Buying Our Dream Home

OUR ADDICTION TO CRUNCHING NUMBERS

I recently stumbled upon a post on one of the Facebook groups I follow, Physicians on FIRE—a group of doctors focused on financial literacy, freedom, and early retirement. The post surveyed the group on whether individuals had regrets of any sort after purchasing their “dream home.” Home ownership is a big and common topic in this group. The responses were varied, but there was a common underlying theme: waiting until financial security to go in on a dream home resulted in less regret. In a group of financially savvy physicians, financial security usually meant having a sizable nest egg in preparation for early retirement.

This example is yet another lesson in delayed gratification but felt particularly pertinent to us as we’ve jokingly explored what a dream home would entail. A dream home can mean or involve many things, but in our discussions, it was always underscored by a hefty price tag. These talks happened even prior to us moving into an apartment together. And during that process, we explored many options of cohabitation, including going in on a property together.

Of the options we looked at, only few were viable—and certainly not a “dream home.” Heck, not even close to it, especially here in California. Peter and I have always agreed on one thing when it came to home ownership, and it is that neither of us ever want to be house-poor. That is, to pay all our earnings into a house at the expense of filling up our retirement accounts or even enjoying small, everyday luxuries.

To top it off, the type of house we could afford in today’s economy would be far, far from our dream home. In California, a “starter home” would basically be the only route available to us and still did not make much sense for our financial or dream goals.

How, then, do we get to a point of financial security, a position in which we are no longer beholden to our employers? How do we continue to grow our nest egg to that point? We certainly don’t foresee ourselves as renters forever either, as we have big aspirations of home- and family-building. This is not to say that renting indefinitely is inherently or implicitly a poor decision, considering inflexibility, repairs, insurance, and property taxes associated with a house. After some discussion, we find our values most aligned with temporarily renting while saving for eventual home ownership.

One alternative we toyed with before deciding to rent a few years more was to purchase a multi-family home. A multi-family home, compared to a single-family home, would be a plot of land shared between multiple smaller units, often with shared walls. Purchasing a multi-family property would allow for us to utilize one home for ourselves, and rent out the rest of the homes/units to help pay the mortgage.

To make this arrangement really make sense, the amount we would be paying per month after all rental incomes were taken into consideration would need to be less than the average amount we’d be paying for an apartment unit. When crunching the numbers, this meant we needed a duplex with a mortgage under 900k, a three-plex under 1.2 million, or a four-plex under 1.6 million, assuming 7% interest rates.

When we scanned the market in our desired location, there was nothing that could get us to the financial benchmark we had set. The properties that fell in these price ranges could never rent individual units for high enough that it would reasonably off-set the mortgage payment to a more affordable price. These properties were often very dilapidated—and though we were ready to make some sacrifices in our quality of life, these were big asks even for us. Thus, it made no sense from either a financial or quality of life perspective.

Herein lies the conundrum in the California real estate market: properties are essentially investments whose value is only realized upon sale after years (e.g. decades) of appreciation. California rentals are exceedingly difficult to cash-flow, meaning they will not bring in cash for the time being. They may not even necessarily break even at such high interest rates early on or until refinancing! Why would we want a property we’d need to hold on to and manage before realizing gains after 30 years? Other investment vehicles can be much less restrictive, flexible, and encounter much less red tape. This isn’t to say that all real estate investments in areas with high cost of living are bad, but it just did not make sense for us in California.

So after we ruled out a multifamily property as a possibility, we looked into single family homes. But instead of following the footsteps of our peers and finding a place to settle (both in the figurative and literal sense), we were looking to make a profitable financial decision. We were hoping to find a fixer-upper, live in it for a few years while making modest repairs and renovations. As long as we lived in the home for at least 2 years, under California law, any capital gains made from the sale of the house under 500k would be free from taxation for a married couple. This would give us a step-wise plan in eventually moving into a home we would love while exploring different upgrades and renovations that we’d love (or dislike).

Again though, it didn’t make sense to go this route as even the dingiest of homes in California were commanding ridiculous mortgages. It did not make sense to tie up all our money and assets in a home. Our hard earned dollars could work for us elsewhere in the market and in much less restrictive capacities with possibly better growth potential. Thus, we decided on renting at a small fraction of a typical mortgage while diverting the rest of our earnings into investment vehicles.

As we reflect on our decision to continue renting, we feel more and more at ease with it. We continually grow our nest egg so that it may be self-sustaining once we do decide on a home together. We’ve adhered to the basic principles of delayed gratification for years at this point—what’s a few more to ensure decades of financial security, psychological safety, and freedom? Neither of us want to be obligated to work for the rest of our lives, and certainly not at the behest or demands of others. Of course, work brings with it many other layers of value aside from financial—another discussion for another time.

At the end of the day, we find that having a sense of home is much more important than having a house. We don’t even know with absolute certainty where we will be in 3, 5, or 10 years. For now, we are happy renters working diligently toward solidifying our financial and material dreams.

XOXO,

Howard and Peter