Thinking ahead (about real estate)

A 10% down-payment on a $500,000, 2 bedroom condo is $50,000. Saving that much would require putting away $1041 a month for 4 years. 4 years away feels like a very long time.

But in 4 years I’ll only be 31. My 31 year old self would probably want to take my 27 year old self out for a beer and thank me profusely if he looked at his savings account balance and found $50,000. Of course, between then and now, there’ll probably be a lot of plane tickets and other unplanned spontaneous large expenses to account for. So saving $50,000 might take a little longer.

In 4 years Stephanie and I will have paid around $72,000 in rent. In 4 years I don’t know what “beginner” condos will cost in the city, I don’t know where we’ll be living or where (or if) we’d want to buy, and I don’t know where Stephanie or I will be working. So I probably shouldn’t be envisioning a condo in San Francisco, but rather one in the next place we live.

Wherever that is, a $450,000 30 year 6.3% fixed rate mortgage costs $2785/month, or $1200 more than we currently pay in rent. One hopes that in 4 years we could comfortably afford that. The funny thing is that $2785×12×30 = $1,002,600. It costs $552,600 in interest payments over 30 years to borrow 450,000. Wow, that is striking.

Things that would be worth paying $1200 more each month for: covered parking for 2 Vespas and/or a Smart Fortwo (or other city car). A washer and dryer in the apartment. A second bedroom. An outdoor space or balcony with room for a grill.

8 Comments

roy

don’t know if you’ve already seen this, but there is a cool calculator from nytimes on the costs of renting v. owning

Priced Out Forever (blog) is great encouragement when looking at Bay Area real estate. The general gist is: the market here is hopelessly fucked up. Renting is cheaper than buying for the foreseeable future, since the overall housing slide doesn’t seem to be affecting the area.

Personally, I’m really glad I can’t afford to make a down payment for a few years, since it keeps me from getting into a market that seems destined for a “correction.”

It’s too bad about pissing away gobs of money on rent, though. At least the weather’s nice and the job market’s killer?

roy, that NYT flash app was endlessly fascinating. Everyone else, make sure you have bugmenot so you can check it out.

So I learned a few things. If I compare my current rent for a 1 bedroom apartment to the starting price of a condo that would in all likelihood have 2 bedrooms, it will never be better to rent than buy in San Francisco. Here’s what that looks like over 30 years (gray means renting is better):

Renting for $1500/month vs. buying for $500,000

However, a fairer evaluation would be to compare the average rent of a 2 bedroom apartment to said 500k condo. A quick gander on craiglist for 2br rentals shows a range of $1500-10,000. The average of all those listings is ~$3200/month. But given my budget I’d probably aim for something around $2500/month. Charting that out suggests that owning shows benefits after only 5 years. Not great, but better than never. (Of course a $3200 rent makes owning look all the better.)

Renting for $2500/month vs. buying for $500,000

Considering that it’s conceivable to rent a 2 bedroom apartment for $2500, and a $450,000 fixed rate mortgage would involve a monthly payment of $2785, actively saving $1000/month on rent now (in our ~600sqft 1br apt) and putting that $1000 in a saving account over for the next 4 years (for a down payment) seems to make good sense for buying a 2br condo later. And if at the end of 4 years I decide there’s an Airstream trailer in my future, then at least I’ll have the means to do that instead.

Josh, thanks for the link as well. I agree that the housing market here is wonky (esp when talking to my parents who live in Austin), but at the same time it appears to be such a persistent aberration, I wonder if it’s merely the natural result of demand outstripping supply.

Regardless of whether I buy here or elsewhere (or not at all), it still seems important to me to remember to save for the longer term so that my future self has the flexibility to decide what he wants to do.

Job-wise, you’re right, it’s really hard for me to imagine being able to do what I do outside the Bay Area.

Can spontaneous people buy real estate? That seems diametrically opposed.

Spontaneous people in general, or spontaneous people meaning me? :)

Probably not, but it’s nice to dream. I guess I like having or working towards having the potential to spontaneously buy real estate (ie, saving), however actually buying real estate is not really an active goal I’m working towards.

At least not for another 4 years.

Kyle

Justin, good luck, it’s certainly difficult to buy a house here in the Bay Area. We’re currently in this process and one thing to consider when doing your calculations is to make sure that you are taking property taxes and insurance into account. You can typically count on an extra 1.25% of your home’s cost in annual property taxes, plus 0.35% annually for insurance. For a $500k house that accounts to an extra $666.66 a month (fees of the beast).

Plus depending on your lender, if you don’t pay 20% of the principle down, you will have to pay PMI (mortgage insurance) fees every month (an extra $150-$300) until 20% of the principle is paid (there are ways to avoid PMI).

-Kyle

Kyle—and don’t forget the spark! :)

Thanks for all the info, about 100% of which I didn’t know (except for some little things gleaned from that NYT calc app). I’m suddenly glad I don’t have to think about this for at least 4 years.

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