Hacking SF Housing Market

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mrspock
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Hacking SF Housing Market

Post by mrspock »

Ok Bogleheads, I want some scrutiny on my thinking here. As many may or may not know, the SF housing market has basically been detached from reality for some time now, creating a dislocation between rental prices and the underlying asset values (i.e. cap rates around ~3% are possible if you know where to look). To this end, wondered just how far I could push this. Meaning, how expensive of a pad can I afford if I put my capital to work either renting (complete with inflation adjustments), or purchasing the home.

First the constants:
1. Housing budget: ~$2m is my "housing budget", meaning if I were to purchase a home it would be in this price range. If I am to rent, I'm only to spend what this amount of money can support via my AA + SWR.
2. AA - 75/25
3. SWR - 3.5%
4. Time horizon - 10 years
5. Inflation rate - 2.5%
6. Equity return rate - 8% (conservative, historical is ~9.5%)
7. Assume rent increases track inflation more or less.

Option #1: Purchase home
Purchase price - $2m

Costs:
Opportunity cost: $160k -- This is how much I'm losing by having the "dead money" in the house. I need to make all this back!
Real estate commission on sale - 5% (drag on any appreciation)
Insurance: $1.5k/yr
Property taxes: 1.25% (annual drag) or $25k/yr (courtesy of prop 13, this won't change much each year)
Upkeep: 0.5% ($10k/year), covers painting, landscaping, roof repairs, hot water heater etc. These are all old homes in SF.

Real estate commission after sale @ 10years - $180k

Income/Capital gains:
Appreciation rate: 6% (I'm going to be generous here)
Sale price after 10 years - $3.6m less $180k commission - $3.42
Capital gain: 3.42m - 2m = 1.42m less $250k deduction = $1.17m
After tax gain: @ 33% fed + state tax, you net out $784k ($1.17m * 0.67), adding back the $250k which was tax free, you get $784k + $250k = $1.034m profit or $103.4k/yr in appreciation after capital gains taxes
... yikes. Even worse if you consider that just based on 2.5% inflation, the home would be worth about $2.6m, so I'm only really up here around $400k after 10 years and I haven't even paid my property taxes yet. So let's do that...

Ok, for option #2, this nets out to $103.4k - annual property taxes of $25k - $10k upkeep - $1.5k insurance = $66.5k/yr in "profit", or my $2m is now $2.665m after all costs at the end of my 10 years. Awesome... I barely beat inflation. Good job.

Option #2: Rent
The analysis here is pretty straight forward. With a SWR of about 3.5% this gives me around $70k to play with to pay for my "housing" money, or $5833/month in rent. Now first.... for my $5833/month I'm not going to rent a $2m home like some "middle class" SFer. I'm going to shop around! See what kind of place I can get for my money. As it turns out.... you can get some *really* nice places for around $6k/month. I'm a pretty good shopper, so I actually found a place worth around $3m good for a cap rate of around 2.3% -- much nicer than any $2m place I could afford. If you want to quibble with my claim, here we can assume $2m as well for a cap rate of 3.5%. Either way, this is bonus.... I won't even take this into account in my math.

Now, my $2m is growing in the market at around 4.5% (8% - 3.5% drag for rent), this yields 1.045^10 * $2m = $3.1m. And since I'm an index investor....I'm not paying a dime of income taxes on this while I'm alive, nor do I incur any realtor commissions.

So essentially, I can rent a place worth $1m more, and come out at the end of this after 10 years with $3.1m or an extra $435k in my pocket, and the landlord upkeeps the home, and shoulders 100% of the home ownership risk.

Seems like a no brainer to me to rent...am I missing anything here?

