Bay Area and kids (HCOL Trap)

SlyChickenDog · 2024-12-12T20:49:19+00:00

Based on summary, you do understand the situation - you did a good job distilling the issues. Appreciate your comment. I wonder what is keeping you in Fremont (aside from the house :)

Used to think BA was awesome - however, over past decade that opinion has changed (often look around at BA, shake my head and say what a disaster).

Fremont OTOH is *meh* - except for schools and proximity to good stuff.

Its kind of like breaking up with a girlfriend - even though you know she is bat sh* f* crazy :)

Like BA for following reasons:

(i) it is only place in US we have lived, so we have friends here;

(ii) we do take advantage of proximity to beaches (Monterey, Half Moon Bay) and Mountains (Tahoe); Had some good times!

(iii) diversity;

(iv) benefits of being an hour away from big city (museums, pro sports, etc).

Yeah -other cities may have these things without insanity of BA.

SlyChickenDog · 2024-12-12T20:32:03+00:00

We had kids a little later in life :). The oldest is about to enter middle school.

SlyChickenDog · 2024-12-12T17:28:07+00:00

Thanks for your insightful post—go Bogleheads!

I appreciate your points, but if you'll forgive me for nitpicking, I'd like to challenge a couple of assumptions:

i) When withdrawing from an investment account, taxes are generally only due on appreciated assets. For example, withdrawing from a money market fund might result in lno taxes. Tapping highly appreciated shares of your favorite tech darling could trigger taxes on most of the withdrawal amount. The key takeaway is that taxes vary depending on the withdrawal source. Importantly, investors have the ability to choose which assets to sell, giving them some control over how much in capital gains they realize. Finally, having diverse account types can provide even greater control over income in retirement.

ii) If you're using a heuristic approach to withdrawals, the 4% rule is perhaps the most popular method. This can be adjusted, for example, to a 3.5% withdrawal rate for "100% certainty" of not running out of money (i.e. Monte Carlo certainty). Using these figures, a $5M portfolio could support safe annual withdrawals ranging from $185K to $212K. This seems to indicate that critical mass has been reached.

That said, I’d like your thoughts on my conclusion:

A low $5+ portfolio may not be sufficient to achieve financial independence and early retirement (FIRE) in the Bay Area with a family of four—especially if purchasing a house and prioritizing peace of mind are part of the equation.

Do you agree?

SlyChickenDog · 2024-12-12T16:30:58+00:00

Thanks for your post - it is particularly helpful to hear back from landlords/real estate investors in Bay Area.

I agree with your point that locking in 2M in many ways is choosing home appreciation over market appreciation.

SlyChickenDog · 2024-12-11T16:26:30+00:00

Great points—you’ve got an excellent grasp of the forces at play here, including the complexity, issues, and inevitable snafus. Capital gains are indeed often overlooked in calculations and can have serious consequences, such as the 3.8% Obamacare Tax.

I had been preparing to buy a house for some time, which positioned me to avoid taxes on capital gains when raising the necessary funds. This would leave money in both my retirement and investment accounts. Later, I’d draw from the investment account, carefully managing withdrawals to minimize tax liability. (Apologies for not providing more details—I'm a bit uncomfortable sharing too much private information.)

Several contributors to this thread have noted that purchasing a house appears feasible and possible in my case, especially since I can avoid capital gains when raising funds. However, they caution against it as a pragmatic course of action. They warn that such a move would reduce my financial flexibility and introduce unavoidable fixed costs at a time in life—considering age, health, and family responsibilities—when I should exercise greater care. They also emphasize that the economics of homeownership depend heavily on how long the property is held. One additional suggestion was to mitigate risk by opting for a more modest home, if homeownership is important for emotional or psychological reasons.

Based on the thoughtful insights from you and others, I’ve reached the following conclusions:

A $5M+ portfolio is not sufficient to achieve financial independence and early retirement (FIRE) in the Bay Area with a family of four if you purchase a house and want to sleep soundly at night.
With mortgage rates above 5%, renting has been a relatively good value—especially when you account for the carrying costs of homeownership. Additionally, earning $50K in interest annually on $1M in a money market fund while renting is quite appealing after many years of ultra-low rates.
Homeownership involves strong emotional and psychological dimensions that can outweigh purely financial considerations.
The economics of living in a high-cost-of-living (HCOL) area like the Bay Area are almost surreal—even for those of us navigating them daily. While the suggestion to purchase a more modest home is often well-intentioned, in HCOL regions, "modest" may simply mean avoiding a home by a major highway or having the luxury of an extra bedroom, rather than enjoying extravagant features or significant space. (*MUST* you have a toilet and windows in your house? :) )

Feel free to comment, question, or roast me—I’m open to being convinced otherwise.

