Every single time I'm in any grocery store, walking the street, or anywhere in a posh neighborhood, esp. the Bay Area, I think:
* "Golly, gosh, gee, how do these people afford these wonderful homes?"
* "What do I have to do in my career to make enough to buy this?"
* "Is it even worth it suffer in a room packed like a sardine in order to invest?"
Then, I came across this little chart on Zillow from Q1 2017:
I highly respect all self-made folks who can afford what they get, but it was really helpful reminder for me.
Many times, one can think someone else is doing great; but perhaps they think the same about you.
Was wondering if thoughts like this have ever entered anyone else's mind?
Cheers,
Alice
@Alice K. All i see when i drive by houses like that are high income earners leveraged up to their eyeballs. I prefer to drive by the middle class neighborhoods and ask myself "How do i buy ALL of these?"
"The Millionaire Next Door" really changed my perspective on material possessions like that :)
Keep hustlin'!
- Lloyd
Great post and a lot of interesting stories in here.
The thing with the Bay Area / LA / NY is that they have plenty of high pay jobs. High tech / finance / etc people earning 300-500k+ are able to leverage up the wazoo... in that chart 38-40%, and still live fairly comfortable lives. It's all relative.
If a household is pulling in 400k/yr and their mortgage is 38% of their income... other cost of living items like food, clothing, transportation are still a small(er) percentage of their income. For example a grocery budget of 1500/mo (say family of 4) doesn't affect them like it would a family pulling in combined 85k/yr. A gallon of milk costs the same to everyone in the local market.
So those high earners can have those 1M homes and eat their avocado toasts too.
@Diane G. great story and love your ongoing grit to stay tough during rough times. Your perseverance has paid off :)
@Alice K., We'll see which multi-million dollar home owners we should be jealous of when the next downturn shows up. Heck, the same could be said for a lot of the investors on BP who look like geniuses right now. It looks to me like 90% of the folks posting here and doing well in RE have really only been in the market since AFTER the Great Recession. That includes me! So, the only way to really prove that we're smarter than the next person is to see how we do going through a down turn. There's a reason why the last dip put a lot of millionaires out of commission... so, I agree with the folks who talk about sticking to the investment strategy that works for your personal financial situation over the long term.
One observation I'll make specific to the Bay Area, though. I feel kinda bad for anybody who DID NOT get into the market between 2009 and 2014. This market cycle so far has really increased the gap between owners and renters. It's tough for a lot of salaried people, when the home prices have doubled. I really don't know how you catch up if you sat on the bench during those 5-years, and I don't think a market correction is going to make up the difference in the SF Bay Area.
Been there, done that, don't want to go back.
Hubby and I used to own a large house with an awesome view overlooking Puget Sound. It was a daylight basement style. Once the kids left home, there were weeks where I did not even go downstairs.
In 2011, we bought a much more modest home in Northern Idaho, on a small acreage, for cash. In 2013, we sold the Puget Sound home and paid cash for an apartment building, also in Northern Idaho. Yippee!
I miss the pretty views of Puget Sound. I do not miss the high property taxes, insane traffic, and high maintainence of a large home. Fancy homes and neighbors also require fancy cars and other lifestyle choices that no longer appeal to me. I prefer the simple country life with space, time and cash for hobbies.
Our apartment building is a gold mine that just keeps producing. Our Idaho property has increased 54% in value.
Start reading the blog "Dr. Housing Bubble". I suspect your biggest problem is that you live in the SF Bay area. Leave California and start your life.
Would leave the bay area in a heart beat if all our family ( ie my kids grandparents) weren't living here. So darn expensive, its painful.
My first wife and I moved to the Bay Area for my job in 1995 right out of school. My cousin told me: buy a house from day one. He would even lend me the down payment. I wasnt ready to do that. But the advice was good. She got a job in 1996 and we banked her entire salary for a down payment. By 1998 we were ready to buy and bought an outrageously expensive (in my mind) home for $340K in West San Jose/Campbell. Total income then was about $100K and mortgage rates were like 7%. Fast forward to 2004, divorce and appraisal came out at about $800K. Took my share and rented for a couple of years. Bought another townhouse for $620K in 2007 in around the same neighborhood. Income at that time was zero (between jobs...the good old days). Lived there until 2014 and with new wife bought 1.3M home in Berkeley with hefty down payment (incomes had risen and we saved money). But kept the town house as a rental. New wife also had her own home in Berkeley which she bought for like $550K in 2006 on an income of less than $60K (good old days) and rented out rooms to make the mortgage work. Also kept that as rental. So fast forward to 2017 we have a primary home valued over $1.5M and two rentals valued at almost $1M each, all three with a lot of equity.