EDIT: Updated to use 4.5% equity CAGR for rent case, backing out 3.5% drag due to rent, vs. original 8%. Not sure the math works this way...but I'll go with this for now.
Last edited by mrspock on Thu Oct 21, 2021 11:51 am, edited 4 times in total.
Olemiss540
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Re: Hacking SF Housing Market

Post by Olemiss540 »

Now rerun the numbers on option 1 with 20% down at 3% interest with the remaining capital invested at 8%.
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Re: Hacking SF Housing Market

Post by bradinsky »

In English, what does “hacking a housing market” mean?
visualguy
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Re: Hacking SF Housing Market

Post by visualguy »

In the rent option, you didn't take into account the drag on your portfolio from the rent payments, or am I missing something?
Startled Cat
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Re: Hacking SF Housing Market

Post by Startled Cat »

I struggled with this three years ago and ended up buying a $1.8M loft in SF. My conclusion at the time was that renting probably made more financial sense, and was especially appealing because renting would avoid direct exposure to such a frothy housing market. But my analysis showed that even with very sober assumptions about future price appreciation, buying probably wasn't a terrible idea, and might well come out slightly ahead given enough time. Ultimately, it was a lifestyle decision - SO wasn't open to renting, as she wanted certainty and control. So I was a somewhat reluctant buyer.

I haven't plugged in recent numbers. Rents fell a lot in 2020, so renting probably looks very good now. On the other hand, financing rates are also a lot lower than when we purchased. We initially went with a 4.5% 30 year mortgage, then refinanced to 4.125%, then 10/1 ARM at 2.625%, and just recently, 7/6 ARM at 1.75%. That's really good for cash flow compared to my pro-forma! And interest-only financing would have been available at 1.875% (I was very tempted, but this was another compromise with my SO). I didn't see any financing assumptions in your post, so it sounds like you're considering a cash purchase? If you're projecting 8% investment returns, why would you want more money than necessary tied up in the home when you can borrow at 1.75%? An argument for buying now is that you could lock in a very attractive mortgage rate.

When I went though this analysis, I made a very detailed buy vs. rent comparison spreadsheet (I could clean it up and share it on request), since I wasn't satisfied with any of the prebuilt calculators out there. I found that they all oversimplified things like tax deductibility. What I found was that two assumptions make by far the biggest difference: what you expect returns to be going forward (both on the home itself and other investments), and how long you keep the home. In a "high return" world (or "high inflation" world, if you prefer to think of it that way), buying looks fantastic because you lock in today's price, compound appreciation over time, have relatively static mortgage/tax/upkeep cash flows, and direct excess cash flow towards other investments that are also appreciating (vs. renting where cash flow towards rent tends to increase over time). But if you don't think home prices will increase much from where they are, or might even decrease, your leveraged investment in SF housing doesn't look so good. The time horizon matters a lot because that controls how long you compound this process, and also lets you amortize the high costs of buying/selling over X years. Projecting 2% vs. 3% price appreciation will totally change the analysis... next to this, almost everything else is noise.

Personally, I would not project 6% appreciation in this kind of analysis. I have a pretty bearish bias on the local housing market, and didn't think it was reasonable to expect housing to significantly outpace general inflation year after year after year... at some point, something's gotta give. So I made my calculations assuming 2% home price appreciation, and also relatively modest investment returns elsewhere. Since I bought, estimates of my home's value mostly stayed pretty flat, until they crashed in 2020 (which at least let me successfully challenge my property tax assessment), and recently seem to have more or less recovered. So I'm running at about 0% appreciation, give or take, which makes me feel justified in running a conservative model. And even that's pretty lucky, because COVID could have tanked the market way worse than it did.
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Re: Hacking SF Housing Market

Post by German Expat »

Somebody else already stated it before. You are missing a couple things:

a) you will only have a 20% down payment
b) 3% interest is possible for the rest
c) your 8+ percent assumption or a return is quite high
d) a house (might) appreciate
e) renting has some advantages offering you more flexibility
f) you might buy a bigger house compared to what you would rent

There are plenty of rent vs buy calculators e.g. the one on nerdwallet that also adds taxes, home insurance, maintenance etc.

https://www.nerdwallet.com/mortgages/re ... calculator
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Re: Hacking SF Housing Market

Post by jfn111 »

bradinsky wrote: Thu Oct 21, 2021 5:45 am In English, what does “hacking a housing market” mean?
The term seems to be used loosely lately. Originally it referred to getting roommates that would pay your mortgage. Then after a certain time you would buy a second house, move into it, and the first one would become a true rental. Now it seems to cover traditional duplexes where you rent out one side and that helps cover your loan.
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Re: Hacking SF Housing Market

Post by runninginvestor »

Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
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Watty
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Re: Hacking SF Housing Market

Post by Watty »

mrspock wrote: Thu Oct 21, 2021 4:00 am Purchase price - $2m
........
Appreciation rate: 6% (I'm going to be generous here)
Sale price after 10 years - $3.6m
Assuming anywhere near 6% appreciation in real(not inflated) dollars is not realistic since home prices would double about every 12 years.

