Buying a house in HCOL cities?

Those of you that have bought houses in HCOL cities, How did you do it?  

How did you save a down payment?  How long did it take you to save?  I am pretty confident I want to be in the city that I am for the foreseeable future, but it looks like its going to be hard to save a down payment as a single person.  

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Comments (43)

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Oct 5, 2021 - 5:44pm

Hard thing to do without having a lot of money, so you'll have to get creative. Here are a couple ways:

  • Buying a house as part of a couple helps (double the income, double the buying power, etc.). This would be the preferred way
  • Saving yourself and then buying. This is getting increasingly difficult as you mentioned, and could make your offer less competitive in today's market if you bring less to the table, plus could make you pay PMI based on your down payment. Shopping around for the right mortgage will be especially critical in this situation. Investing the money for a down payment is also hard because while you want to have as much as possible (or as much to get the best financing package), you also want to keep the principal since your timeline to invest may not be long, so that's something to think about also
  • Getting a loan/help with a down payment, usually from your parents. I know some people that did this in lieu of an expensive wedding. It's something I'd like to help my kids with if the situation arises. Alternatively, you could structure a loan with your parents/family and then pay them pay on top of a mortgage. Penciling this out is critical to see if you can afford it, but based on your earnings, it could also be a nice way to pay your parents back as they could be earning interest on that loan to you, albeit low. Depending on how these loans are structured, which seems to be a reporting issue to the IRS, the IRS may actually force your parents/family to charge a minimum amount of interest. I'm not sure on the details about this.
  • Lastly, if you can't afford as much house, then you'll have to be forced to look for something smaller/further away/worse condition. Depending on what you're willing to put up with, this could be a good idea. For example, you could get a place in a good location but wasn't well maintained, so you can renovate it yourself/with family and then have it worth more, but that will only help you when you either sell or want to do a HELOC or something like that

I'm curious to hear what others with more homebuying experience have to say

Edit: an option I forgot to mention is buying something like a duplex/triplex with some mixture of the above, and then leasing out the spots to help pay the financing costs/construction/etc. This can be especially good since you'll eventually have a cash flowing property with better per unit maintenance costs vs a single family home (just 1 roof, bulk buy 2x4s/other equipment, tenants who likely don't have dogs or children breaking things, etc.).

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

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  • Analyst 2 in IB - Cov
Oct 5, 2021 - 5:53pm

Yeah I get the first few.  It just feels like the few options are rent out extra rooms if you can get a house with a few or get a spouse(not sure I want to gamble on if a spouse has saved for a house or not) 

Oct 5, 2021 - 5:58pm

Yeah exactly, unfortunately it's partly a gamble like everything else. Another thing that can help but isn't as important is seeing whether your state/town (if you're US-based) has some kind of specialized savings program to help with getting better financing, like a first time homebuyer program or something like that.

Talking with your spouse about money is definitely really hard, and many people don't, but it's one of those hard conversations that people need to have. It can cause a rift in the relationship, especially if one party makes more than the other, but just like everything, has to be approached in a healthy way since you're in it together. Chuck and Wendy must have had that conversation in Billions, he couldn't afford that house on a district attorney's salary in today's market.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

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Oct 6, 2021 - 3:18pm

Consider moving to a lower COL city. I know that's probably not what you want to hear, but that's life. Even if you could afford the downpayment, you'll struggle to pay the mortgage every month. If you're in LA, SF, NYC, Miami, Boston, etc, consider Dallas, Denver, Austin, Charlotte, etc. All great cities with booming job markets and *more* affordable housing than what you'd be able to afford on the coasts. That's what I did after saving my 20% down.

  • Analyst 2 in IB - Cov
Oct 6, 2021 - 3:57pm

Still it seems like once you move the jobs are not a lucrative in the other cities, which still does not help the affordability question. 

  • Analyst 1 in AM - Equities
Oct 6, 2021 - 3:31pm

This is my perspective which I generally view as a unique perspective as I am a fifth generation born and raised New Yorker and intend on staying in this city for the rest of my life. 

People always talk about how expensive NYC is and how you can move to Texas/Midwest for a cheaper style of living. Generally, transplants move to NYC, stay their for their 20s and move to NJ, Westchester, LI when they get married. This is going to ruffle some feathers but the experience living in those three locations is not remotely close to NYC. If you like a city, stay there and just put in the work to buy a house. That was what my grandfather did when he was conflicted between staying in NYC and moving to Texas and he put in the work to buy a home in Brooklyn. Yes houses were cheaper back then but he was also a factory worker so still had to put in the work.  

  • Analyst 2 in IB - Cov
Oct 6, 2021 - 3:56pm

Yeah I get the put in the work, but unless you are looking at Senior Associate money it seems like it is hard to find anything affordable (that is also nice). 