So thats how we end up with three $1M properties in the Bay Area. Two rentals generate about $1K+ per month positive cash but of course we still have a mortgage on the primary home
I can hear you all saying but we cant do that now. Prices will not continue to go up. Its the top of the market. Wait for the downturn. All I can say is that when I bought the first home for 340K I was sick to the stomach and couldnt sleep. Every penny we had was in that house. And the mortgage ate up a lot of the income. But you have to get in the game to win.
Great story ... my takeaway: BA home ownership = good investment (most times) ... marriage = bad investment (sometimes) ... LOL :)
"The Millionaire Next Door" is a fun read and gets to the heart of this discussion.
For me to own a 1,000,000 dollar home, it would cost me ~4460 more per month. That's a lot of cruises, trips to the Frio, atv trips to Mena and snorkeling trips to Cozumel/Honduras at the Money Bar/Half Moon Bay. I guess I'll always be too lazy to work more just to afford taxes/insurance equal to the median income in my state : (.
Every single time I'm in any grocery store, walking the street, or anywhere in a posh neighborhood, esp. the Bay Area, I think:
* "Golly, gosh, gee, how do these people afford these wonderful homes?"
* "What do I have to do in my career to make enough to buy this?"
* "Is it even worth it suffer in a room packed like a sardine in order to invest?"
Then, I came across this little chart on Zillow from Q1 2017:
I highly respect all self-made folks who can afford what they get, but it was really helpful reminder for me.
Many times, one can think someone else is doing great; but perhaps they think the same about you.
Was wondering if thoughts like this have ever entered anyone else's mind?
Cheers,
Alice
Don't make yourself feel better so quickly, Alice. Don't forget.. many of these SFers who spend a large % of their income on a mortgage.. come in with $500K-1M of equity from another house or in stocks. In that case, annual income is not so important.
In NYC, where studios can be upwards of $1.2, I wonder the same thing -- but sometimes i see the salaries and some starting doctors are over $500,000 base + 150,000 bonus.... bankers -- front end + traders are at this... all at age 29.... real estate sales people, depending on the deals you do and who you know can make $500,000 on a few deals...
I was watching Million Dollar Listing - New York the other day. They were selling $14 million+ condos like nothing. Huge commissions. It seems the trick is to get in good with the developers and get them to have the exclusive right to sell the units.
In NYC, where studios can be upwards of $1.2, I wonder the same thing -- but sometimes i see the salaries and some starting doctors are over $500,000 base + 150,000 bonus.... bankers -- front end + traders are at this... all at age 29.... real estate sales people, depending on the deals you do and who you know can make $500,000 on a few deals...
I was watching Million Dollar Listing - New York the other day. They were selling $14 million+ condos like nothing. Huge commissions. It seems the trick is to get in good with the developers and get them to have the exclusive right to sell the units.
The 10+ million market sucks right now. Our salaries, though, DEFINITELY do not compensate for the fact that our cost of living is SOOOO much higher. Millenials are completely stuck right now and cannot get out of renting -- 400 sq ft studios are 3100+, 1 beds are 3500-4000+ per month for rent. The only people able to afford to buy are BANKERS (not so much anymore due to lower bonuses), some LAWYERS, ENTREPRENEURS, and international people with lots of money -- alternatively, those who have lived in the city through it's pattern to double every 8 years -- and downtown and Brooklyn even more than that. Tribeca, for example, I have no idea where most of these people get this money LOL.
On the other hand, we have way too much inventory over 10 million. A few years ago, there were only a handful of apartments sold over $50 million. I believe now, on the market, there are over 700 listings over $10 million and at least 50 over $50 million. When 15 Central Park West came on the market ONLY a few years ago, people GASPED at the 3,000/ft price! Nowadays, 15 CPW is at 7k/ft. Additionally, we now have 57th street being called "Billionaire's Row" b/c I believe there are to be 6 or so buildings averaging over $5,000/sq ft -- and 432 Park Ave is around $10k per foot -- at least when they started selling this building. There are MULTIPLE apartments over the $100 million mark and even 1 apartment I know of over $200 million at 220 Central Park South. Unfortunately, they realized -- you need to be a billionaire to buy a $50 million apartment (probably not someone who just has $100 million) and they have to be looking for a brand new cookie-cutter condo (as opposed to pre-war co-op) all at the same time -- how many people are there looking for these? Well, not many as they found out. However, you have to remember that NYC is city for 2nd, 3rd, 4th homes for the uber rich, and as we've found out -- many billionaires from China, Russia, [used to be] Brazil, etc were just simply parking their money in these condos NOT to live, but rather to hide and hedge their currency from their government, who could confiscate their bank accounts in an instant. Also, we have a lot of money laundering in these apartments -- so they implemented a rule last year that all cash over $3 million on an apartment must be reported who is the ultimate beneficiary of the apartment. We joke that Billionaire's row has no lights on ever.... anyone spending $5k a foot probably doesn't live there.
