How People Can Afford To Buy San Francisco Bay Area Real Estate

San Francisco Bay Area real estate is the most expensive real estate in America. The San Francisco median home price currently hovers around $1.8 million as of 2021. People are wondering how is it possible for young people to afford to buy San Francisco Bay Area real estate today?

It’s very simple really. The reasons why people can afford to buy San Francisco Bay Area real estate is due to the following formula:

Salary + Another Salary + Bank Of Mom & Dad = Housing Affordability.

That's right. First-time homebuyers can afford to buy San Francisco Bay Area real estate because roughly 40% of them get down payment help from their parents.

San Francisco Bay Area Real Estate Is Expensive Because Incomes Are High

The average person joining Facebook, Google, Apple, Uber, banking, consulting, law etc makes about $150,000 – $175,000 a year all-in right out of college. In eight years, when they are around 30 years old, they are making $200,000 – $350,000 a year all in. But wait, now each one of these folks shacks up with another person in a similar situation. You’ve now got a household income of $400,000 – $700,000 a year.

San Francisco real estate prices

With a $400,000 – $700,000 a year household income, you can easily afford a $1,000,000 – $1,500,000 mortgage based on today’s interest rates (~4% for a 30-year fixed, ~3% for a 5/1 ARM according to SF-based Credible, one of the best places to shop for a mortgage online for free as banks compete for your business).

Now hold up. You’re saying average people don’t work at places like Facebook, Google, and Apple. Well, despite these tech, finance, consulting, and law firms employing tens of thousands of people, the average person who is willing to come to San Francisco and pay such a high cost of living does indeed work at companies that pay well, otherwise, they wouldn’t be here. Places like SF and NYC are the gravitational centers for gung-ho, highly motivated people.

Further, only about 20.5% of 18–35 year olds in San Francisco own homes and only 36% of the entire SF Bay Area population own property. Therefore, you only need 1/5th to 1/3rd of the population to be earning this type of money to afford a SF Bay Area home.

Should You Buy San Francisco Bay Area Real Estate

In my opinion, if you plan to live in the San Francisco Bay Area for at least five years, you should try buy in the area. Following my 30/30/3 home buying rule is difficult in the area. Therefore, many households stretch to 5X their annual income to buy San Francisco property. I wouldn't stretch beyond 5X annual household income.

As we come out of the global pandemic, San Francisco looks to be an attractive real estate market. San Francisco hasn't climbed as much as 18-hour cities across the country as people left. However, the tech-heavy NASDAQ was up 43% in 2020. Further, people are rushing back to big cities like San Francisco and New York City as that is where the jobs are.

The western portion of San Francisco, which is less dense and more affordable, has seen a tremendous amount of demand. Neighborhoods like Golden Gate Heights, Parkside, Sunset, Outer Richmond, West Portal, and St. Francis Wood is in high demand. Whereas condos are in lower demand. But I believe condo prices will come back in 2020, especially condos with balconies and that are near parks.

San Francisco Median Home Prices

Bank Of Mom & Dad Is Everywhere In San Francisco

If you secretly look behind the covers, the Bank of Mom & Dad is ubiquitous when it comes to first time homebuyers in expensive cities around the country. I’ve spoken to hundreds of agents and the estimate is roughly 40% of first-time homebuyers get help in the form of a down payment or full payment from their parents.

It’s the only logical way if your 25-year-old annoying colleague making $120,000 a year suddenly tells everyone he just bought a $1,200,000 condo or $1,800,000 home!

I’ve surveyed all my neighbors over the 10 years I lived in the Marina and now the three years I’ve lived in Golden Gate Heights, and practically every one of them got help from their parents. That’s the world we live in folks. The Baby Boomers are the wealthiest generation in history because they been able to save and invest the longest during the biggest boom in history.

Just be careful to not turn out like a couple of my deadbeat neighbors who are 20-something year old guys with no motivation to do anything because they get to live for free in a paid off, multi-million dollar home. To be gifted wealth instead of earning it is one of the worst curses ever!

Diversifying Real Estate Exposure

You might have come to this article because you're looking at buying. Well, I sold my San Francisco rental home I bought for $1.52M in 2005 for $2.74M in 2017. The valuation ended up being for 30X annual gross rent. I sold because I wanted to simplify life as a new father. However, ideally, I would have been able to hold onto it forever.

I tried to sell the house in 2012 for $1.7M after the financial crisis, but thank goodness nobody wanted to buy it! I got a couple low ball offers for $1.6M so I took the house off the market after 28 days. Besides the fantastic price I got in mid-2017, I sold my rental house because I was paying $23,000 a year in property taxes, had PITA tenants, lots of maintenance issues, needed to remodel, and finally became a first time dad!

I’ve reinvested $500,000 of the proceeds in real estate crowdfunding like Fundrise. Fundrise is my favorite platform to gain real estate exposure in a stable way through their eREITs. It's great to take advantage of technology and arbitrage opportunities in lower cost, higher cap rate parts of the country. They are free to sign up and explore.

There is so much opportunity to buy property across the country at much lower valuations (10–15X annual gross rent vs. 30X here in SF) and much higher net rental yields (8% – 12% vs. 2% – 3% in SF).

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

The Future Of San Francisco Real Estate

San Francisco is always going to be a tier 1 city. The number of huge companies that pay big bucks is always going to be here. The weather is moderate and the area is beautiful. With so much diversity and money-making opportunities, San Francisco Bay Area real estate will always be desirable. I believe the housing market is going to do well for years to come post pandemic.

Good luck in your property hunt. Always run the numbers and make sure they work for you in difficult scenarios. Be patient. There’s always another deal to be had. I’m still long one rental in Pac Heights and three single family homes in Golden Gate Heights, my favorite San Francisco neighborhood.

Again, if you plan to live in the San Francisco Bay Area for at least five years, I would at least get neutral SF real estate by buying your primary residence. Then, consider diversifying across 18-hour cities due to demographic trends. You can check out CrowdStreet, another favorite real estate crowdfunding platform that focuses on individual deals in 18-hour cities.


Sam, Financial Samurai

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