I have been everywhere, and it is clear to me that San Francisco is one of the cheapest cities in the world based on its wealth creating potential. So many of my friends who live in New York City or around the country like to say that the median rent and home price in San Francisco are our country’s highest. It’s simply not true. Rent and property prices in Manhattan are the highest AND they only get to enjoy the outside for six months a year! Related: East Coast Living: Is It Really That Horrendous?
If I had to pay $2,500 a square foot for a condo in Greenwich Village, I’d be a little bitter too about equally amazing SF property costing 40% less. Heck, you can even get panoramic ocean view properties in San Francisco for under $800 a square foot. There’s no other city in the world that can boast such value.
The media have a great way of misleading the public because they like to take averages and extrapolate. I am in the trenches, actually visiting open houses in NYC and SF and bidding on places. I’m also a landlord who is very in-tune with market rents and wages for the 22-35 year old crowd. Based on the rents and incomes I’ve seen, San Francisco is affordable if you can land one of the many tech, internet, software, healthcare, consulting, and finance jobs.
I was just in London for Wimbledon, and places in Knightsbridge and Chelsea make Pacific Heights in San Francisco feel like Costco prices!
THE COST OF LIVING INDEX
Let’s say you are a skeptic and still think San Francisco is so expensive. That’s fine. Don’t listen to me. Take a look at this fantastic cost-of-living index from The Economist, which pegs New York at 7.
As you can see from the chart, San Francisco is nowhere to be found! Well actually, I did find San Francisco rank at a lowly #34 after looking hard enough.
For those of you wondering what is the definition of an “international city,” let’s put it out there. An international city is a city where there are large amounts of foreign office hubs, foreign visitors, wealthier immigrants, and foreign property owners. An easy way to think about an international city is to ask yourself whether you’d consider vacationing there. New Delhi? Absolutely. Karachi or Chicago? Not so much.
EXPLORING HONOLULU, HAWAII
In early 2014, I was thinking of renting out my house, increasing passive income, and moving back to Honolulu to be close to my parents. I went searching every weekend for five weeks for property, and here’s an example of what I found. This isn’t even the most expensive of the bunch.
This house is at 4657 Aukai Avenue in Kahala, Oahu. It’s a great neighborhood close to the Waialae Country Club where I could play golf in the morning, get some lunch in the afternoon, take a nap on the beach, and then play tennis after 4pm when the sun isn’t too hot. Not a bad life right?
With 4 bedrooms, 4 bathrooms, 3,430 square feet of living area, a pool, and 0.25 acres of land, the house would be just perfect for a family of four and the occasional guest. It’s certainly not one of those mega-mansions by any means.
Here’s the problem. The asking price is $3,475,000! I mean, seriously? How the heck is the normal person supposed to afford this home? I worked in finance for 13 years, saved 50-75% of my after tax income, and have the largest blog in my zip code that starts with the letter “f,” and there’s no way I could afford this home. I’d have to come up with a $2,475,000 downpayment to get to my ideal mortgage amount of $1,000,000.
Even if I could come up with a $2.475 million downpayment, earning $150,000 a year in passive income just barely comfortably covers the $4,000 a month PMI mortgage payment if I were to have kids. You might be wondering why I wouldn’t just get a job then?
Well, getting a job in Hawaii would be counterproductive if I’m going to Hawaii to hang out with family and retire. Unless you are a doctor, private wealth manager, or lawyer, there aren’t any six figure jobs to be had. Sure, I could make $35,000 – $70,000 selling BMWs as a newbie car fanatic. But spending 40 hours a week doing so would lower the quality of my life.
I had to look on.
HELLO NEW YORK CITY!
Despite New York City being grey, cold, or muggy for half the year, NYC is still the best city in America for the other half of the year. The food, the entertainment, the people, and the buzz are incredible!
My biggest regret was not buying a $730,000, two bedroom, two bathroom, double balcony condo at 24th and Madison with a view of the Chrysler building in 2000. The 1,300 square foot condo is probably worth much more today. But how much more, I’m afraid to know.
Undeterred and always hopeful, I went looking online and offline for my retirement condo in NYC and here’s what I found.
1) A 569 square feet West Village condo at 366 W 11th St #10A with a deck for $1,445,000. I like the indoor/outdoor living, but come on. $2,539 a square foot is outrageous for what it is. I’m a middle-aged man who doesn’t want to go back in time and live like a college student. 569 square feet is tiny, especially if there will be two or more people inhabiting the space. Let’s keep looking.
2) I was thinking to myself, why not try and find a home in Manhattan that is similar in size and in location to my home in San Francisco. A fair trade in property, despite the inferior weather of NYC sounds like a decent goal. I couldn’t find a 2,400 square foot brownstone in Manhattan. All of them were at least 3,500 square feet with four stories. Fine, I’m happy to entertain bigger properties if the value is there.
Here’s a 3,500 single family home at 112 Washington Pl in the West Village. One big problem. It just sold for $11,000,000 million! The brownstone is gorgeous, but come on Gina. That’s $3,141/sqft and where am I supposed to park my lady-killer Honda Fit? On the street? Ridiculous.
