First Time Home-Buyer from Bay Area to Austin Texas

30 Replies

Hey BiggerPockets fam,

Anyone who knows the Bay Area knows that home prices here are on the expensive side.
I am currently employed at a great company working as a cashier making $17.25 but because I live(with my parents) in the pricier side of the area(San Jose) I get a $2.00 premium which brings me up to $19.25/hr which is awesome! The only issue is that when I went to get pre-approved for a home they only approved me at $175,000. If I continue working at my current employer I probably wont be able to afford anything in my area anytime soon. 

Knowing the importance of location, I was looking at Austin,TX being one of the fastest growing cities out there. I hope to eventually turn my property into a rental property after my girl friend finishes nursing school out there which should be about two years max. 

I have also had my real estate license here in California for a little over a year now but I have not made any moves in this industry. I'm held back by the thought of not being ready and many other excuses especially the fact that there is no promised paycheck. If I could be successful in this career I would prefer to stay but I want to consider this a higher risk route with a higher reward. 

Essentially, my first choice is to move to Texas and buy a house for about $150,000. Take the $2.00 pay-cut for an estimated yearly earnings of at least $33,000 and eventually convert it to a rental property to eventually move back to California. 2nd choice would be to just stay here in San Jose and earn about $28-30k a year working part time hours at my great company and also try to get something started in Real Estate. I wont be able to buy anything until I sell at least two properties as opposed to be able to make the Texas move as soon as I find a property.

Is there anything I should know prior to making such a move or any advice you guys can offer me that might give me some kind of direction? 


Thanks,

Rafael Gallardo Jr

@Rafael Gallardo Austin is a great city! I took a leap myself and am glad I did. As for the $150k house, you're going to need to look about 30-60 minutes outside of Austin to find that. You can still get the occasional house for $250k within Austin but $150k is low for most markets in the US.

Texas is certainly more affordable than California on many fronts. We do not have a state income tax - that savings alone will cover most of the $2/hr differential that you are currently earning. Add in gas prices and other commodities, and you will come out ahead in TX vs. CA with only a ~12% income swing.

As Jordan indicated, $150K will not take you very far in Central Texas. Your only option for something in the Austin metro area at that price point would be a small condo in some less desirable parts of town, often conversions from former apartment complexes. For lots of reasons, I would stay away from that for an investment.

If you can push your budget to $200-$220K, you start having some good options in the 20-30 mi radius suburbs - places like Kyle, Leander or Hutto.

@Rafael Gallardo As mentioned already its going to be tough to accomplish your goals in the city of Austin for a rental house at that price point. You can do the exurbs like taylor at that price which isn't bad at all. I like Taylor.  Have you chatted with a lender about the possibility of buying a duplex and living in one side while renting out the other side? That should increase the price point a bit and you will likely be able to cash flow on it when you move back to CA. In such a scenario you can get tax benefits as well. 


You can get a condo as well. There are a few near the domain but they aren't brand new. The domain is a hot area. There are also some near the rapidly redeveloping area of riverside. But the condo fees and water allocation bill can kill the cash flow, initially. I know folks that have done well in those types investments as well. 

There are options. Chat with your mortgage lender. If you don't have a good one then I can refer you to a few.  

The lack of state income tax is more than made up by the exorbitant property taxes in Texas - especially Austin.  High income earners benefit the most from no income tax.  

Originally posted by @Tim Hendricks :

Texas is certainly more affordable than California on many fronts. We do not have a state income tax - that savings alone will cover most of the $2/hr differential that you are currently earning. Add in gas prices and other commodities, and you will come out ahead in TX vs. CA with only a ~12% income swing.

As Jordan indicated, $150K will not take you very far in Central Texas. Your only option for something in the Austin metro area at that price point would be a small condo in some less desirable parts of town, often conversions from former apartment complexes. For lots of reasons, I would stay away from that for an investment.