@Alice K., We'll see which multi-million dollar home owners we should be jealous of when the next downturn shows up. Heck, the same could be said for a lot of the investors on BP who look like geniuses right now. It looks to me like 90% of the folks posting here and doing well in RE have really only been in the market since AFTER the Great Recession. That includes me! So, the only way to really prove that we're smarter than the next person is to see how we do going through a down turn. There's a reason why the last dip put a lot of millionaires out of commission... so, I agree with the folks who talk about sticking to the investment strategy that works for your personal financial situation over the long term.
One observation I'll make specific to the Bay Area, though. I feel kinda bad for anybody who DID NOT get into the market between 2009 and 2014. This market cycle so far has really increased the gap between owners and renters. It's tough for a lot of salaried people, when the home prices have doubled. I really don't know how you catch up if you sat on the bench during those 5-years, and I don't think a market correction is going to make up the difference in the SF Bay Area.
I don't think Bay Area will decrease until teenage billionaires stop popping up all over SF LOL... yes, there's a little envy in there. Atherton's median home price last year was $10.5 million according to Forbes!!!
Some are heavily leveraged and some are making a good living where almost half their money may be going out a mortgage, but the amount of money they are bringing in is staggering. There are those in banking and finance, attorneys, executives in established corporations, those who own their own businesses, etc., all making half a million+ a year. They have to live somewhere lol
Some are heavily leveraged and some are making a good living where almost half their money may be going out a mortgage, but the amount of money they are bringing in is staggering. There are those in banking and finance, attorneys, executives in established corporations, those who own their own businesses, etc., all making half a million+ a year. They have to live somewhere lol
Those making half a million a year are looking at places in the $1,500,000 area -- i can't tell you the ********s I've shown people for $1.5.
Case in point: http://streeteasy.com/building/402-east-90-street-... -- this property is estate condition and needs to be completely gutted... its horrific! Thus, the $1,000 per ft price point.
The only time I was upset was when I purchased beach property in Laguna Beach in 2006 -- height of the housing bubble. Others in the community were blue-collar, paid nothing b/c beach wasn't desirable when they bought -- my parents spend an exorbitant amount of money when they're executives to live among blue collar workers whose homes had exceeded the $4-5 million mark-- where they may have spent $500-$700,000 or so at the tme when the "hills" view was better than beach view. Value on the house is still under what they paid for it in 06... almost 400,000 under what they paid for it.
In the Years 1997 to 2001, I worked as a Software Developer for around $100k, peaking around $200k per year with Bonus.
The stock market crashed in 2001, so bonuses was cut and I was making on average around $140k or so.
By 2004, I quit my job.
During that time, my Partners and I bought 3 Brooklyn, NY Investments:
1) 1997 - $340k 2 Family in Ditmas Park worth $1.7 Million today
2) 1999 - $140k 2 Family in Windsor Terrace now worth $1 Million conservatively today
3) 2004 - $890k 3 Family in Clinton Hill now worth $2.8 Million today
Note that today's values included going through the Great Recession of 2007/8.
We also bought more Investments and currently own 7 Investments and another in Contract.
Funny thing is now I'm going back to software development and started researching the jobs I can possible get. They are still around $120k to $150k for the position I last held.
Salaries in my field are still approximately the same. But the home values have all skyrocketed to current levels.
I cannot imagine what it would be like if I NEVER Invested and just horded the money. There is NO WAY I could have achieved the level of wealth without Investing.
I do want to contrast my results with another Investor's results, however. Let's call him Dave.
Dave bought a SFR in Germantown area of Philly around 2004 for around $100k. It was a dilapidated 6 Bedroom house in a War Zone area.
His Calculations told him that he would have something like a 20% Cash on Cash Return.
During the holding period of his Investment, it's been destroyed several times by his tenants, all section 8s that had large number of children because the house has 6 Bedrooms. Section 8 doesn't seem to want to give a 6 Bedroom House to a mother with under a certain number of children.
