Your $1.5 Million Dollar Starter Home: Living Small Making Big Bucks
All real estate is local. Despite San Francisco clearly being the most beautiful city in America (you know it’s true), there’s a steep price to pay to live longer, healthier, and happier lives: expensive homes!
The cheapest single family house on the market in San Francisco’s north-end has three bedrooms, two bathrooms, and 1,266 square feet of living space for $1.5 million. The location is good, but $1.5 million is pricey! The kitchen and bathroom upstairs is outdated, and there is not even a small yard to play around in. Maybe the house will sell for $1.4 million, but even still, that’s a large sum of money to pay for a small house without views.
There are two bedrooms upstairs where a couple and child can sleep. Downstairs is the third bedroom behind the garage. The problem is that you’ve got to walk through the garage to get to the third bedroom. Hey, at least there is a garage right?
I really hope the owners get $1.5 million or more for the house. If so, there is no doubt in my mind that real estate is back with a vengeance here in San Francisco. The funny thing is, my Manhattan friends are salivating that $1.5 million can get a stand alone house with a garage! Surely they’d have to pay over $2 million back home.
THE SECOND CHEAPEST HOUSE IN SAN FRANCISCO’S NORTH END
The second cheapest house next to the Bay is a trust sale for $3.5 million. That’s right, the next cheapest house on the market is $2 million more! I actually think this house is worth it with 4,000 square feet, four bedrooms, three bathrooms, and views of the Bay. It just needs about $500,000 in work to make it sweet. If I was a tech executive worth $15-20 million, I’d buy this house hands down.
The upstairs has a huge living room and balcony overlooking the Bay. There’s even an elevator in the back to help carry older folks with bad knees up from street level. The house is on a busy street, but that’s OK since the street quiets down at night, when you’re at home and sleeping anyway.
The rest of the 10 or so houses on the market in this area range from $3.6 million all the way up to $36 million. There clearly is not enough inventory for the “average” $400,000-$500,000 a year couple looking to buy a reasonable $1.5-$2.5 million dollar home.
HOW ABOUT A MEGA MANSION?
For all you entrepreneurs out there who were able to cash out like Mark Pincus at Zynga at $12/share, here’s a nice $15 million mega mansion for you! The house is incredible, with views of the Bay sitting high atop Pacific Heights.
In fact, I didn’t realize until recently that I met the owners last year at Marissa Mayer’s party. They sold their company Bebo (yep, never heard of it either) to AOL for some $850 million bucks in cash and they were the majority owners! In 2010, AOL sold Bebo for only around $10 million, a nice 99% loss.
To get rich, remember to always identify the donkey in the room with the biggest empire building aspirations! The funny thing about this house is that even after spending $15 million or so dollars, you’ve still got a neighbor just a couple feet away from you!
DON’T FORGET TO NOT SELL
The first house for $1.5 million was purchased 7 years ago for $1.21 million. At 1,266 square feet, it’s not exactly spacious for a family of three. However, for so many other people living around the world, 1,266 square feet is plenty! These homeowners will have to pay $75,000 in commissions + another $10,00 in real estate transfer taxes and other fees just to move. That’s just crazy.
The second house for $3.5 million is a trust sale. The owners passed away, and the trust is liquidating this asset which will probably get distributed amongst the heirs. The home has been in the family for decades and has likely risen in value by over 10X, providing a huge windfall for the trustees.
As for the final home, does it really matter? They can do whatever they want with their money and they’ll still have more than enough. The owners are great contributors of Charity Water and are very nice people.
Regular homeowners feel the heat of the rental market and know it’s just a matter of time before property prices head much higher. Given there is a lack of inventory, homeowners don’t want to sell because they can’t buy anything either. There becomes a vicious loop that lasts until a raging bull market returns.
Furthermore, almost everybody I know has refinanced their mortgages lower, making home ownership the cheapest ever for existing owners. I’m personally paying 60% less in mortgage interest from seven years ago for example (5.75% down to 2.625% rate). Imagine the cash flow increase of paying 60% less in interest while seeing a 50% rise in rents in the past 8 years.
Sellers today will punch themselves in the face 10 years from now when they see their old homes go for much higher. The only sellers I see are forced sellers. Don’t be one of them.
Recommendation: You should seriously check the latest mortgage rates via Quicken Loan with the 10-year yield at ~1.72% and QE3. If you haven’t refinanced in a year, I’m pretty certain that you can get a rate that is 0.5% lower than your existing rate. I just refinanced to 2.625% for a 5/1 jumbo ARM saving me $3,600 a year in interest expense!