If you can push your budget to $200-$220K, you start having some good options in the 20-30 mi radius suburbs - places like Kyle, Leander or Hutto.

 

@Brandi T. but you aren't looking at the whole picture. Yea property taxes are high but we have one of the lowest overall tax burdens in the country, meaning you'll end up with more money at the end of the year. I'd much rather pay a voluntary tax like property tax than be told I have to pay a huge state income tax.

Well, I kind of agree with you.  We moved here from Colorado and I understand what you're saying but that is dependent on where you move from.  I just think people need to understand that the income tax "savings" is offset by the higher property tax and not think they will have alot of extra cash from the income tax savings.  You can see from this graphic that if we had believed that when we moved from CO we would have been disappointed!  

https://wallethub.com/edu/states-with-highest-lowest-tax-burden/20494/


Originally posted by @Jordan Moorhead :

@Brandi T. but you aren't looking at the whole picture. Yea property taxes are high but we have one of the lowest overall tax burdens in the country, meaning you'll end up with more money at the end of the year. I'd much rather pay a voluntary tax like property tax than be told I have to pay a huge state income tax.

 

The info provided shows that you ended up paying .03% more in taxes @Brandi T. ? I don't understand why that's something to get upset about. Did you move to Texas to purely save money and for no other reasons?

@Jordan Moorhead  Why only say that there is no income tax, without mentioning high property taxes?

Another thing I’ve seen agents/brokers say is that lock down the low interest rate for years so that the monthly payment stays the same while rent would increase with time, completely ignoring that the monthly payments may increase at a faster rate than the rent due to taxes and insurance.

I also wonder why the brokers/agents say to a buyer that they are free to them, without adding that they will negotiate hard to bring the price down by at least 6% from the market value.

And so many other things brokers/agents say while they ignore the other side of the coin completely... why?

I never said I was upset...we love Texas.  I just think it shouldn't be presented that you save all this money on income tax without mentioning the higher property tax in Texas.  Just an opinion.

Originally posted by @Jordan Moorhead :

The info provided shows that you ended up paying .03% more in taxes @Brandi T.? I don't understand why that's something to get upset about. Did you move to Texas to purely save money and for no other reasons?

 

@Jordan Moorhead As someone who has recently moved from the Bay Area to central Texas you really need to take into account the higher property taxes and insurance. My property insurance went up considerably in Texas due to the high incidence of hail/wind storm damage. 
If you are thinking long term you should also consider wage appreciation. You Texas employer is likely to freeze you hourly rate while in CA your wages will continue to grow. If I were still working 9-5 I would have stayed in CA. 

@Jordan Moorhead  My comment on wages is based on personal experience; 20+ years working in Texas 13 of which were in Austin vs 7 years working in the Bay Area. My wages more than doubled moving from Dallas to San Jose.  In my experience the CA income tax is a total red herring. Who cares if I pay 8% income tax at double the wages. Do the math. 
CA real estate was very good to me as well. I turned $765k primary residence into $3M house hacking in South Bay. 

@Jordan Moorhead

I made enough money in CA to retire early. Or I should say I now do real estate full time. :-)

Why retire in Texas? My three daughters and four grandkids are all in Texas.

@Brandi T. you raise a good point about total tax burden. It will depend on your specific income level and house type, but I would assume that OP @Rafael Gallardo will have a lower tax burden in TX than CA based on what he shared. At $45k/year in income in CA, assuming 6% net state income tax (after any deductions, etc), he's looking at $2700/year in taxes.


While CA has a lower property tax rate than TX, with the absolute value of the homes being so much more expensive, your total property tax dollars will be lower in TX. Let's assume he buys a $200K home in TX and pays 2.5% in property taxes, or $5000/year. A starter home in the CA exurbs might be had for $350K and a 1% tax rate, or $3500/year.


TX = $5000/year

CA = $3500 property + $2700 income = $6200/year


That also assumes that he is even able to purchase a home in CA, which is not likely possible.