3) OK, so now I’m thoroughly depressed because there’s definitely no way I can afford $11 million for a house that looks pretty similar to my house in San Francisco at the time. I would have to grow readership on Financial Samurai by 10X to even have a chance. So I figured, let’s do what rational people do and compromise. Forget a single family home in Manhattan. Let’s go back to looking for a condo in a great location. I’ve always wanted to live near Central Park. Having the combo of a big city plus nature would be incredible.
I found this great 2,021 square foot, two bedroom, two and a half bathroom condo at 15 Central Park West #2E. The size is perfect and it has a nice terrace, but I was hoping to have a third bedroom in case I have guests or kids. Oh well, I’m willing to compromise if I can save a little bit of money. Unfortunately, the asking price is $8,990,000 or a whopping $4,448 a square foot!
Thoroughly depressed, and still amazed by how often people say that San Francisco is the most expensive city in America, I decided to give up my plans of moving to Honolulu or New York City.
PS: New York has six ZIP codes among the Forbes’ top 10 most expensive zip codes list. Long Island’s Sagaponack 11962, in the town of Southampton, grabs the No. 2 slot after Atherton, CA at #1. Number 3-5 are New York City ZIPS: Lower Manhattan’s 10013 (No. 3), the Upper East Side’s 10065 (No. 4) and 10075 (No. 5).
HOW ABOUT PARIS?
I spent a week in Paris in May 2016 and San Francisco is definitely dirt cheap in comparison. Notice how Paris ranks #5 in The Economist’s list of most expensive cities above.
I stayed at a Junior Executive Suite Deluxe at the La Reserve Hotel for a week and it costs 1,700 Euros a night. That’s about $2,000 a night. The hotel room is nice at ~500 sqft, but $2,000 a night seems a tad much doesn’t it? In San Francisco, you can stay in a similar size suite for about $500 – $700 / night. Not cheap, but 70% cheaper than Paris!
Food is super expensive as well. It didn’t matter where I went, each meal cost $80 for two at a minimum for dinner. Below is a light dinner we had off the Champs Elysees for about $74. The French Onion soup cost about $28, the Caesar Sald $31, and the beer about $15.
WHY IS SAN FRANCISCO SO CHEAP?
Maybe people are afraid of large earthquakes, which happen once every 25+ years. I would rather chance having a large earthquake than having hurricanes or tornadoes every single year. Or maybe people believe SF is so expensive because the media has successfully scared away people at the margin. For 13 years, I had no idea there were homes with ocean views in San Francisco for so cheap until I decided to actually go look.
You would think that with amazing weather, world class universities in Berkeley and Stanford, huge companies like Apple, Google, eBay, Genentech, Facebook, Twitter, AirBnB, Uber, Clorox, Chevron, SalesForce, Yelp, Yahoo, Levi’s, plenty of VC and PE funds, and nation-leading low unemployment, San Francisco would be way more expensive than Honolulu and New York City.
But San Francisco is so much cheaper in comparison. You can buy a panoramic ocean view, 2,000 square foot, single family home for less than $1.6 million ($800 / sqft) and still earn the same income, if not much more than if you lived in Honolulu or New York City. Some might have thought me crazy for buying a fourth property in Golden Gate Heights, but I found it insane that prices weren’t even $1,000 a square foot for properties with panoramic views!
Then there was this 26 year old guy who went to programming bootcamp and told the world he received a $250,000 a year total compensation package at Airbnb! Just look on LinkedIn or Angel.com for jobs and you’ll see plenty of $100,000 – $200,000 a year opportunities.
Six figure jobs are a dime-a-dozen here in San Francisco. One ad agency rep with only one year of experience moved to Netflix for $100,000. Not bad for a 24 year old right? Every single one of my 23 year old tenants makes over $120,000 a year given they work in finance and tech. My MBA grad tenant makes over $250,000 a year, if not much more based on her carry.
Even if there was a great house with views in Honolulu for $1.5 million, I wouldn’t feel as comfortable spending the same amount of money there as I would in San Francisco because the job markets are so different. In Honolulu, I was thinking about working at Cold Stone Creamery for $10 an hour. At least I could hook my friends and family up with some free ice cream.
I could probably find a six-figure job in New York City in finance or internet/tech. But the problem is that New York City is so much more expensive than San Francisco that I would need at least a 50% pay bump to afford something similar.
BUY SAN FRANCISCO REAL ESTATE
It’s pretty evident that San Francisco is undervalued in terms of rent and property prices compared to other major cities in America and around the world. All you have to do is spend hours pounding the pavement and searching online to realize the truth. The first picture in this post is a $8.9 million, 9,500 sqft mansion in Presidio Heights, San Francisco. This would be well over $25 million in New York City if such a place could exist.
When you can earn the highest incomes in the nation and not even be included as one of the 100 most expensive places to live according to The Economist, you know you’ve discovered an absolute steal. The key is to buy your slice of heaven before everybody locally and internationally find out. I fear what will happen when China’s capital account gets liberalized. I’m buying all the panoramic ocean view single family homes possible in Golden Gate Heights!
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, 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. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Shop around for a mortgage: 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 2019 and beyond. San Francisco property and other coastal city real estate markets are finally starting to slow as mortgage rates and inventory finally increase. I’m investing in the heartland of America due to lower valuations and higher net rental yields.