Should I buy an apartment in Silicon Valley? (My analysis of the situation)

Nvidia / Eng
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May 5 61 Comments

Warning: This is a long post with some of my analysis of the whole situation.

First of all a little background about myself. I am a 26 years old Masters student who is graduating this summer. I have 3 YOE before I started my Masters. I will be relocating to Silicon Valley for my full-time job, and my offer is 185K/150K/90K (Base/RSU/Joining). From various other blind posts, I know the refreshers are good at my company (~100K-~150K for my level). I am single, and I have no plans to get married in the next 18 months at least. I have 1K/month of student loan debt which I will continuously be repaying. Including my joining bonus, I will have around 70K liquid money in the next two months.

I am trying to weigh in pro and cons of buying an apartment in Silicon Valley. I am considering either a one bedroom or a less expensive two bed - two bath under 750K. Assuming that I pay 60K downpayment (~8%) and keep another 10K for the closing amount(~1.2%), I will be paying $4,724 monthly to cover my overall payment for the property. This includes Principal, Interest, Property tax, PMI (Since less than 20% DP), HOA, Home Insurance (Zillow estimate with 4% interest).

Now, if I am buying a two-bedroom apartment, I am planning to sublet one of the rooms in my apartment for ~1.3K (Usual rent in the area). Based on my calculation I will be saving around ~$900 every month in federal tax credit for Mortgage interest. Also, if I don't buy the apartment, I will be paying 1.8K as rent. Summing up them, the total is ~4K. So, if I buy an apartment, I will be paying ~$700 extra from what I would have paid otherwise, but I would build equity over time. I can afford to spend a lot more than this, but I am sticking to the minimum for the sake of this post. Also, paying the minimum will allow me to max out my ESOP, 401K and other investments too.

Since we cannot time the market, I also tried to capture the scenario where the real estate market may crash in the future. Assume, I am considering this a long term investment (~8years), by the end of 8 years, I still need to pay around ~590K principal to my bank. Also, assume that the real estate didn't appreciate due to lousy market or whatsoever. After eight years I paid around 128K already (70K for DP and closing, ~58K for extra payment above my rent, i.e., ~700 monthly). If I would have invested this money and assuming a 4% interest in the worst market scenario, I should have ~175K. However, I will have around 160K equity which isn't a bad deal in the long term with a terrible market situation. Since it's a long term investment, I am expecting that prices will appreciate it anyway.

Considering that apart from my investment in this property, I am investing ~35% of my base income in another portfolio, maxed out my 401K and saved all my RSUs for unfortunate circumstances, do you think it's a good idea for me to invest in real estate now? I will be paying ~700 extra every month with the initial payment of 70K. Please help me understand the points which I might have missed based on your experience. I will be adding some more explanations if required based on your input.

PS: I have ignored a significant expense for maintaining the house, but I believe we need to pay some maintenance in rental properties also (Forfeiting the security deposit, other costs, etc.).

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TOP 61 Comments
  • This guy fks, will be rich and retire soon
    May 5 0
  • Microsoft jesus-
    Buy
    May 5 0
  • Google / Other dinklage1
    First of all, it's 2 bed-2 bath, 3 bed-2.5 bath and so on. Not sure what this BHK business is. Seems like you have done all the math. Don't over think it and fall into the paralysis by analysis trap. If you can buy and hold a home for 7-8 years, typically you can't go wrong with it in the Bay Area, even if there is a dip in the markets in between. Good luck!
    May 5 2
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      I meant 2 bed-2 bath. Thanks!
      May 5
    • Google / Eng hooli.xyz
      “BHK” is an Indianism. I believe it stands for “Bedroom Hall Kitchen”.

      I am almost 100% sure OP is Indian.
      May 5
  • Google xkvpspecmg
    Let me just comment on whether you'll get a loan.

    The bank may count your Rsus, typically only if the company is public, depending on the bank and the company you work for.

    If they don't, then with your income of 185K, assume 15K per month for simplicity.

    You already have a debt of 1K. For credit cards only the minimum payment is counted, so say you have 3-4, then assume $100.

    Banks will only loan you for a debt-to-income ratio of around 36-42%.

    So you can have a Max monthly debt of 15000 *0.4 (assume 40% DTI)=6000.
    Subtract 1k, another 100 and any car loans or other debt you may have, you might be cutting close with your estimated 4.7k per month that you may not qualify for a loan.

