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Don't listen to people on internet forums that claim it's impossible unless you earn ungodly amounts of money - Be mindful that if you surround yourself by people that say you "can't" (complete with all their little snarky comments), you will eventually believe their lies. Rid yourself of people like that and hang around with people that are financially savvy enough to understand it's doable
Accept the fact that buying a home in this area requires sacrifices and will probably result in your being house poor for anywhere from 3 to 5 years - So, get rid of that handy dandy phone with the internet, unlimited texting, and the ability to toast bread. You don't need it and it will just run up your expenses. Get a cheap phone and use it to talk, and a cheap phone plan (have a computer at home if you need internet). Cable TV..gone. Get an energy efficient TV and buy an antenna (you can watch local programming and some other channels you probably didn't know existed because they're not on cable). Buy energy efficient appliances, lighting, etc., and be mindful of electricity costs (i.e. not having lights on you don't need, etc.). Bundle up during cold times and keep heat at a minimum. Brown bag it! Eat at home (including brewing your own coffee). Forget the night clubbing and bar hopping. Buying drinks out is expensive (you can have that fun again in about 5 years after you've gotten some promotions at work). You love the area, you want to live here. So enjoy the area. Your vacations will be stay-cations. People pay all sorts of money to vacation in the Bay Area. You get it for free. Enjoy it. You can travel away from the area down the road. Your mother and I love you and want to see you. So plan on coming over at least once a week for a home cooked meal.
Marry a woman than understands that buying a home here requires both partners to work - This has been the case for years so any lists talking about a family with a single income earner not being able to afford here are just stupid (virtually no profession on its own could buy a house here). The average household income in SF is roughly $105K. You and your wife will need to earn at least 1 1/3 of that amount. Shoot for that goal. If that means picking up an extra 8 hours on a weekend for a side job, so be it. Keep in mind, even if your debt ratio on the mortgage ends up being in the low 40% range, that remaining amount is still much higher than most areas of the country. You'll survive (we did and we started off at roughly 42%).
Save money for a down payment - What a novel concept. You'll constantly hear people whine about the people that come here penniless and can't save for a down payment. That's because that's dumb and they apparently think the way banks did things prior to the last recession was a good way to go. Anyone I know that came from out of the area saved in their low COL area before they got here. Those that I grew up with here either got help from their parents or were allowed to stay at home rent free so they can save for their down payment (that is the gift your mother and I are giving you...and I encourage you to put away every dime). Also realize that you don't necessarily have to put 20% down and their are currently vehicles out there that will prevent you from paying PMI.
Realize that the further away from the city you buy, the less expensive the cost (keeping in mind your commute). Run the numbers. You're going to pay exorbitant rent anyway so you might as well buy if you plan on staying in the area. To rent a 2 bedroom in or very near the city, you'll be looking at roughly $4k in rent. Your after tax cost is going to be similar if you buy. If you look further away, it will be less so figure it out and how long a commute you can deal with (I recommend being closer if you're working in the city). Use our best friend (realtor) to help you with your home purchase. He'll make sure it's in good enough shape so you're initial maintenance costs in the first 5 years are small. Also, be mindful of the ebbs and flows in the real estate market here and Economist predictions. We typically have had runs in the ballpark of 7 years. The housing costs come down, rebound, and exceed the previous high. The next recession is predicted for 2017 (it's not a guarantee but at least something to be mindful of). People that bought in 2010 are quite pleased right now. However, even during these recessionary times, rents still remained relatively high in relation to the drop in housing prices (just another reason to buy instead of rent). Hopefully you pick a good time to get in, but don't get scared off as you can still find opportunities if you're persistent and do your homework.
Buy a reliable, fuel efficient used car with a reasonable insurance rate - You don't need a BMW and for that matter, you don't need an expensive Prius (regardless of the fuel economy). Buy yourself a used car that gets good gas mileage (i.e. maybe a corolla with 50-60k miles on it). If you take care of a car, you should expect to get at least 200K miles on it. And buy it outright with cash.
Get the least expensive health plan possible - Unfortunately Obamacare eliminated catastrophic plans, but just plan on getting a low cost plan with the highest deductible possible. You can pay for a checkup. Eat right, exercise, and don't get hit by a bus
Don't be in a rush to have kids - to raise a child from birth through college is probably going to cost you in the ballpark of $500-750K. Wait.