He wants out and had been trying to sell the SFR for what he paid. He can't. The offers are around 30% or so under what he paid and under the current mortgage balance.
Regrettably, Dave turned down to be included in the Partnership with me on my 3rd Brooklyn Purchase of the $890k which appreciated to $2.8 Million because the Cash on Cash was breaking even on 20% down. Today, this property cashflows around $4k per month when it was zero in 2004.
I needed to Contrast my experience with Dave's because I don't want people to think that investing in Real Estate and making millions is a normal thing.
I know I'm lucky. But there's an old saying, "Luck is when Opportunity meets Preparedness."
My Analysis of the Brooklyn Market at that time told me there was an opportunity and I was prepared to get them.
So did Dave's. BUT, my Analysis of Dave's property told me at best, he may have made a small profit, which didn't turn out to be the case.
Today, after being successful in all the properties I've purchased in the last 2 decades, we buying another 3 Family for $1.9 Million.
We will hear the same responses again and again like we experienced for the last 2 decades..... "What are you crazy buying a property for $1.9 Million?" etc.
Then in 10 years from now when the property is worth $4 Million, everyone will call me Lucky for the 8th time in a row, especially if Salaries do not improve.
I've come to accept the fact that there will be a multitude of investors that will tell me my business plans are incorrect, despite all the analysis and results I can give them.
But getting back to the topic, there is no need to be jealous.... JUST INVEST CORRECTLY AND YOU WILL BE REWARDED!
First of all, a million dollar house in the Bay Area is like a $200,000 house in my city. I know several people in the Bay Area who own million dollar homes and they didn't pay anywhere near a million dollars. They have owned them for years or purchased during a down turn (2000 tech bust or 2008 real estate crash). I also know plenty of other people with million dollar homes that are house-poor.
Expensive houses are nothing to be jealous of. Yes, live in a cramped space and save your money. Expensive houses just get you more expenses such as taxes, utilities and maintenance.
Honestly, California has so many amazing things to do that I am left wondering why anyone would spend much time in their home. You are just paying for space you aren't using.
First of all, a million dollar house in the Bay Area is like a $200,000 house in my city. I know several people in the Bay Area who own million dollar homes and they didn't pay anywhere near a million dollars. They have owned them for years or purchased during a down turn (2000 tech bust or 2008 real estate crash). I also know plenty of other people with million dollar homes that are house-poor.
Expensive houses are nothing to be jealous of. Yes, live in a cramped space and save your money. Expensive houses just get you more expenses such as taxes, utilities and maintenance.
Honestly, California has so many amazing things to do that I am left wondering why anyone would spend much time in their home. You are just paying for space you aren't using.
This is true. I don't think you need as big a house in coastal CA as you do in other parts of the US. Doesn't make up the difference but for a little bit though.
As far as the original question I think others were on to it with their answers. I know my townhouse in West LA is more than triple the value I bought for back in 99. I would really struggle paying that mortgage (and higher property taxes on the higher assessed value). I was young and single back then and just rented the other room to friends to help cover my bill.
Now, it seems like the others in my neighborhood almost always have family money. I know someone in SF and he says that many in his neighborhood either inherited the house or had some other family money. At a minimum, basically few can do what I did and buy as a young single guy and scrape by. Now I would have to be married to get in and the student debt is so much higher. Kinda sad.
Ok here's to summarize the anecdotes on this thread.
In order to own a million dollar house in the bay area, one has to do one of the following:
Did I miss anything?
In each case, there's always a breakthrough involved.
Asking "how can I afford" is a good first step towards a breakthrough. :)
@Chris Martin Im with you again lol Id much rather have assets that pay for themselves over liabilities that cost money each month. Your tenants don't own their cars the banks do. I believe another important point Chris mentioned is that his company paid for his truck. Most wealthy people have businesses that can absorb many of the expenses we could incur personally.
@David Faulkner I know a few of those "Homeless millionaires"...My dad being one.
@Steve Vaughan I am going to use the labor camp line.
I have never been envious or impressed by the mansion.. Fortunately neither has my wife.... That frugality and decent w2s has allowed us to invest from a young age. If we would have burdened ourselves from the start, I know we would never achieved financial freedom before our 40s and while our children are young.. We could easily afford one of those homes and actually were contemplating it not to long ago... We both agreed we would no happier... But what would make us happier is more time with our families and a larger mortgage/home does not achieve that.