There is a saying "Trees don't grow to the sky."

This is a way of saying that there are natural limits about how high something can go. With trees one of the natural limitations is how high a tree can lift water and nutrients from the roots to the top branches. A tree cannot grow higher than that and there are other limitations too which is why different species of trees will grow to different heights and then not get any taller.

Housing prices also have a big limitations like that in that people need to be able to make the mortgage payment, or have a bigger down payment, in order to pay a higher price for a house.

Try to picture just who will be able to pay $3.6 million for the house in 10 years(if that is not in badly inflated dollars). Whoever is doing your job then likely will not be able to afford it so maybe your boss or your boss's boss would be buying it then? That is a real limited number of people.

You also need to remember that they will be crunching the numbers just like you are so try to figure out how their numbers will look to them. I they cannot get a 3% mortgage or no longer assume 6% growth then they may not be willing or able to pay $3.6 million, or even $2 million, for the house.

Bay Area housing is in a perfect storm of ultra low mortgage interest rates and tech workers getting absurd pay. Be careful. If either of those end it will be ugly. In a housing market where housing prices are falling few people will want to buy. A declining market can feed on itself just like an this appreciating market has.
mrspock wrote: Thu Oct 21, 2021 4:00 am Seems like a no brainer to me to rent...am I missing anything here?
I did not see future rent increases in your calculations, or how the numbers would look once the house is paid off if you buy instead.
mrspock wrote: Thu Oct 21, 2021 4:00 am I want some scrutiny on my thinking here. As many may or may not know, the SF housing market has basically been detached from reality for some time now..
You are over analysing this Mr Spock, you are trying to make a logical decision about an illogical situation. (Dang, that sounds like a quote from Star Trek. :D )

To me the big question(assuming that you can really afford it to buy the house) is if you want to stay in the Bay Area for the rest of your life or not.

If so then buy the house for $2 million with a 30 year loan at around 3% and if the home price goes up or down it will not matter for a long time.

If you plan on eventually moving while you are still working, or when you retire then rent.
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Re: Hacking SF Housing Market

Post by BogleFan510 »

Given you are a busy person, I might also consider which option allows you the more time and space for productive use of your time to build wealth via work or live the lifestyle you want. For example, we bought a small rental in the north bay during the last housing crash and had a fabulous tax base for a cash flow positive rental. The house almost 3x'd in value over 10 years, but managing a rental was consuming time (good tenants often move) that we wanted to spend elsewhere, so we sold it and the cash is now in VT instead. Likely we will have worse after tax returns, but a nice chunk of VT consumes only a few minutes per year of my time.

If owning steadies your life, and that is great, but renting also allows one to move to the south bay to take a great new job. A friend's owned SF unit is now a rental while he rents on the penninsula, which to me seems a hassle (though he has a nice capital gain). Congratulations on accumulating enough wealth to have many options.
Last edited by BogleFan510 on Thu Oct 21, 2021 10:41 am, edited 1 time in total.
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Re: Hacking SF Housing Market

Post by willthrill81 »

runninginvestor wrote: Thu Oct 21, 2021 7:46 am Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
1% is a general rule of thumb, but it assumes that the structure is where the majority of the property's value lies. In the Bay area, the structure is only worth a fraction of what the entire property is worth because the land it's sitting on is so valuable. But you don't have to pay for 'land maintenance'. So .5% for homes there is probably a good estimate.
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Re: Hacking SF Housing Market

Post by BogleFan510 »

willthrill81 wrote: Thu Oct 21, 2021 10:29 am
runninginvestor wrote: Thu Oct 21, 2021 7:46 am Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
1% is a general rule of thumb, but it assumes that the structure is where the majority of the property's value lies. In the Bay area, the structure is only worth a fraction of what the entire property is worth because the land it's sitting on is so valuable. But you don't have to pay for 'land maintenance'. So .5% for homes there is probably a good estimate.
Agreed. 1% of a 2M home is 20k/yr in maintenance. That seems incredibly high as one would need to be reroofing or landscaping every year.
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Re: Hacking SF Housing Market

