I’m looking to do house hacking for the first time in the Bay Area! This would be my first property.
Details:
Income: 350k
Savings: 600k, but ideally don’t want to take away too much savings for the down payment.
Age: 23, no plan on having kids anytime soon, and might invite friends from time to time
Would probably want to be somewhere in between Santa Clara and San Francisco for work and family reasons.
I’d also like to take advantage of any California First Time Home Owner assistance if there is any.
Any suggestions for home size and price I should aim for? Single family or multi family? An initial suggestion will help me get started as I start learning more. Thank you!
Wow, this is incredible! At age 23, you have an income of 350k and savings of 600k. What is your profession that can generate so much income and savings at such a young age?
Thank you for the kind words! I work in software. I finished college in 2 years to get an early start in my career. I started off very lucky at 150k. I saved almost every penny of my income.
My case is lots of luck, because I ended up being very lucky and 5x’ed my savings in 2020 through the stock market bull run.
After 2 years of working, I was able to negotiate and bid up my salary to 350k with another software company!
Again lots of luck involved, particularly, happening to graduate 2 years early which let me save just enough to invest in 2020, picking the right stocks, and negotiating that job offer!
My friend, you are incredible - you probably have a genius level intellect in multiple areas.
Academic: Graduating college in 2 years
Work skills: 350k Comp with 2 years work experience
Negotiation skills: to get to a Comp package most of us will never get after a lifetime
Investing: you have made 600k in 2 years
A mere mortal like myself has no business giving you advice. Yet, my 2c is that you focus on starting a tech business. With your intellect, skills and drive, it will be a unicorn soon and you will be a billionaire by the time you turn 30. Then you can buy your first house for $10M + in Los Altos Hills or Atherton
As others have said, congrats on being so thrifty and accumulating so much savings that young. Luck helps, but you’ve clearly prioritized savings.
I would think ahead about 10 years:
Do you think you’ll be getting married?
Do you want to have a housemate or two?
Are you interested in having kids, and if so would you be likely to put them in public schools?
If you’re not interested in any of these, you likely could be happy with a 2BR 1000sqft house and you’ll probably want to prioritize commutability and proximity to things you’re interested in. The second bedroom can be an office or guest room (or both).
If you’re likely to get married soon or want a roommate or two or think you might have kids in the next 10 years, then I’d look for either a 2 or 3 bedroom with 1200-1500 sq ft (or 4BR with 1800 sq ft if two housemates) . You don’t have to prioritize school district right now, and if you get a 3 bedroom, you could go a good 5-6 years after having your first kid before you’d have to move to a school district you cared about if you intend to do public school, and if you end up with a decent school district, you might even put it off until middle school.
If you are a fan of private schools, you might consider a safer neighborhood in a lower school district (Redwood City, West of El Camino for example). Then you can save the extra money for the private schools (BTW: My personal opinion on privates, especially full-priced ones ($50K/year) is that you get the most bang-for-your buck if you start in 5th/6th grade.)
There’s an argument for moving into a good district which is that it will always be in demand and appreciate faster. There’s also an argument for moving into areas, like Redwood City, which are being gentrified where the school district will improve that the improvement will increase your home value whereas a good district’s value could go down. I’ve never seen anyone run hard numbers on that, but they’re both decent theories.
If you think you’d want to stay in a house and add-on if you need more space, be sure to look for expandability:
Larger lot size
A layout that is conducive to adding on without it being a kludge
Be careful about setbacks (you can only build so close to the sidewalk, and you might have restrictions on the backyard).
For example, I’ve seen houses where the only way I knew there was an addition was that there was a slight bump in the floor. Others are so obvious it’s painful. I’m living in a house with a 2nd story addition, and the layout is seamless - I don’t think I’d have known if someone hadn’t said something except for the fact that all the outlets upstairs are 3-prong and grounded
Covid has taught us that you can do a lot of entertaining outside, so if you think you want to host large dinner parties, think about parking for guests and outside space where you could put up a canopy and some folding tables and chairs and BBQ.
One thing you should not do is to buy a huge house that you can’t comfortably afford thinking you’ll have a family if you’re not necessarily on track for that. I do know a woman whose mother pressed her to buy a large house on a large lot in Menlo Park who never got married because she was working too much trying to pay for it that she had no time for a social life.
Remember that some houses are cheaper because they will always have a downside:
Near the highway
Near the train tracks (I don’t know - if they electrify, will you not get the horn anymore at night???)
Next to the airport
Major thoroughfares
Small lots
Some people love being near schools, but if you don’t have kids, be aware of how crappy school day traffic can be – go there on a school day and watch the insanity. I’ll try not to run you over
I am not planning on having kids until possibly 28-30. I’ll make sure to keep your recommendations about school in mind, although I don’t have experience with schooling in the Bay Area. I’ll definitely research more on public vs private schooling here.
Would a 1.5 Million Dollar home be within my budget based on my income and assets?
I think later on, I would like to move some family, along with having kids. Based on your suggestions, 3 rooms with further expandability later on, or 4 rooms, seems to be the sweet spot. I plan on renting out the other rooms until that happens, so hoping that can help cover the mortgage in the interim.
