I live in San Francisco, where I can’t go a day without hearing how unaffordable it is to live here. The media loves to excoriate the tech companies for pricing out poorer residents who’ve been here for decades. Ironically, the majority of techies themselves can’t afford to rent a $3,500 one bedroom apartment or buy a $1.1M median property by age 30 because they are relatively underpaid!
It is VERY bad form to buy a property with long term tenants, boot them out through an Ellis Act eviction, remodel, and then flip the property for a profit. It’s also terrible to buy a property with the intention of replacing long term tenants with yourself. Folks, please buy a place that does not displace existing tenants! It’s cruel to make people move out of homes when they’ve lived there for decades. There are plenty of other properties sitting underutilized or vacant to choose from.
Perhaps you also live in one of the many crowded cities in the world where rent and real estate prices have made living unbearably expensive. Your teachers, artists, writers/bloggers, musicians, and public servants are getting pushed out. Traffic has become unbearable. And your neighborhood is getting homogenized, much like it is at work. Let me offer three immediate solutions to the housing affordability crisis.
HOW TO ALLEVIATE THE HOUSING CRISIS
Rule #1: Don’t Disrupt, Maximize Existing Housing Utility
When I first moved to San Francisco in 2001, I went on Craigslist and rented a room in a crappy two bedroom, one bathroom, walk-up apartment in Chinatown for $1,850 total (Powell and Jackson St). The noise was unbearable, but the ad called so I filled it. I wanted to live in Pac Heights, The Marina, Cow Hollow, Russian Hill, or Telegraph Hill for $2,500+, but that would have blown my budget to smithereens. I felt it was necessary to make some sacrifices in my 20s in order to maximize my savings to one day buy and get neutral inflation. If you think Chinatown is noisy and dirty today, it was much noisier and dirtier 15 years ago!
I bought my first condo in 2003 from a retired woman who wanted to move to Oakland for the warmer weather. The place was a humble 2/2 with 990 sqft that hadn’t been updated since 1970. It wasn’t my dream property, but it was what I could afford. No disruption here as two people moved in for her one departure.
In case you’re wondering, it felt just as expensive in 2001-2003 as it does now. Living in a studio with another guy for two years out of college in Manhattan, sharing a 2/1 near Chinatown for a year with a couple strangers in SF, and splitting a small 1 bedroom with my girlfriend for another year while saving and investing the majority of my income allowed me to come up with the downpayment. It wasn’t fun to constrict spending so much and share tight quarters, but it was worth it in the end.
In 2005, I bought a house in the north end of SF from a Texas-based oil retiree who was renting the property back to the previous sellers for one year. The Texan later decided he wanted a one story house as his knees were bad, so he sold it to me and never moved in. Meanwhile, the rent-back tenants bought a new house down in the Peninsula. In order to help them settle their affairs, I was happy to let them continue renting back for two more months. No disruption. Waiting two months to move into my new home was not a big deal. Two people out, two people in.
For nine years this north end house was underutilized, housing only two people for most of the years. For a couple years, I rented out the downstairs bedroom to a middle school teacher for 50% below market rent because I’m very pro education. She made under $30,000 a year, but got to walk to the middle school where she worked, which was awesome! The house now houses five people, reducing the demand for housing by taking 2-3 people out of the rental market. No disruption.
In 2014, after renting out this north end house, I moved into a vacant fixer upper on the much cheaper western part of San Francisco in the Inner Sunset area. The original owner had moved up to Washington to be with her sisters before she passed away. For the past two years, I’ve spent money remodeling and doing some landscaping. Again, no disruption, only neighborhood improvement.
No Disruption + Increased Housing Utilization = Less Demand. Less Demand = Less Competition = Lower Prices. Lower Prices + Less People Who Get Disrupted = Happier People With More Disposable Income. Below is a clear illustration of how much better it is to maximize utilization of existing infrastructure and inventory.
Rule #2: Expand Your Search, Be Less Ignorant
After I’d purchased my western San Francisco property in 2014, a 29 yo fintech friend asked where he should buy because downtown was so expensive. I told him, “Why not look in the Sunset, Richmond, or Parkside districts out west where it’s 40% – 60% cheaper? I think there’s great opportunity to purchase a relatively undiscovered property there right now. It’s also much less crowded.”
He responded, “I don’t want to live in the Asian ghetto!”