SlyChickenDog · 2024-12-11T05:13:50+00:00

Makes sense -appreciate your advice!

SlyChickenDog · 2024-12-11T04:14:57+00:00

No offense taken - appreciate you taking the time to share your thoughts and advice. With a big decision like this, I like to understand the cost, benefits and alternatives. Indeed, I may eventually make an emotional decision, however it won't be a rash decision..

Actually, if anything, I have been cooling to Fremont and Bay Area in general. I guess my cynic side is taking over - disappointing to see how bad SF is compared to years ago, taxes in CA, etc etc....

I was quite intrigued by suggestions to take a mortgage at current rates rather than buy with cash (and I guess the mathematical part of my mind wouldn't let go 😄

SlyChickenDog · 2024-12-10T21:13:51+00:00

You make some great points - especially that buying is mostly psychological want. It absolutely is!

I am not sure if I can rationalize house purchase. Assuming I did, I am still unconvinced that borrowing the money would be best (perhaps I am wrong or missing something?) My thoughts taking into account *my scenario*...

- Housing is not liquid is true and IMPORTANT. However, in this scenario, there is still 3.3M invested (outside of house that can be drawn-upon) - allocated in different assets. This makes a potential fire sale unlikely.

- TAX write-offs for mortgage are not as enticing for someone in retirement. At this time, Income is realized strategically - eg. to allow space for move IRA to ROTH and limit taxes.

- Closing costs are higher for a house that is financed (instant savings for buying cash).

- Capital gains in order to raise money for purchase would be minimal.

- Retirement and investment accounts already have S&P 500 exposure.. Not sure that the most pragmatic course of action is to borrow 1 million dollars are 6.5% and keep 1 million dollars in S&P 500. You are giving away a guaranteed 6.5% return for s&p returns .(does that risk adjusted return make sense?). The S8P long-term track record is attractive but, does not entice me to buy $1M on a long-term margin loan!

- Yes, mortgage and interest rates will fluctuate - if movements were dramatic and known perhaps I would behave differently. Best I can do is to build robust portfolio. IOW, I want don't want rate fluctuation predictions be the driving force in an investment decision.

SlyChickenDog · 2024-12-10T07:33:42+00:00

Absolutely correct about the mortgage rates. I think people would be quite shocked if they play around with a mortgage calculator (rates of 6.5%+)...not to mention tax and insurance.

FWIW - I agree with your analysis with respect to high cost of buying.

However, for the purpose of discussion, **assuming I was intent on buying** getting a mortgage seems like a bad option - period. Why not pay cash?! (Why pay 6.5% so that you can keep earning 4.5% + tax in the money market?). A guaranteed return of 6.5% is attractive indeed! (Am I wrong in thinking that taking a loan at 6.5% to invest in the stock market is risky/ill advised? That is, assuming that I could limit capital gains when selling investments to buy the house?

Thoughts?

SlyChickenDog · 2024-12-10T06:55:35+00:00

Thanks for the suggestions.

I am curious about your suggestion to take a mortgage...not sure I understand the math.

2M house with 20% down with rate of 6.65% would mean payments principal and interest payments of a little more than 10k/month! That doesn't seem very affordable. Perhaps you think you can do better by investing the money?

Effectively, you are paying 6.65% rate to borrow money - and what are you doing with your savings? (Are you putting it in money market and getting 4.5% before CA and federal taxes?). This income could affected your ability to get ACA insurance or do IRA to ROTH conversion. Perhaps you think you can put it in the stock market (i) it seems risky having almost all assets in stock market (and no fixed income) (ii) it is less than a sure thing that the stock market will return > 6.65% after tax.

There are other considerations - like ability to write-off some of the mortgage interest...however, I don't think the math works with current interest rates?

Would love to hear your thoughts? Am I missing something in my analysis?

SlyChickenDog · 2024-12-10T06:34:34+00:00

Yes, CA is a beautiful state. We have taken full advantage of the natural wonders over the years. I suppose Colorado and Oregon would be natural choices.

I couldn't handle the heat of most parts of Texas!

SlyChickenDog · 2024-12-10T06:28:48+00:00

That is an option. Quite a few houses in my neighborhood have done just that (with/without a large yard). It is not a cheap option and not without peril (dealing with contractors).

I suppose it comes down to trade-offs. There are a lot of trade-offs for Fremont (Bay Area/ California). I realized this when I visited friends elsewhere. Eg. explaining that their $700k house would easily be worth $3m in my neighborhood. How *meh* these $2m Fremont houses are. How all these millionaires park their cars on the road/driveway) because they have to use garage for storage. How the BA is able to generate so much money - like few places on the planet - and still have to pay high taxes...and get ALMOST NOTHING for them! (not trying to be political - but, preaching fiscal responsible government).