Post by gubernaculum »

I bought a house in SF for 2.1 million. To me this house is my REIT. It has already appreciated 20% over 2 years. I think in general, it takes 7 years to justify ownership over rent, but housing in SF market continues to appreciate and I suspect that in the near future a single family home will hit 4-5 million.
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Re: Hacking SF Housing Market

Post by miket29 »

mrspock wrote: Thu Oct 21, 2021 4:00 am First the constants:
1. Housing budget: ~$2m is my "housing budget", meaning if I were to purchase a home it would be in this price range. If I am to rent, I'm only to spend what this amount of money can support via my AA + SWR.
Now, my $2m is growing in the market at around 8%, this yields 1.08^10 * $2m = $4.3m
I'm a bit confused here. Is this $2m money you actually own and have invested, or was it just a figure you pulled out of the air? If the latter, there is no $2m growing.
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Re: Hacking SF Housing Market

Post by runninginvestor »

BogleFan510 wrote: Thu Oct 21, 2021 10:44 am
willthrill81 wrote: Thu Oct 21, 2021 10:29 am
runninginvestor wrote: Thu Oct 21, 2021 7:46 am Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
1% is a general rule of thumb, but it assumes that the structure is where the majority of the property's value lies. In the Bay area, the structure is only worth a fraction of what the entire property is worth because the land it's sitting on is so valuable. But you don't have to pay for 'land maintenance'. So .5% for homes there is probably a good estimate.
Agreed. 1% of a 2M home is 20k/yr in maintenance. That seems incredibly high as one would need to be reroofing or landscaping every year.
Makes sense, thank you. Midwesterner here, so the reverse as land can typically be cheap compared to the build value.
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Re: Hacking SF Housing Market

Post by mrspock »

bradinsky wrote: Thu Oct 21, 2021 5:45 am In English, what does “hacking a housing market” mean?
It means being able to get a $3m "home" for the same price as a $2m home -- perpetually, assuming rent tracks inflation more or less. If you are clever you can do even better than this in SF due to iron clad rent controls (this is the worst place in America to be a landlord -- it's a wonder why anyone bothers here).
visualguy wrote: Thu Oct 21, 2021 7:03 am In the rent option, you didn't take into account the drag on your portfolio from the rent payments, or am I missing something?
Fixed. Updated to use 4.5% CAGR vs. 8%, backing out the 3.5% needed for rent. This definitely narrows the gap to "only" a $435k edge for renting.
German Expat wrote: Thu Oct 21, 2021 7:26 am Somebody else already stated it before. You are missing a couple things:

a) you will only have a 20% down payment
b) 3% interest is possible for the rest
c) your 8+ percent assumption or a return is quite high
d) a house (might) appreciate
e) renting has some advantages offering you more flexibility
f) you might buy a bigger house compared to what you would rent

There are plenty of rent vs buy calculators e.g. the one on nerdwallet that also adds taxes, home insurance, maintenance etc.

https://www.nerdwallet.com/mortgages/re ... calculator
I'm going with a cash comparison here, as that's likely what I'd do. Leverage is a wash to me, as I could lever the money to buy equities as well (and still have a really low overall leverage in my portfolio with 0 risk of calls during a 50% correction). As for 8% CAGR on stick, it's less than the historical average, and I gave the house a high/unlikely appreciation rate, so to me this is a wash/judgement call.

The house does appreciate, but there is massive drag on the investment due to realtor fees, insurance, upkeep and property taxes.

Thanks for the calculator, I'll play around with that tonight.
miket29 wrote: Thu Oct 21, 2021 11:33 am
mrspock wrote: Thu Oct 21, 2021 4:00 am First the constants:
1. Housing budget: ~$2m is my "housing budget", meaning if I were to purchase a home it would be in this price range. If I am to rent, I'm only to spend what this amount of money can support via my AA + SWR.
Now, my $2m is growing in the market at around 8%, this yields 1.08^10 * $2m = $4.3m
I'm a bit confused here. Is this $2m money you actually own and have invested, or was it just a figure you pulled out of the air? If the latter, there is no $2m growing.
Cash money, it goes into a house or goes into the market.