My dad has some experience working with contractors and home renovation. Is it an economically good idea to find a cheaper house, tear down some walls, and paying for renovations, rather than buying a house with everything exactly as you want it? And if I do that, should I contract an interior designer to help plan out how we would do renovations, or try to be self-taught?
Thank you a lot! That is the goal. I’m currently in the process of finding the right talent, covering my bases in engineering, learning to be a leader, and studying the business world. A lot of my drive to study the stock market was not just for profit, but also to better understand how companies operate, and think about what are the fundamental issues that are unsolved in the world.
I would start with talking to a mortgage broker / banker to understand how much you qualify. Based on your downpayment and your income would let you know what you can qualify. Then, narrow your search with that. You don’t need forever home with this one, just look for something that’s convenient for your commute as well as rental long term. Based on your track record, I am sure you will earn enough to buy another house and leave this house as rental. Start with how much you can buy then narrow down the neighborhood as well as type like SFH or Townhouse.
Short answer: You can afford it, but the nature of your income may determine if you can get a mortgage.
Long answer: It’s complicated. (It’s been a while since we went through all this, so if I’m wrong, please correct me)
IIRC the formula for a owner-occupied is 20% down payment, 40% of your salary (regardless of tax bracket) can go towards the monthly payment PITI - mortgage, insurance, mortgage insurance (which you don’t need if you’re over 20% down), and property taxes. You can calculate PITI on Redfin for any particular house based on current interest rates.
They’ll also want a reserve which could be 12-24 months of PITI.
$8,060 per month = around $100K per year
$300K down payment
$97K-$193K reserve
So the big question is how much of your $350K is income vs. stock? Because lenders treat the cash salary differently from the stock bonus.
If you have $350K in salary (no stock bonus) then $350000*.40/12 = $11,666 > $8060, so you should be fine, BUT if you have $175K in salary, and $175K in post-IPO stock bonus, your calculation will look quite different. Either they’ll ignore the stock entirely and say you can only afford $175K * 40% = $70K which is $6854 per month or if you’re lucky they might count 60% of your stock and you can bring that up a bit to $9333 ( = (175000 + 175000*.6) *.4 / 12)
If you want to be considered a landlord and have your rent count, then they’ll want a 30% down payment, plus they want to know that you have experience and/or a signed lease (yeah right!), and they’ll only count something like 60% of the rental income. Honestly, that route is probably less desirable for you.
Either way, if you’re renting out a room or two, you can certainly afford the house, it’s just a question getting the mortgage for it. I have a friend who rents out two rooms and pays no rent at all 10 years later, so if you’re game for that, just make sure you trust your roommates, because eviction in California can take months even if your roommate is threatening your safety.
If you have significant stock income that needs to count towards the house purchase, I recommend this guy:
Robert Cohan
He pulled a miracle for us - about $200K of post-IPO stock in lockup counting towards reserve, changed jobs in the middle of buying, and stock bonus counting as income. We paid .5% or .75% higher on the interest rate, but have refinanced now, so no big deal. SOOOO glad to have the house.
When will the family might move in and will you charge them rent? If it’ll be 10 years, you may want to wait and buy another house when it comes time. If in 2 years, then definitely account for them now.
What kind of layout you want? You could buy a duplex which often have a different pricing than SFRs (Single family residences) and sometimes give you a cheaper price per square foot because the price is more based on possible rent income. This would give your parents or inlaws a separate entrance and you more privacy.
Pros and cons:
Because of various factors wood is extremely expensive right now (or was recently). Manpower might be as well because of Covid. So i’m not sure that now is a good time to renovate - you’d want to know what current price per square foot for add-on or renovation is and how backed up the contractors are. (anyone here know?)
When you buy a house, you need to compare the price per square foot to the price per square foot to renovate or add-on. In the past it’s been something like $400 to build, $800-$1000 to buy. It could be a toss-up whether to build-on or buy what you want.
Even if you’re salaried, your time and sanity have a price (or your dad’s).
You might need to keep renting out while renovating or you might need to move out later to renovate, so account for rent.
When you’ve owned the house for 15 years or more, the price per square foot to build ends up being much lower than buying new, and you’ve got a lower property tax, and selling then buying again costs $$ to the realtor, so many people opt to add-on and live through the construction rather than move.
I thought we’d have to buy a house and do an add-on, but we found a place with a great price per square foot and didn’t have to renovate, and in retrospect, I’m glad. We’ll still do a kitchen and bathroom renovation at some point, but finding a place you can move into and get on with your life is nice. If you were a SAHM with kids in school, handling a home renovation part-time could be fun, but if you’re working full-time, how excited are you manage a construction project as well?
Whether to contract an interior designer or not is really up to your comfort level. My husband wants a “professional” to do the design when we redo our kitchen. I want a particular layout that I’ve thought about for 2 years now so he can hire a professional, but they better come up with my layout.
It’s recommended that you live in a house for 1-2 years before you make any changes. I agree, but if you’re going to do something like add a second floor or an addition, the layout is the biggest thing and you can observe a lot of renovations just by going to a lot of open houses around here.