I don't mean to paint TX as a tax-free utopia, but it does have a lower overall tax burden for *most* people. It's also producing more new jobs than almost anywhere else in the country, which is driving income growth, especially in Austin.

@Tim Hendricks

Your math is oversimplifying how income taxes are calculated. They are based on brackets. At $45k of income, his marginal tax rate is 6%. But that rate is only applied to income above ~$32k. The income below that is taxed at a lower rate and so on and so on. If his gross wages were $45k his California tax liability is under $1.3k. So your hypothetical scenario is much closer to a break even. (Although OP stated he makes $33k a year, ONLY $600 of CA income tax at that level)

@Jordan Moorhead

The whole picture! Well California has a reputation for high state income taxes and Texas has...no state income taxes! The fact of the matter is thought that at OP’s income level the property taxes on a purchase in Texas are fairly significant relative to income.

Say his wages are $30k in Texas. Monthly income of $2,500. Assume a 43% DTI limitation for his loan so his P&I can be up to $1,075. He could qualify for a loan up to $225k (30 yr fixed @ 4%). Let's assume this is the purchase price and no down payment for simplicity. At 2.5% the property taxes would be $5,625 or $469/mo. Property taxes alone are 18% of his monthly income. Combined with the mortgage payment this is over $1,544/mo.

Comparing to California is not apples to apples whatsoever, as the property costs are too high to begin with. Another simplified illustration, but a person in each state buys a $1,000,000 house. Assume 1% property tax CA and 2.5% for TX so $10k and $25k respectively. In order to cover the $15k gap with income taxes the California person would need to earn $200k per year.

I could go on and on and none of these factor in federal taxes which would affect your net take home earnings. But moral of the story don’t paint taxes with too broad of a stroke.

@Rafael Gallardo

If you want to get more exposure to the real estate industry, consider taking the leap and starting to work as an agent. It may not have a guaranteed paycheck (although I’ve heard of agent positions with hourly or fixed income, I believe Redfin is one). It may start slow but once you get some experience you could greatly outpace the earnings from your current job. At that point you can see if buying in CA might be feasible and you’ll know much more about your local market and buying and selling.

If you have your heart set on Austin, maybe consider saving up for an extra year. During that time, study up on the Austin market and figure out where you would want to live, hopefully a neighborhood that would be good for a rental down the road. The extra year of savings could help you afford a place closer to the city. Don’t forget to set some money aside for reserves!

Don't forget there is a cottage industry in Texas that protest property taxes yearly. In Austin the usual market rate for their costs is 1/3rd of the savings. Most savvy landlords use them. The taxes are high unless you protest them. The same thing applies to income tax. Employ cpa or cpa's that understand real estate taxation. And then put the players to play so that they can utilize their expertise to help you on your journey. 

I read that comparing CA to Tx is not an apples to apples comparison. Wrong. Capital is free flowing. It will flow to the area that has the highest perceived risk adjusted rate of return whether it be California, Texas or Brazil (not good right now). 

Taxes are a factor no doubt about it and its important to study the matter. One must also factor income growth into the equation as well.   

In regards to job, do what you enjoy doing. That is a paraphrase of Warren Buffet. If you enjoy doing it then the rest will take care of itself. Buffet's son is a farmer btw from what i have read and I have read that he is pretty good at it. 

@Rafael Gallardo I say you do it! I moved to Austin back in 2012 and I was making about $30k/yr at entry level marketing job at a software company back then. I wish I would have had the education and boldness to be open to real estate back then or even years later when my income doubled and then tripled. It wasn't until last year that I finally bought a home. Needless to say, I missed perhaps a better window of buying a home and REI. You have to consider that Austin and the metro area will continue to grow. There are many job opportunities here too. Perhaps it's less about the taxes, income, etc and more about the possibilities. The only thing I would add is to level your California expectations when moving to Texas. I'm not one to hate on Californias at all (many of my neighbors, colleagues, and friends are from CA) , but just keep in mind we are two very different states.