----

Many are calling out leverage here as the way to win with the "buy" option, I get that. But I can also do that with equity investing and mop the floor even more buying a home vs. renting (we need to compare apples to apples in terms of leverage). My "core" retirement portfolio is pretty large, so this is a real option for me. To simplify things, I'm just keeping things cash which is really giving an edge to the "buy" option as I find it really unlikely that after taxes & fees the "buy" option can beat 8% CAGR of equities -- which again is low vs. the ~9.5% historical average.
Last edited by mrspock on Thu Oct 21, 2021 12:03 pm, edited 1 time in total.
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Re: Hacking SF Housing Market

Post by ResearchMed »

mrspock wrote: Thu Oct 21, 2021 11:43 am [San Francisco] is the worst place in America to be a landlord
Some jurisdictions have exemptions from assorted rent-control regulations if it is a 2 or 3 unit property where the owner lives in one unit.
Does SF have anything like that?

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Re: Hacking SF Housing Market

Post by econalex »

Just want to jump in there. Why not get a mortgage with 20% down? You can still invest the rest of money in the market.

I see you mentioning leverage. But mortgage is not callable and you can safely leverage 5:1 (assuming continuous employmnet). I wouldn't leverage a market portfolio to nearly that level. I'm aware that Maintenance Margin at IBKR is 9-15% for commonly used ETFs but who knows what they will do in a crisis.

Also I'm aware of folks in Bay area that flip thru homes very couple years to max their $250k exemption :twisted:
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Re: Hacking SF Housing Market

Post by hotscot »

You're looking for advice, not 'hacks'.
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Re: Hacking SF Housing Market

Post by Bungo »

econalex wrote: Thu Oct 21, 2021 12:03 pm Also I'm aware of folks in Bay area that flip thru homes very couple years to max their $250k exemption :twisted:
Maybe I'm missing something, but it seems like the selling costs would wipe out most if not all of the tax savings. Example numbers: $2 million house, realtor commissions 5% (2.5% buyer, 2.5% seller) amount to $100k. Federal capital gains tax on $250k would be $37.5k or $50k depending on income bracket. California income tax on same would be around $25k. Does it make sense to pay $100k in realtor expenses to save $75k in taxes? Granted, the realtor costs themselves are tax deductible, so maybe it's a wash. But moving is not free, either, especially if you value your time.

If married, the exemption becomes $500k so the numbers are more favorable, but it's also less likely that you would see that much appreciation in only a couple of years anyway.
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Re: Hacking SF Housing Market

Post by cchrissyy »

your general observations and the math behind them fits well with my knowledge of housing options in this area.

the only thing i doubt is, are you sure there are available rentals you like? for me, the "buy vs rent" flipped to "buy" when i couldn't find any acceptable rental.

also, i would suggest that given the strength of your financial position, you don't have to optimize the place you live. you are fine in the long run no matter which path you choose. therefore i suggest picking based on what will make you happy. maybe you enjoy the act of renting or buying, or maybe you just enjoy a specific neighborhood, building, or property. try to identify what you would like, and do it, knowing the financials are strong enough either way.
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Re: Hacking SF Housing Market

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willthrill81 wrote: Thu Oct 21, 2021 10:29 am
runninginvestor wrote: Thu Oct 21, 2021 7:46 am Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
1% is a general rule of thumb, but it assumes that the structure is where the majority of the property's value lies. In the Bay area, the structure is only worth a fraction of what the entire property is worth because the land it's sitting on is so valuable. But you don't have to pay for 'land maintenance'. So .5% for homes there is probably a good estimate.
A 2M dollar home in SF is not a mansion. It is a pretty basic house by most standards. What would you possibly be spending 10 to 20K a year on for maintenance? Are you looking at fixers?
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Re: Hacking SF Housing Market

