of the Bay Area. A decent condo near Silicon Valley would very easily cost over $1M these days. Whether or not that is affordable depends in large part on the overall budget but factors such as commute times, job stability, and the prospect of having children (their impact on the budget and importance of school districts) should be considered as well.
Post Reply