  • Analyst 1 in AM - Equities
Oct 6, 2021 - 4:19pm

Yeah it is definitely a bit challenging now. One of my friends older brother just rented until he was 30 in low cost (relatively) to what he made in IB and then bought a fairly nice 2bd in a building with amenities for around 2mm in the upper east side. Currently a recently promoted MD at a boutique and he said that in the long run he will most likely sell his current place and buy a house in one of the nicer neighborhoods in Brooklyn/Queens (BHeights, Dyker, Whitestone etc.) and drive in once he has kids (currently 34 and married). 

Similarly, Ik i want to stay in NYC long term so will just be trying to optimize that. Obviously will move out of my dumpy apartment in time (4 Beds, 4 roommates (1 double in the master bdrm), 2.5bath in Hells Kitchen), as time goes but until I get a sig other. who I can live with I will live with a roommate (will probably drop to 1 friend) and just try to keep my housing no higher than 2000 a month. Personally am looking to live in BHeights where I grew up long term so that is where I will be looking to buy in the future. 

  • Investment Manager in HF - Other
Oct 6, 2021 - 4:34pm

As others have mentioned there is no magic bullet, it will take a significant amount of money to buy a place in a HCOL area. As already mentioned: you can save yourself, get help, or try to subsidize some of the expenses. 

Then within the "save yourself" category you need to decide how important ownership is. Do you want to have vacations? Nice nights out? Etc. This will delay your savings (obviously…). 

Also, you want to factor in the buying costs (I.e. in nyc closing costs are high) and the moving costs (if you end up getting married, wanting a bigger place, etc, will you sell? Rent it out? How much will selling cost you?). 

I personally chose the wait until early 30's. I wanted to enjoy life in nyc and travel. So I set a goal, invested as needed, and also got more stability in my career (and higher comp). I ended up buying a place that could be a lifelong home, as I didn't want to buy a 1 bd and deal with moving, renting or selling it, etc. 

Just think through those options before thinking you need to buy a place. 

Oct 8, 2021 - 8:30am

With runaway inflation and increased institutional interest in the SFH market I'm not sure the market will even be accessible in the next ~5 years. I'm not sure how people are getting comfort around this when asset prices are moving 30+% (at least in Toronto and likely other major HCOL centers though I'm not necessarily privy to those).

Oct 7, 2021 - 11:05am

FHA 3.5% down plus first time homebuyer assistance can let you get into a 1M property for about 38 - 45K all in depending on the location.  Also note that many cities have local home buyer assisstance as well. 

Don't worry about PMI it isn't a big deal, you can't get rid of it on an FHA loan so you will have to refiance.  However, if you do a 5% down traditional loan it is likely that in 2 - 3 years you will be out of the PMI range due to normal appreciation anyway.   Homes on average appreciate at a 3.5% compounded rate, so with 5% down you can get to 20% in a few years, ask for a reassessment and bam you will be good to go.  

  • Analyst 2 in IB - Cov
Oct 7, 2021 - 11:10am

I guess the only problem I see is that then your payments are sky high. I am assuming that this hurts peoples savings.  

Oct 7, 2021 - 11:25am

Payments are higher yes, but not much honestly.  A on a $1,000,000 purchase price a  $$800,000 30 year mortgage at 20% down would have you paying $2,222 in principal a month, where as $950,000 30 year mortgage would have you paying 2,638 in principal a month, interest difference would be about $200 per month and PMI about $390 per month.   So $900 per month or just under $11000 per year difference.  If you look at an 8% return on 150,000 per year in the market that is $12,000 per year on average.  Also not that after a few years that PMI will drop off so the delta on the money you kept in your pocket vs what you put into the house will only continue to grow.  Putting sizeable downpayments down is a good idea for people who have trouble saving their money.  If it is someone who has strong discipline and a financial understanding it is better to use as much leverage as possible.  Also considering that this home is unlikely to be your long term home is is better to keep the cash invested in a higher yeilding asset rather than have it parked in a liability. 

The trick here is just never sell.  Keep the property and rent it out, hire a PM if you don't want to deal with it.  Even if you are breaking even on the rent you still have an asset that is growing in equity value and someone else is paying to capture that equity.   Constantly use 5% down homeowners mortagages to bounce from propety to propety every couple of years and by the time you call it quits on work you will have a 10 to 15M portfolio in todays values and a stream of cashflows to retire on.

  • Associate 1 in IB - Cov
Oct 7, 2021 - 10:49pm

FHA limit this year is $820k plus you have to factor in closing costs of 2-3% so another $20-30k due at signing. 
 

I wouldn't do fha unless I had to. It now carries pmi for the life of the loan where conventional drops it when you get past 20%. 

Oct 8, 2021 - 9:21am

If you do this, you're buying with super-high leverage at what could be near the top of the market. If there's a recession and prices trend down even moderately you'll be underwater. Then you won't be able to move without coming up with a major chunk of cash to pay off the loan, since you'll be selling for less than the loan amount. And if, because of the recession, you need to move for work....you're kind of screwed.

If you're an analyst, you're probably too young to remember what happened a decade ago. Not saying you can't do it, but go in fully aware of the risk that you're taking.

Oct 8, 2021 - 10:06am

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