Post by willthrill81 »

hoops777 wrote: Thu Oct 21, 2021 1:36 pm
willthrill81 wrote: Thu Oct 21, 2021 10:29 am
runninginvestor wrote: Thu Oct 21, 2021 7:46 am Is 0.5% a good value for upkeep? I've always assumed at least 1%\year, and I've seen threads recently where that is more. Don't forget the additional money you might spend out of the gate. This far along in a housing run-up, you may encounter those who have neglected certain upkeep and want out before prices stagnate or fall. This is happened in my area to an extent in late summer; houses that needed 10-20% of maintenance in the next 5 years. They'd rather sell in a seller's market and pass it to a willing buyer while they are still there.
1% is a general rule of thumb, but it assumes that the structure is where the majority of the property's value lies. In the Bay area, the structure is only worth a fraction of what the entire property is worth because the land it's sitting on is so valuable. But you don't have to pay for 'land maintenance'. So .5% for homes there is probably a good estimate.
A 2M dollar home in SF is not a mansion. It is a pretty basic house by most standards. What would you possibly be spending 10 to 20K a year on for maintenance? Are you looking at fixers?
Yes, I don't know that there would be even $10k (.5%) of annual maintenance on a $2m home, maybe half that or less.
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Re: Hacking SF Housing Market

Post by jarjarM »

Given what you proposed and the fact that you're not looking at leverage with fixed term (mortgage), rent is by far a better choice in SF. The even better choice is move out of SF and settle in a better place (maybe even cheaper) location. :twisted:
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Re: Hacking SF Housing Market

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ResearchMed wrote: Thu Oct 21, 2021 12:01 pm
mrspock wrote: Thu Oct 21, 2021 11:43 am [San Francisco] is the worst place in America to be a landlord
Some jurisdictions have exemptions from assorted rent-control regulations if it is a 2 or 3 unit property where the owner lives in one unit.
Does SF have anything like that?

RM
They do, but after the state passed statewide rent control, only units built after 2004 qualify. Eviction and change of use is also very difficult. To get long time renters out, it’s not unusual to have to offer huge relocation sums, recently one landlord had to shell out $475k in relocation compensation.

If you read the article, these folks basically did my plan here, but on steroids. They were paying $12.5k for a 7 bed / 8 bath apartment with expansive views of the GG bridge. The unit was probably worth $8-10m, $12.5k/m is bargain, cap rate of maybe 1.5-1.9% — no wonder they wanted them out.
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Re: Hacking SF Housing Market

Post by Dottie57 »

bradinsky wrote: Thu Oct 21, 2021 5:45 am In English, what does “hacking a housing market” mean?
I don’t understand either.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Hacking SF Housing Market

Post by KlangFool »

OP,

Rerun the calculation with 0% down or 20% down Interest-only non-recourse fixed-rate 30 years mortgage. "Rent" your house by buying. If the house appreciate, you make money. If the house's price drop, you walk away from your house.

This makes the most sense in this kind of housing market.

KlangFool
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interwebopinion
Posts: 273
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Re: Hacking SF Housing Market

Post by interwebopinion »

KlangFool wrote: Thu Oct 21, 2021 10:06 pm OP,

Rerun the calculation with 0% down or 20% down Interest-only non-recourse fixed-rate 30 years mortgage. "Rent" your house by buying. If the house appreciate, you make money. If the house's price drop, you walk away from your house.

This makes the most sense in this kind of housing market.

KlangFool
IO mortgages have become harder to get. Also, the IO period is usually for a limited number of years, 5 or so. I suppose it can be re-fi'd, but now you have to add the costs and hassle of the refi.

I've stopped predicting the Bay Area housing market. There's a lack of buildable land and increasing comp for tech people. So prices keep going up. But NIMBY activists have been successful in passing legislation recently that should increase supply. I wonder if that will finally help puncture the market. Who knows?
DH0
Posts: 100
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Re: Hacking SF Housing Market

Post by DH0 »

KlangFool wrote: Thu Oct 21, 2021 10:06 pm OP,

Rerun the calculation with 0% down or 20% down Interest-only non-recourse fixed-rate 30 years mortgage. "Rent" your house by buying. If the house appreciate, you make money. If the house's price drop, you walk away from your house.

This makes the most sense in this kind of housing market.