Never carry a balance on a credit card and maintain your FICO score - The last thing you want to do is pay interest charges on a credit card. I suggest a couple of cards so you can establish a score, but get ones that you don't have to pay an annual fee and actually reward you for your purchases (a nice spiff). Use them for any bills you would normally pay, groceries, etc. Heck, you might be able to get a short vacation paid by the credit card company. But ALWAYS have the full balance paid off at the end of the month
Always continue to educate yourself - Whether it's training for your job or something else you can segue into. The worst thing that happened in the last recession is people getting laid off of jobs they had for years and their inability to reinvent themselves. I've had 3 different occupations in my lifetime. Sometimes it's necessary.
Put in the extra time at work and do the little things that will result in your getting promoted
Be mindful of your tax write offs. Do everything you can to give as little to the government as possible. Owning a home in this area opens the door for you to itemize your deductions. Educate yourself on what you can write off and take full advantage of it. Run the numbers on your net difference regarding retirement savings and its impact on your taxable income. Your mother and I have gotten as low as an effective Federal tax rate of sub 8%. Always keep as much as you can and then you decide how you want to spend it (that includes any charities but at least you can give it to causes you care about instead of just letting the government decide where it should go).
Last edited by bodyforlife99; 02-26-2016 at 08:49 AM..
Good common-sense advice, Mom. I would also add that they don't need internet at home. In a pinch, they can use the computers at their local library. A library--what a concept! Free books, free computer time, even free programs for kids!
We just moved here from Phoenix, AZ (a very cheap COL state) where we are used to owning large, nice and brand new homes. It was a bit of an initial shell shock here in the Bay with what you have to give up in order to live in this beautiful state.
It was hard for us at first moving here and looking at rentals, and just the idea of renting. For what you get on a middle class income, the homes are old, many in original condition, in questionable areas and in poor school districts. Not to mention tiny. In AZ, your master bedroom closet is the size of some bedrooms here in CA. In CA, you just need to learn to live on less, less space, and be wise with your money. You don't need all these fancy luxuries you had in cheaper COL states because CA and everything you can do here is the "luxury" you traded for.
We are spending our first year here getting adjusted and learning where we do want to live. With all the research we've read, it does seem buying right now may be a bit risky as it certainly does seem the Bay Area is in a bit of a housing bubble. We decided not to sell our homes in Arizona. We've rented them out for thi year, and will evaluate selling them next year to roll a down payment into a home in CA.
We check listings daily and there are plenty of homes for sale in the East Bay that a middle class family can afford. Can a middle class family afford anything near SF city? No. But there are PLENTY of places in the East Bay a working two income family can afford.
Don't listen to people on internet forums that claim it's impossible unless you earn ungodly amounts of money - Be mindful that if you surround yourself by people that say you "can't" (complete with all their little snarky comments), you will eventually believe their lies. Rid yourself of people like that and hang around with people that are financially savvy enough to understand it's doable
Accept the fact that buying a home in this area requires sacrifices and will probably result in your being house poor for anywhere from 3 to 5 years - So, get rid of that handy dandy phone with the internet, unlimited texting, and the ability to toast bread. You don't need it and it will just run up your expenses. Get a cheap phone and use it to talk, and a cheap phone plan (have a computer at home if you need internet). Cable TV..gone. Get an energy efficient TV and buy an antenna (you can watch local programming and some other channels you probably didn't know existed because they're not on cable). Buy energy efficient appliances, lighting, etc., and be mindful of electricity costs (i.e. not having lights on you don't need, etc.). Bundle up during cold times and keep heat at a minimum. Brown bag it! Eat at home (including brewing your own coffee). Forget the night clubbing and bar hopping. Buying drinks out is expensive (you can have that fun again in about 5 years after you've gotten some promotions at work). You love the area, you want to live here. So enjoy the area. Your vacations will be stay-cations. People pay all sorts of money to vacation in the Bay Area. You get it for free. Enjoy it. You can travel away from the area down the road. Your mother and I love you and want to see you. So plan on coming over at least once a week for a home cooked meal.
Marry a woman than understands that buying a home here requires both partners to work - This has been the case for years so any lists talking about a family with a single income earner not being able to afford here are just stupid (virtually no profession on its own could buy a house here). The average household income in SF is roughly $105K. You and your wife will need to earn at least 1 1/3 of that amount. Shoot for that goal. If that means picking up an extra 8 hours on a weekend for a side job, so be it. Keep in mind, even if your debt ratio on the mortgage ends up being in the low 40% range, that remaining amount is still much higher than most areas of the country. You'll survive (we did and we started off at roughly 42%).