    It'll highly depend on the bank and your ability to shop around for rates and qualification.
    May 5 2
    • This guy fks, has at least a condo
      May 5
    • Nvidia / Eng
      EndGa

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      OP
      Thanks for bringing this up. I came up with an upper limit of 750K based on this criteria only. Hence I am cutting close. The company is public, so I believe the banks should be able to count that in to let me cut close. Otherwise, I have to go down on the upper limit.
      May 5
  • Nvidia Brouwer
    Refreshers good at Nvidia? 😂
    May 5 2
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      Well! Who said I am joining Nvidia 😜
      May 5
    • Nvidia Brouwer
      Nice! Yeah was wondering with that TC. What’s the new company if you don’t mind sharing?
      May 5
  • F5 Networks / Eng moveon?
    You use the term, BHK, a common term amongst Indians.

    Curious if you're from India and are on visa? If yes, you've to factor in the "visa" status.
    May 5 5
    • Nvidia / Eng
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      OP
      Good catch! I am on a visa. In the worst case, I can rent it out or resell. It might hurt if the market is low and I am out of status at that time. But, I am only risking ~100K, and the odds are in favour I guess.
      May 5
    • F5 Networks / Eng moveon?
      Let's factor in a few things then:

      1. Have you considered your tax increase based on TC growth?
      2. Have you considered tax increase based on H1B?
      3. How good is your credit? Mortgage rate?
      4. Are banks willing you give you a big loan on F1 Visa?
      5. What happens if you don't get H1B?
      May 5
    • F5 Networks / Eng moveon?
      Based on your comments, it looks like you'll be at FB.

      You definately will earn top tier and you shouldn't be worried about "money" per se.

      Just factor in life, because, you know life just happens.
      May 5
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      Thanks for pointing these out. 1 & 2 shouldn't impact a lot, as I am only paying extra ~700 from my pocket. The Credit is good, and I am already selected in the H1B lottery this month.
      May 5
    • F5 Networks / Eng moveon?
      Awesome! Good luck then :)
      May 5
  • Google ovBk62
    The calculation is biased towards buying. You are saying you'll pay 1.8k rent if you rented but only get 1.3k if you're buying and renting out. So it's clear that you aren't looking at the same quality of housing. If you want a proper calculation, compare equal quality of housing options.

    Further, most houses under 750k are quite crap. I also don't see any mention of school districts etc.

    If you take into account all these things, renting will come out on top.
    May 5 1
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      Well, back to the first chapter of my Business 101 mini-course. I need to consider the intangible cost of moving far from my workplace if I need to compare renting and buying at two different locations. Thanks for pointing this.

      Also, the difference in rent is because I plan to always live in the master bedroom irrespective of buying or renting. If I am buying, I plan to rent another room, and I can't charge the same rent for non-master bedroom.
      May 5
  • LinkedIn HATK64
    Have you considered the possibility that a housing crash may also mean you'd be out of a job ?
    May 5 1
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      I am planning to save a good chunk of my RSUs money for these unfortunate circumstances. Moreover, I believe there is some risk involved with every investment. I guess this risk entails with every other homeowner in the country who bought home on the mortgage.
      May 5
  • New jbnote1
    If you are on work visa, you cannot make money with active participation in any activity. Having a roommate makes you a landlord, I guess? Am I wrong about this?
    May 5 6
    • New jbnote1
      Yes, i am sorry i didnt mean to rain at your party but this is explicitly mentioned in work visas. That is why when people are renting out something, they hire a rental management company which takes care of all this and you are passively making money.
      May 5
    • StubHub FreeMasons
      You can take it in cash and have an implicit understanding, but then again it’s risky as the person can just blow your lid or overstay and may not have enough legal options left
      May 5
    • New jbnote1
      I know of an instance where the roommate overstayed their visa and the owner was slapped with harboring an illegal immigrant kind of situation. And the rent situation was being dealt in cash
      May 5
    • Nvidia / Eng
      EndGa

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      OP
      I am glad you brought it up, and I am aware of it now. This was the reason I made this post on Blind 😊
      May 5
    • Google xkvpspecmg
      I don't think that renting out a single room in single house is going to be seen as doing other "work". If bought a few rental properties and started spending a significant time managing them, then yes.
      May 5
  • Oracle HeSheMe
    Which company is giving 185 base to new grad???
    May 5 6
    • Oracle HeSheMe
      Work experience in India?? Do they count it?
      May 5
    • Google / Other dinklage1
      Are you a SWE or Hardware Engineer?
      May 5
    • Nvidia / Eng
      EndGa