KlangFool
+1

Leveraging real estate and leveraging equities are very different animals. 5:1 leverage is typical in real estate and generally not that risky, especially in a non-recourse state like CA. Would you really feel comfortable using 5:1 leverage to buy VTI with callable margin debt? You would have been wiped out last March...
JackBoglereader21
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Re: Hacking SF Housing Market

Post by JackBoglereader21 »

Buying a $2 million San Francisco home means you need to find a place with a listing price of $1.6-$1.8 million if not less. That's a tough spot right now.

In SF, the big price jumps are all about the location (yes, the age old real estate rule). Be highly walkable to a quaint neighborhood commercial street + MUNI transit line + super family friendly eg, Noe Valley, West Portal, Parkside, Inner Sunset, Glen Park (maybe). These are the neighborhoods you are seeing the rapid skyrocket appreciations but these are tough neighborhoods to buy at $2 million. For me, I will never buy another SF home after I sell this one because the home prices have exceeded it's value to me. If/when we return to SF I will be a renter. Currently $2,200 for a 1 bedroom in the Lake Street/Inner Richmond area where homes can exceed $5-7 million, adjust for inflation is still better than $2 million in a house, plus property tax, insurance, maintenance. My advice: If you are looking at SF real estate as an investment, buy the location. If you are looking for a home, buy what you love. Either way, you're not going to lose investing in SF real estate if you can hold 7-10+ years. Yes, even if there is an earthquake. No one who had a SF house in 1989 has any regrets today.

San Francisco is a small town in size, culture, thought, and diversity. Don't get me wrong, that $2 million house today will be $4 million in 10-15 years, maybe sooner. At those numbers, I would spend it on Manhattan, Chicago, London, Paris, Hong Kong, Tokyo, Los Angeles. This is just me, probably because I have live here all my life and am ready to leave home.

As a lifelong San Franciscan if I was forced to invest $2 million in cash into a piece of SF real estate tomorrow, it would have been this but most people will not see this as a "home" even though the apartment upstairs is gorgeous. And great location.

https://www.redfin.com/CA/San-Francisco ... /173290648

This is available and probably could be had for under $2 million

https://www.redfin.com/CA/San-Francisco ... me/1283619

Regarding maintenance or remodeling, it's blindingly expensive and you will need mental health support for the building permitting process.

If you decide to rent, I'd highly suggest a 6 unit+ building. All rentals are subject to rent controlled price adjustments but renting in a larger building means less chance of a forced move. Yes, you will be paid re-location money but it doesn't sound like you need it. Renting a $5,000 home or condo in a 3 unit building only to have it sold in a year would be a bummer.

PS: For purchase, Cash really is king here - at your price range, you will need do All Cash, no contingencies. Good luck and happy hunting.
Wannaretireearly
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Re: Hacking SF Housing Market

Post by Wannaretireearly »

I really think property taxes will be a shield for prices raises in the future. $2M requires $25k a year! For an average place in SF.

Predictions of $4-5M are insane imo. Writing a prop tax Cheque for $60-70k a year for an average place?

I don’t know for sure, my guess is places like Vancouver and London don’t tax directly based on property value, like SF and the US in general. That May mean these locations are more price elastic (?)
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
Youku
Posts: 34
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Re: Hacking SF Housing Market

Post by Youku »

mrspock wrote: Thu Oct 21, 2021 9:53 pm
ResearchMed wrote: Thu Oct 21, 2021 12:01 pm
mrspock wrote: Thu Oct 21, 2021 11:43 am [San Francisco] is the worst place in America to be a landlord
Some jurisdictions have exemptions from assorted rent-control regulations if it is a 2 or 3 unit property where the owner lives in one unit.
Does SF have anything like that?

RM
They do, but after the state passed statewide rent control, only units built after 2004 qualify. Eviction and change of use is also very difficult. To get long time renters out, it’s not unusual to have to offer huge relocation sums, recently one landlord had to shell out $475k in relocation compensation.

No, owner occupied buildings of 4 or less unit are no longer exempted from SF rent control, they haven't been for at least 20+years. It has nothing to do with the recently passed statewide rent control. I'll take the statewide rent control over SF rent control any day, 5%+CPI vs 60% of CPI up to 7%.
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