Save money for a down payment - What a novel concept. You'll constantly hear people whine about the people that come here penniless and can't save for a down payment. That's because that's dumb and they apparently think the way banks did things prior to the last recession was a good way to go. Anyone I know that came from out of the area saved in their low COL area before they got here. Those that I grew up with here either got help from their parents or were allowed to stay at home rent free so they can save for their down payment (that is the gift your mother and I are giving you...and I encourage you to put away every dime). Also realize that you don't necessarily have to put 20% down and their are currently vehicles out there that will prevent you from paying PMI.
Realize that the further away from the city you buy, the less expensive the cost (keeping in mind your commute). Run the numbers. You're going to pay exorbitant rent anyway so you might as well buy if you plan on staying in the area. To rent a 2 bedroom in or very near the city, you'll be looking at roughly $4k in rent. Your after tax cost is going to be similar if you buy. If you look further away, it will be less so figure it out and how long a commute you can deal with (I recommend being closer if you're working in the city). Use our best friend (realtor) to help you with your home purchase. He'll make sure it's in good enough shape so you're initial maintenance costs in the first 5 years are small. Also, be mindful of the ebbs and flows in the real estate market here and Economist predictions. We typically have had runs in the ballpark of 7 years. The housing costs come down, rebound, and exceed the previous high. The next recession is predicted for 2017 (it's not a guarantee but at least something to be mindful of). People that bought in 2010 are quite pleased right now. However, even during these recessionary times, rents still remained relatively high in relation to the drop in housing prices (just another reason to buy instead of rent). Hopefully you pick a good time to get in, but don't get scared off as you can still find opportunities if you're persistent and do your homework.
Buy a reliable, fuel efficient used car with a reasonable insurance rate - You don't need a BMW and for that matter, you don't need an expensive Prius (regardless of the fuel economy). Buy yourself a used car that gets good gas mileage (i.e. maybe a corolla with 50-60k miles on it). If you take care of a car, you should expect to get at least 200K miles on it. And buy it outright with cash.
Get the least expensive health plan possible - Unfortunately Obamacare eliminated catastrophic plans, but just plan on getting a low cost plan with the highest deductible possible. You can pay for a checkup. Eat right, exercise, and don't get hit by a bus
Don't be in a rush to have kids - to raise a child from birth through college is probably going to cost you in the ballpark of $500-750K. Wait.
Never carry a balance on a credit card and maintain your FICO score - The last thing you want to do is pay interest charges on a credit card. I suggest a couple of cards so you can establish a score, but get ones that you don't have to pay an annual fee and actually reward you for your purchases (a nice spiff). Use them for any bills you would normally pay, groceries, etc. Heck, you might be able to get a short vacation paid by the credit card company. But ALWAYS have the full balance paid off at the end of the month
Always continue to educate yourself - Whether it's training for your job or something else you can segue into. The worst thing that happened in the last recession is people getting laid off of jobs they had for years and their inability to reinvent themselves. I've had 3 different occupations in my lifetime. Sometimes it's necessary.
Put in the extra time at work and do the little things that will result in your getting promoted
Be mindful of your tax write offs. Do everything you can to give as little to the government as possible. Owning a home in this area opens the door for you to itemize your deductions. Educate yourself on what you can write off and take full advantage of it. Run the numbers on your net difference regarding retirement savings and its impact on your taxable income. Your mother and I have gotten as low as an effective Federal tax rate of sub 8%. Always keep as much as you can and then you decide how you want to spend it (that includes any charities but at least you can give it to causes you care about instead of just letting the government decide where it should go).
1) You should also tell him to not march against Wall Street if the economy crashes and he loses his job because he bought a house he couldn't afford. Buying a house is different than having high career ambitions. You shouldn't surround yourself with people who say you won't make it, so don't even try. However, there is nothing wrong with having friends who give you reality checks when you say you plan to buy a home, but can only afford 5% down and an interest only loan.
2) I somewhat agree with you here, although I can't imagine any job paying enough to afford a home that won't require you to have a smart phone or internet at home, so I think it's very naive to think you can save money by eliminating these expenses. I also think traveling is very healthy and worth more than anything else in life. You don't have to be rich to travel either, you can backpack around Europe or Asia through Hostels and eat street food etc to keep expenses down.
3) I agree with you here.
4) I somewhat agree with you, while you don't need 20%, it's still good to have a 20% down payment. If you don't have 20%, then you shouldn't be buying. I worked as a mortgage loan originator in San Francisco, so this is the advice I would give my friends or family if they don't have a large nest egg.
