Dear MarketWatch,
My wife and I are in our mid-30s and live in Southern California and have a combined income of about $ 350,000. We currently invest $ 5,000 a month into index funds and ETFs. We have recently begun to look at homes as our rental costs about $ 4,500 per month. However, for even $ 1 million in our area, you will get a fixer-upper that is over 60 years old, which is undesirable to us.
Moving out of SoCal isn’t an option because of work. With an annual income of around $ 350,000 which is projected to increase again soon, should we try to save the requisite $ 300,000 or more for a jumbo mortgage in SoCal with a mortgage that will likely cost our current rent — plus the $ 5,000 we put into the market monthly?
Or would we be better served to continue putting $ 5,000 or more into stocks each month, buy a rental property in another state where the market is great (say for $ 250,000 or less) and continue to rent?
Sincerely,
Cash-strapped in SoCal
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.
Dear Cash-strapped,
Your situation demonstrates how difficult it can be to make these sorts of housing decisions when you live in an expensive part of the country like Los Angeles, Seattle or New York. In many other parts of the country, a couple who made a combined income of $ 350,000 wouldn’t have much trouble finding a home they could afford, but it’s not so straightforward in places like Southern California, as you’ve seen.
Close friends of mine in Los Angeles faced a similar struggle recently when they tried to buy a home — what they liked was well out of their price range, and what was in their price range wasn’t to their liking.
You wouldn’t be alone in determining that it’s better to rent than buy where you live right now. Attom Data Solutions, a real-estate data company, releases an annual report that examines where owning a median-price, three-bedroom home makes more financial sense than renting an equivalent property. Consistently, their report finds that it is more affordable to rent than buy all across Southern California — of course, that doesn’t mean the cost of rent is cheap.
If you settled for a fixer-upper because that’s all you could buy without seriously diminishing your capacity to save money, then that could be a risky gamble. Not the least of which because a home in serious need of repair could have many unexpected problems that require expensive fixes.
“ It it is typically more affordable to rent than buy a home in Southern California, according to research from Attom Data Solutions. ”
Based on your income, you could likely afford a home that’s considerably more expensive than $ 1 million, but it’s clear that you would have to cut back in other ways. I don’t know how much you spend outside of the money you put into savings, and I certainly don’t think you should jeopardize your retirement just to get into your dream home. That said, it does sound like you’re ahead of the curve when it comes to stashing away money for your golden years. You could possibly stand to reduce how much you put into your investments each month, and still be saving a considerable sum, in order to afford higher housing costs.
“ What you shouldn’t do is buy a home that is so expensive that you wouldn’t be able to save at all. ”
What you shouldn’t do is buy a home that is so expensive that you wouldn’t be able to save at all. You need a cushion for a rainy day to ensure you can keep paying the mortgage. And that cushion should not come at the expense of your retirement.
As for the alternative you suggest, I pose the following question: Why do you want to own a home? From a young age, many of us are raised to believe that achieving homeownership is critical to achieving the “American Dream.” But that view ignores the harsh realities of a housing market like the one we’re in right now.
Be cautious about buying a home just to have bought a home. Owning a rental property isn’t for the light of heart, especially as we emerge from a nationwide crisis that caused 12% of single-family rental home owners to sell their properties because of financial distress. And it’s one thing to be a landlord when the property you own is nearby, so you can address any problems that arise with the property firsthand. If you buy a property on the other side of the country on your own, you’d likely need to hire a property manager to do that work for you.
If you’re buying in cash, perhaps you’d see a profit on the property from Day One — otherwise, you’re likely to just cover the cost of the mortgage and maintenance with whatever you might fetch in rent. Plus, keep in mind, the real-estate market is extremely competitive across many parts of the country, so finding a home for $ 250,000 won’t necessarily be easy.
“ Plaftorms like Fundrise and Roofstock have simplified real-estate investing, making it easier to own and manage properties across the country. ”
If you’re more interested in diversifying your holdings, consider buying property through a real-estate investment platform. Companies like Fundrise and Roofstock have enabled renters like yourself to still invest in real-estate, and their platforms often include property-management services that can reduce the hassles involved with being a landlord.
In some cases, you can purchase just a fraction of a real-estate holding, making it a lower-cost proposition that nonetheless allows you to explore the benefits of buying property. If you’re ultimately only buying a home to have as investment, and not to live in yourself, it might not be a bad idea to test the real-estate waters through fractional ownership first. That could give you a sense of the risks and rewards you could expect from a larger investment before you dive in.
Meanwhile, don’t lose sight of your homeownership dreams. Keep saving money and keep your eye out for that dream home. In a worst case scenario, money that isn’t used as a down payment can be used for myriad other purposes. But if you don’t squirrel those funds in a safe spot, you won’t ever have that opportunity. Good luck as you navigate these tough choices, and do let me know how it all pans out.