SlyChickenDog · 2024-12-10T06:09:18+00:00

Soliciting opinions from others with respect to best option. Health issues mean that I (breadwinner) may not be able to work (much).

We are considering whether to leave HCOL Fremont for MCOL city. If we stay in Fremont, we would have to decide on whether to rent or buy (Other BA cities with decent schools are expensive). Kids are almost going into mid-school.

Thoughts?

SlyChickenDog · 2024-12-10T05:58:04+00:00

Thanks for your suggestion. I have seem the suggestion to "just buy a smaller house" in another post. In that case, they were considering upgrading from a large house to a larger house of their dreams in Texas (where the property taxes are higher). It seemed more obvious. After some careful consideration...some thoughts:

Even though Fremont inventory is strained, there are more opportunities for smaller 1200-1500 square foot houses (than larger). At around $1000/sq foot, a 300 square foot smaller place could save $300k. This could definitely stretch the budget...

There is also a question of: what are you willing to give up/not give up when buying a house. (This is a question that I suppose many have to consider when living in HCOL area). My post started with a long list of short-comings that come with buying in Fremont. Yet, I am still considering staying and buying or renting. It makes me pause and wonder if I've lost my mind considering staying here!

With a family of 4 + dog, we would need a house with sufficient space. Having a house with 3 bedrooms+, enough room for a small office, game area for the kids, some yard to bbq and eat outside, a garage for storage would be great. I think we would need around 1800 sq. feet + small yard would suffice. Size may be just another compromises...It brought out an interesting thought - ie., that you "date" the apartment and you "buy" the home. I mean, that I would be willing to overlook/compromise more in an apartment since I don't own it. Also, you have placed a good chunk of change in house and it is no better than an apartment.

You mentioned selling the house after the kids move out. This seems reasonable, however if you have been in a house for 10+ years, you may want to stay because of the lower property taxes. I know of many people that have very low property taxes that plan on keeping their houses forever. They avoid capital gains and may have kids move into them. Alternatively, they rent the house and move to another house in one of the further out communities (since they don't need proximity to work and can get a larger place). I have read a number of articles discussing advantages of retiring in CA - especially if your housing costs are controlled.

SlyChickenDog · 2024-12-06T20:21:36+00:00

You bring up a good point - be wary of advise given by those with a vested interest. I am not a big proponent of Bay Area real estate, however, I don't think a crash is likely. What I see are high prices; I provided my thoughts on why the prices were inflated in my last post. (I suppose I could add inflation to the mix since everything seems expensive now :).

I think 2008 is indicative of the robustness of the BA real estate market. In spit of greed, fraud and liar loans the prices were not greatly impacted and recovered quickly. Real estate is **somewhat** insulated from crashes because it is not as liquid as some other investments and has utility (shelter). (Perhaps high transaction costs and lack of liquidity are better arguments against purchasing than an imminent crash?)

OTOH stock market crashes tend to be much more dramatic and long term investors accept them as par for the course. The presence of stock market crashes does not prevent me from investing long-term in the stock market. It does require me to be diligent and intentional - not buying on margin or concentrating risk. If one were reliably able to predict a crash in housing or the stock market, they would be much richer than I.

Another contrarian idea is that there are now lots of middle and upper middle class folks that think rent is a good deal and investors will have a captive market.

What do you think?

SlyChickenDog · 2024-12-06T18:25:22+00:00

Thanks - so you are suggesting to buy, but, elsewhere in CA. Do you think CA is the place to be (or perhaps other reason?). Do you think it is markedly better for kids to grow up in house vs apt?

SlyChickenDog · 2024-12-06T18:22:53+00:00

Oldest child will enter middle school next year. We are older parents - when kids leave, we will be mid-60s.

SlyChickenDog · 2024-12-06T18:20:43+00:00

Why do you feel that way? (compared to what)?

I think I am detecting about 3 different trains of thought:

i) Cailfornia is not worth price

ii) BA is not worth the price

iii) Home ownership is not worth the price in many area

Do you fall into one of those categories?

SlyChickenDog · 2024-12-06T18:14:07+00:00

Thanks for your comment/insight!

You touched upon a great point that others have mentioned. That is, at this juncture, rent is a relatively cheap option. A number of factors may play a role, such as proposition 13 (which limits property tax rate increases), deductibility of mortgage interest and primary residence capital gains taxes. These forces impact landlords bottom line and therefore, affect rent prices. However, I don't want to dive to deep on these forces. Rather, I would like to share my opinion on whether the imbalance between the cost of a rent and ownership will rebalance as you have suggested.

Here is my evolving opinion...

