Don’t buy a condo this year

Last night, I was having drinks with a friend of mine. He and his wife have been renting an apartment they love for about five years in a part of San Francisco that is convenient for both of them. The transportation, entertainment and daily living options in their part of town are comprehensive. Between the two of them, their annual income is in the neighborhood of $250K a year. They are in their 30s, they have no kids and no long-term debt.

“Don’t buy a condo in San Francisco.”

[imagine a puzzled look on my friend’s face]

“You heard me. Don’t do it.”

I understand that sounds like crazy talk from a guy who sells real estate for a living. But, after years of practice, I have grown accustomed to the strange looks.

Explain yourself, Jon.

This isn’t some cheap reverse psychology game. I’m serious. The median price for a condo in San Francisco right now is $1.2m. The median price for a single family home in San Francisco right now is $1.5m. Sometimes you get parking or a view included in that price, but not always.

So, instead of buying one condo in San Francisco, they are shopping for two rental properties while they continue to be renters in their primary residence. The total cost of the TWO rental properties will be less than what they would have spent on ONE condo as their primary residence. Plus, the rental properties create rental income which adds to their bank account balance every month. Buying a condo in San Francisco would cause them to subtract from their bank account balance every month.

THIS IS THE NEW TREND WITH 20-SOMETHINGS AND 30-SOMETHINGS: THEY CONTINUE TO RENT IN NEIGHBORHOODS THEY LIKE WHILE THEY BUY INVESTMENT PROPERTIES ELSEWHERE.

WARNING: There’s some math below.

Lake Tahoe rental property:
Purchase price $300K
Down payment: $60K
That leaves a balance of $240K, spread over 30 years.
Monthly payments: $1200
Monthly rental income: $2000
Money in their pocket every month after they pay their expenses: $800

And they plan to buy two similar properties this year, which will bring their monthly rental income to $1600 after they pay their expenses. All the while, other people (aka tenants) are paying-down their mortgages for them.

The tenants will continue to cover the cost of the mortgages every month for the next 30 years. Even if the value of their properties stays the same (property generally increases in value over time) and the rental rates stay the same (rental rates generally increase over time), they will have free and clear houses that were paid for by someone else at the end of the 30-year mortgage term. Increases in the value of their properties and increases in the rents they can charge may accelerate that 30-year term and make it much shorter, but that’s a conversation for a different time.

The competing math for a city condo:
Purchase price: $750K
Down payment: $150K
Monthly housing payment: $3200
Monthly rental income: Goose egg

So, how many Tahoe rentals would they need to purchase before their monthly profit would be enough to pay for a city condo? Hint: it’s a round number between 3 and 5.

If they buy ONE Lake Tahoe rental property every year, it will only take four years before their rental income will be enough to cover the mortgage payment on a $750,000 condo in the city.

To them, four years is a reasonable amount of time to wait in order to buy four rental properties that will subsidize the mortgage payments on the condo they REALLY want.

Is four years of patience a good trade in order to acquire five properties that are being paid for by someone else?

Things that make you go hmmmmmmm….

Oh, I almost forgot. They can visit Tahoe when the house isn’t rented and enjoy it themselves.