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      OP
      Does it matter if I earn my experience in India or the USA if it's useful, relevant and matches my current profile? Some FAANG companies consider it.
      May 5
    • Nvidia / Eng
      EndGa

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      OP
      I am SWE.
      May 5
    • Oracle HeSheMe
      I guess N in FANG is Netflix and not Nvidia
      May 5
  • Facebook public2
    Save up and buy land (sfh+) instead. Never pay pmi.
    May 5 2
    • Land has not cash flow tho
      May 5
    • Facebook public2
      It does if you rent some or all of it. It also doesn't lose as much value during corrections or have insane hoa rules.
      May 5
  • Google / Eng hooli.xyz
    Are you actually talking about buying a condominium?

    Apartments are rental only. Difference between condominiums and apartments: https://www.apartments.com/blog/difference-between-renting-an-apartment-or-condo

    So if you are buying a condominium, you also need to account for the monthly HOA fees. This can be $250 or more per month.

    Also, don’t forget the condo insurance: https://www.nerdwallet.com/blog/insurance/condo-insurance/. It can be as much as $50 per month.
    May 5 1
    • Nvidia / Eng
      EndGa

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      OP
      I didn't know the difference between these two terminologies. I meant to say condominium. Good to know. Thanks!

      I have included HOA, PMI, Property taxes and Condo insurance in the monthly cost for the property.
      May 5
  • Roku smashhulk
    What is a bhk?
    May 5 1
    • Nvidia / Eng
      EndGa

      Nvidia Eng

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      OP
      Sorry! I meant two bed - 2 bath. I have updated the post.
      May 5
  • Google xkvpspecmg
    Couple of more things came to mind:
    1. I suggest allocating at least some of that sign on for paying tax, you'll easily owe 24-32% on that amount. Alternately, you could plan to withhold enough during the year from paychecks, but if you didn't do enough, you'll end up owing penalty.
    2. considering your relatively low liquidity situation, your offers on homes may not stick as well as others'. Sellers like to see a bit more liquidity than just what you need to conclude that you are not likely to bail using any contingencies that you may put on the offer.
    3. I don't understand how you calculate 900k/month impact from mortgage interest deduction. My rough calculation puts the interest portion of your monthly payment around 2k which means say 25k/year of interest deduction. So the impact of that will be 32% (your likely top tax bracket) * 25k /12 < 670/month.
    4. I would suggest you not to assume that a) you'll be able to get a roommate consistently for extended periods of time and b) you'll consistently be able to get the rent you think you'll get.
    May 5 0
  • Synopsys teamblnd
    Buy...worst case u can still rent it out and live elsewhere
    May 5 0
  • Expedia Yoyofog
    Are you sure you will have enough deductions to itemize and benefit from mortgage interest given the higher standard deduction?
    May 5 3
    • Expedia Yoyofog
      And what do you mean by "federal tax credit"?? Is this something different that the deductibility of mortgage interest?
      May 5
    • Nvidia / Eng
      EndGa

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      OP
      Thanks for bringing this up. I still need to do more research on this to understand the deductions and recent changes. But I meant the deduction for mortgage interest only.
      May 5
    • Amazon uuuwuuuuu
      Pretty easy to have enough deductions to itemize from mortgage interest. Im in similar situation as op
      May 6
  • Bose sockerfan
    You forgot u gotta pay tax on your rent . So remove 40% tax , also HOA can reject rental and subleases so make sure u check rental restriction before buying. Good luck 👍 maybe update your calculations in your post
    May 5 1
    • New jbnote1
      Yes, this. I mentioned tax but missed HOA rental restrictions
      May 5
  • Cruise Automation OrsQ75
    One word of caution, be careful if you're renting out a room, a bad roommate can really make your life suck
    May 5 1
    • True, but I find being the landlord provides you a power position
      May 5
  • Apple highwayman
    One room in your apartment is 1.3K but if you are renting elsewhere you pay 1.8K, why?
    May 5 1
    • Nvidia / Eng
      EndGa

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      OP
      I am renting close to my office and planning to take a master bed room. For buying, I don’t think I can afford anything close, and it’s not going to be a master bedroom, hence the low rent.
      May 5
  • Dell x123
    Congrats for the offer... Why don't you rent for a while, perhaps a room to save money. Get to know the areas get familiar with costs, then buy..
    May 5 0