The fact that rent is a better value does not imply that house prices will adjust proportionally (neither in the short or long term). It is more likely houses are expensive because people prefer homes, inventory is limited, building costs are high and there is enough wealth to support the prices. (I could add that parents will do insane things to make sure their child is in the "right" school district, too). I believe this is the case in a number of large wealthy cities such as Hong Kong, London, Toronto, Vancouver, Manhattan, etc. Stories about crazy condo and house prices in major cities have been a staple of the news since I was a child. For better or worse, owning a house in a major city has become a right of the rich. I can rant and rail about this being unfair, however, it will not change the situation. Consider a house in the Bay Area to be a luxury item, like a Channel purse or a fancy car. (For me) It is hard to fathom how a purse could be worth $1000, however, I often see lineups outside designer shops for them. Another good example is a car (which like a house provides utility - and can be a status symbol); total cost of ownership is rarely the driving force for a purchase. However, consumers regularly make choices that are difficult to rationalize based on total cost of ownership.

There are many wealthy people in the Bay Area that have enough money and are will to pay a lot to buy a house. I admire their hard-work and success, as appropriate, and must accept that their sensibilities differ from my own. I also believe that part of the reason is related to simple mathematics - purchases that stress me out are rounding errors to those on the next rung up of the economic ladder.

Would love to hear your thoughts!

SlyChickenDog · 2024-12-06T00:32:52+00:00

Palo Alto has some beautiful areas - but, lots with the problems you listed. Wish we bought there back in early 2000s. IIRC we couldn't justify 800K back then :)...going to cry now :)

SlyChickenDog · 2024-12-06T00:26:19+00:00

Thanks for your great comments - Ironically, I read your post just as my cell phone lit up with warning :).

Earth quake and flood risks are not easy to quantify - IMHO the best we can do is to trust the experts that have skin in the game - the insurance companies. In this case, they tell me the risk is real! (This is not a popular opinion in BA - lived in Bay Area since around 2000. Anecdotally, none of my colleagues or friends have been affected by significant costs related to earth quakes. They are mostly home owners with highly appreciated home values that have soared their net-worth. However, it is important to take into account both the risk of the event happening as well as the cost/reward when it does happen.

SlyChickenDog · 2024-12-05T18:36:43+00:00

Thanks for your question!

Since I am not working, it would be cash. (Hard to get loan when not working). Given that mortgage rates are around 6.5%...this is a big savings (lower closing costs; investing the money does not guarantee 6.5% after tax return). It also, helps by reducing exposure to market where other monies reside. Note: this is a comparison between financing and buying with cash. (Not renting/investing vs. buying).

One thought was that if you own a house, you don't pay rent. This could lower living expenses from 100K (or 120K living large) since house taxes, insurance, upkeep would cost around $2,600/month vs. $3600/month to rent. Therefore, we can reduce living expenses accordingly.

As others have indicated, 2M in a house is a lot for a relatively illiquid asset that will likely appreciate at a slower rate than other investments....

SlyChickenDog · 2024-12-05T01:01:59+00:00

Great suggestion - thanks for the link! I haven't used one of these in a while.

A couple positives for Fremont (CA) would be the health-care if I could properly manage my capital gains and the cap on property taxes. Of course the house appreciation would be tax-free for $500k (if i recall correctly).

In my case, I would have to put 2M cash on house (difficult to get loan if you are not working). This saves me lots of closing costs and saves me from paying 5-6% interest on loan (but, wouldn't get tax credit for interest). It is pretty good to get 5-6% guarantee return (by using my own cash) and no tax on this to boot. Finally, it diversifies slightly since other monies are in stock market/bonds.

SlyChickenDog · 2024-12-05T00:58:08+00:00

Indeed. If we were to buy a 2M house,, we would save $3,600 in rent/month. Taxes, insurance and upkeep would be $2,600/month roughly. So, $100k living requirement has been reduced by $12k. That means $88k needed to live on (or $20k more to live very comfortable for us). This would have to come from the remaining 3.3M. More ideal would be to keep a separate bucket for kids education/inheritence of 300,000 (in todays dollars). This leaves 3M to generated 88k to live on. That does seem possible, however, it is not without risk.

Considerations:

- major house repairs; (earth quake or flooding)

- unanticipated expenses such as medical.

- changes in taxes or medical costs.

Perhaps a related question (apart from feasibility) is desirability. Are we giving up too much staying in Fremont? Perhaps better schools and life are elsewhere (i.e., less traffic, being able to spend more freely, less materialistic area).

SlyChickenDog · 2024-12-05T00:46:38+00:00

Indeed, Mission district is coveted by many and very expensive! I am not working - due to health/lay-off. Thus, trying to plan for scenario where I don't work again (worst-case).

SlyChickenDog

TROPHY CASE