Peter
I see the fancy houses and cars and think to myself - 'Nice payment. Wonder how much that is? Bet that one has two commas every month!
Work, work, work. Run, run, run.
Houses are just labor camps we sleep in. Who needs a million dollar labor camp?
"99% of everything done in the world, good or bad, is done to pay a mortgage." - one of the best one liners from the movie "Thank You for Smoking".
In the Years 1997 to 2001, I worked as a Software Developer for around $100k, peaking around $200k per year with Bonus.
The stock market crashed in 2001, so bonuses was cut and I was making on average around $140k or so.
By 2004, I quit my job.
During that time, my Partners and I bought 3 Brooklyn, NY Investments:
1) 1997 - $340k 2 Family in Ditmas Park worth $1.7 Million today
2) 1999 - $140k 2 Family in Windsor Terrace now worth $1 Million conservatively today
3) 2004 - $890k 3 Family in Clinton Hill now worth $2.8 Million today
Note that today's values included going through the Great Recession of 2007/8.
We also bought more Investments and currently own 7 Investments and another in Contract.
Funny thing is now I'm going back to software development and started researching the jobs I can possible get. They are still around $120k to $150k for the position I last held.
Salaries in my field are still approximately the same. But the home values have all skyrocketed to current levels.
I cannot imagine what it would be like if I NEVER Invested and just horded the money. There is NO WAY I could have achieved the level of wealth without Investing.
I do want to contrast my results with another Investor's results, however. Let's call him Dave.
Dave bought a SFR in Germantown area of Philly around 2004 for around $100k. It was a dilapidated 6 Bedroom house in a War Zone area.
His Calculations told him that he would have something like a 20% Cash on Cash Return.
During the holding period of his Investment, it's been destroyed several times by his tenants, all section 8s that had large number of children because the house has 6 Bedrooms. Section 8 doesn't seem to want to give a 6 Bedroom House to a mother with under a certain number of children.
He wants out and had been trying to sell the SFR for what he paid. He can't. The offers are around 30% or so under what he paid and under the current mortgage balance.
Regrettably, Dave turned down to be included in the Partnership with me on my 3rd Brooklyn Purchase of the $890k which appreciated to $2.8 Million because the Cash on Cash was breaking even on 20% down. Today, this property cashflows around $4k per month when it was zero in 2004.
I needed to Contrast my experience with Dave's because I don't want people to think that investing in Real Estate and making millions is a normal thing.
I know I'm lucky. But there's an old saying, "Luck is when Opportunity meets Preparedness."
My Analysis of the Brooklyn Market at that time told me there was an opportunity and I was prepared to get them.
So did Dave's. BUT, my Analysis of Dave's property told me at best, he may have made a small profit, which didn't turn out to be the case.
Today, after being successful in all the properties I've purchased in the last 2 decades, we buying another 3 Family for $1.9 Million.
We will hear the same responses again and again like we experienced for the last 2 decades..... "What are you crazy buying a property for $1.9 Million?" etc.
Then in 10 years from now when the property is worth $4 Million, everyone will call me Lucky for the 8th time in a row, especially if Salaries do not improve.
I've come to accept the fact that there will be a multitude of investors that will tell me my business plans are incorrect, despite all the analysis and results I can give them.
But getting back to the topic, there is no need to be jealous.... JUST INVEST CORRECTLY AND YOU WILL BE REWARDED!
Hey Lew. Thanks for providing your story. Do you mind sharing the numbers on the $1.9M property? I am curious on what it takes to make them work financially in the early years and how they are underwritten. Thanks.
Mike
Someone may have mentioned this. I didn't read all 70+ replies. Keep in mind why we got in trouble in 2007. I'd venture a guess that a lot (I want conjecture as to a %, but it's probably higher than we think) of those people really can't "afford" it. It's the same with expensive cars. Different people have different views of what they can afford. Some people have a really nice house and/or car and spend every cent they make every month on it, foregoing any type of investing. That means ANY negative change in their situation and it's all at risk. It's not just the "poor" who live paycheck to paycheck. Back in 2007, I was approved for a loan for my primary residence that was double what I actually bought. Had I bought a house at the level I was approved, I'm not sure how I'd eat or do anything else, but yet I was approved for that amount anyway.
I look at it a different way. Whenever I see someone with a really nice house or car, I often find myself asking "I wonder how much debt they are in and can they ever get out?" Sure, there are plenty of people out there who have these things and it's a small % of their income because they are truly rich, but my gut tells me that's not the majority.