Here my friend was, living in a studio in the Tenderloin district, the worst district in San Francisco where drug dealers and pimps proliferate, calling the western half of the city the “Asian ghetto.” He couldn’t afford to buy a two bedroom condo downtown, yet was turning his nose up on buying a beautiful house for a lower price out west. As a Chinese-American, I didn’t know whether to be insulted or amused.
I realized long ago that almost every ignorant statement is due to a lack of education. My friend has never spent much time in the western half of San Francisco, where it’s peaceful, has fantastic ocean views, diverse food, diverse people, cheaper services, and the wonderful Golden Gate Park.
I myself didn’t realize there was a place called Golden Gate Heights, which has homes with panoramic ocean views, until I spent several weekends driving around the area looking at open houses once a large CD came due in early 2014. I’d often called the western area “the boondocks,” even though it was just three miles west of where I used to live.
Here’s a great example of my own ignorance, born out in a post called, “How Do People Afford To Live A Comfortable Life Making Less Than Six Figures In An Expensive City?” New Yorkers, who do live comfortable lives, pounced on my post and shared how they make things work. I was familiar with only expensive Manhattan and ignorant about the other boroughs and lifestyles people lead. Heck, I lived in a downtown Manhattan studio with another dude back in 1999-2000 because it was so expensive! I’m glad others helped set me straight.
Rule #3: Earn Your Way In Over Time
Nobody deserves to live in the most expensive neighborhood. Demand is way too concentrated in the eastern and northern neighborhoods of San Francisco. Spend 15 – 20 more minutes commuting from western San Francisco and you’ll save 40% – 60% on rent or purchase price. It’s that simple. But whenever I reach out to a reporter or someone who writes about the high cost of living, they refuse to acknowledge the choice of commuting as a way to afford more.
They would rather profile the person getting pushed out of their home in the Mission (an important topic), or why it’s so expensive to live in the hottest neighborhoods, rather than profile the thousands of people who live in the Outer Sunset who are doing just fine. Solutions are much better than pontificating on the past or pointing fingers.
If Manhattan is too expensive, move to Queens. If the west ends of Vancouver and Chicago are too expensive, move east. If Santa Monica is unaffordable, move south. If you can’t afford Honolulu, move to Waianae. Eventually, those non-prime areas will rise in value too as population continues to grow. The people who live in expensive neighborhoods were there before you. And if there are new buyers in your desired neighborhoods, they probably saved and earned enough money to afford it more than you.
Regular Financial Samurai readers know how much I emphasize aggressively saving and investing over time to be able to achieve financial independence. When your time comes, take advantage. In the meantime, learn how to properly asset allocate your portfolio, build up multiple income streams, and start a website to give yourself more leverage. While you’re at it, read everything you can about real estate so you will be absolutely prepared when it comes time to make a move.
The same people complaining about the cost of living without being willing to move sound like the same people complaining about not getting ahead at work without putting in their dues. Nobody gets to go straight to the corner office after college, just like nobody gets to buy a mansion at the top of a hill without doing something amazing for a very long time.
We must earn what we deserve. This does NOT include those of you who think you deserve to live somewhere just because you have the money to buy a building and evict a tenant.
FOCUS ON IMMEDIATE SOLUTIONS
All this talk about building more affordable housing is great for the long run. Increasing public transportation routes is great too. But how does this help people NOW who have trouble affording a comfortable place to live? It doesn’t, unless you somehow win the housing lottery or the actual lottery.
I’m priced out of the northern SF neighborhoods so I moved west. Would I love to live in a 3,800 sqft Pacific Heights home for $6M with a view of Alcatraz and an outdoor blogging hot tub? You bet your buns of steel I would. Alas, I didn’t make enough money during the downturn to get in, and now I’m priced out. I accepted that fact and searched elsewhere. Now, I live in a cozy ~1,900 sqft home in the western part of San Francisco that’s good enough. The commute into downtown is 15-20 minutes longer that in the past, but that’s the sacrifice I’m willing to make to save money. If I one day get priced out again due to opportunity cost, I’ll move once again.
For folks who believe expensive cities like San Francisco, New York, and LA are the greatest cities in America, you might be right. However, if you ever venture out of your bubble, you may also discover there are plenty of other great places to live that are overall, much cheaper.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Check out my Fundrise review as well.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.