5) I disagree for the most part here. Nobody knows when the next crash will happen and putting all your trust in your realtor is a mistake. It's very easy to get your real estate license. At the end of the day, they also want to make money and most realtors always view the market as a great time to buy. If it were as easy as averaging out the times between past booms and busts, then you should quit your job and put everything into options in the stock market. Also, instead of focusing on your commute, which really isn't a big expense in the whole scheme of things, you should focus on all the added costs to home ownership from HOAs, maintenance, water heater, gutters, drainage, plumbing, property taxes, there are a million things that will need to be fixed or replaced when you own a home. Some of them you can do it yourself, while others you will need to hire someone. One of the biggest mistakes I see people make comparing owning to renting is they underestimate the amount of maintenance required each year and even brand new homes aren't maintenance free, especially not for 5 years! Thinking you can buy a property and have no issues for 5 years is fantasy island.
6) I agree with you here, although I would rather see your son have a higher down payment than to pay cash on a used car.
7) I don't agree with you here, but that is just a personal preference of mine. I've seen too many people have unexpected health complications where they didn't have good insurance plans and are now in mountains of debt probably for the rest of their lives.
8) Agreed.
9) Agreed as well, there are a few options that give you 2% cash back on all purchases with no annual fees. Treat them like a debit card and never spend money you don't have.
I'm not sure I agree with number 7 (get the cheapest health insurance possible) - that can come back to bite you in a very expensive way if something does go wrong. And most good employers subsidize the vast majority of the premium, so even the best plan is not going to cost you that much.
Along similar lines, don't skimp on your liability limits for car insurance. Even a $250k limit won't go very far in the Bay Area. Get an umbrella policy - they're quite cheap and a very prudent purchase for anyone who has assets or future earnings that they don't want to lose, and who shares the road with tech millionaires/billionaires on a daily basis.
Another suggestion: when buying a house, try to buy during a downturn if you can. Prices will be lower, and you won't have many other people outbidding you. More importantly, sellers lose some of their arrogance and leverage, so you can negotiate them downward and they are not in a position to reject inspection contingencies, etc. For the same reason, avoid the busiest season (spring/summer) if you want less competition with other buyers.
Disagree on #8. I know many folks that say lets wait another year when we are in a better financial position to have kids only to find they are approaching 40 and still saying that. I know I certainly wished I would not have waited so long (35). California is expensive know matter what income class you are in.
Tell the potential home buyer also: learn how much you need to save for retirement using conservative rates of return, how much to save for college for kids, how much for rainy day savings in case of unemployment, etc. And child care, if your kids are young. It'll be at least 15k per year per kid those first few years.
Then calculate that necessary savings over time, year after year, and then calculate that with your mortgage payment and set asides for property taxes. Then look at your income, and add in *realistic* increases in your earnings, and see how comfortable you are, how close you might be cutting it re: living paycheck to paycheck.
Then sit back, relax, enjoy your work on that sheet of paper or screen, and have a thought that maybe, just maybe, you do need to earn waaaaaaaaaaaay more than some people tell you that you do, that maybe it isn't so simple and easy, and just being frugal isn't enough. Maybe.
BTW, I don't think unlimited texting charges exist anymore. And, for me that overage was $10 per month. I didn't use it. Somehow I don't think that would help my savings much. It's important to know that things are different in 2016.
Sorry for the snark, but unwarranted positivity and optimism and marginal penny-pinching is no counterpoint to hard financial reality. Again, go calculate.
Don't get me wrong on the health insurance thing. Obviously if he has an employee plan at work, he should take advantage of whatever they have if it's reasonable. However, if he's self insured, I'm encouraging him for a short term period (5 years) to get a higher deductible plan. He won't be destroyed financially if he he does encounter something, but he's also young enough that it's worth the risk to me. I can't think of anything major I had done medically at least until well into my 40's. If he ends up having something happen and has to pay a $5k deductible, so be it. I think it's worth the risk. Obviously there would be things beyond the medical that would be more of a concern.
I wasn't necessarily saying to skimp on the auto insurance as much as simply getting an older, reliable car that can get decent gas mileage and would naturally have a lower blue book value and lower insurance rates.
The medical and other items (i.e. retirement) will have modifications after he gets through that initial 5 years and starts earning more (a normal progression for most couples).
Last edited by bodyforlife99; 02-26-2016 at 11:19 AM..
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