Walter Updegreave got what I thought was interesting question from a reader about buying a 1st home in Silicon Valley. The reader is 27 year old guy living at home who’s managed to put 80,000 into CDs and Money Market Funds. 80,000 would be plenty for downpayment on a very nice home in many parts of the country. Silicon Valley is not one of these places. Personally, I didn’t care much for Walter’s suggestion to the guy. He basically suggested that the poor guy should move. Relocation should be a consideration, but I strongly believe that finances should not be the primary driver in deciding where one lives. So what should someone who lives in one of these sky high markets do?

First off, I think there are a number of choices. Kevin doesn’t have an either or choice of living at home or buying a place for himself. I think living at home can be great way of saving money, and with 80,000 he’s clearly put himself in a great position. However, buying a home is not the only way of moving out. Kevin could easily rent a place, preferably with some roommates. One of the things that gets lost in many of these discussion of overpriced housing markets is that the rent while still overpriced is much more affordable. For example my brother lives in NYC in a small one bedroom apartment for 1900. That same apartment would probably cost conservatively about $600,000 to buy. Even with a 20% downpayment we’re talking a monthly mortgage of around $2,700 plus condo fee of $400 and taxes around $300 a month. Clearly renting for $1,900 vs paying out $3,400 a month to buy (even taking into account the benefits from the mortgage deduction) makes financial sense. Renting rather than buying is a better financial move given the market dynamics. Everyone considering buying a property needs to know what the cost to buy vs. rent is.

Let’s return to Kevin. What are his specific options? I’m going to assume he wants to buy and live in the San Jose area as that’s where he’s writing from. I personally don’t know that much about Silicon Valley, so the examples below may not be very reflective of specific local conditions. These examples are just what I could pull together quickly from Craigslist on seach around San Fransico using “San Jose” as a keyword.

Purchases

Rental

I realize for many people these prices might look very high, but given that I live in another expensive coast city, they don’t look bad at all. One of the biggests cost to buying versus renting is often self inflicted. People tend to buy more than they would rent. I rent a one bedroom apartment, and have no desire to rent anything more than 1 bedroom apartment. However, if I were buying, I would buy at least two bedrooms. People generally want to buy something they can grow into, but as result people pay often pay for extra space they don’t immediately need.

The biggest savings Kevin can achieve would be to live with roommates. I’ve always been a big proponent of living with roommates when you’re young, and Kevin is still young at 27. He can live with roommates if he rents or buys. When I purchased my condo, I purchased with renting the 2nd bedroom in mind. My roommates effectively helped me pay my mortgage. While it’s never adviseable to buy a place that you can’t afford, knowing that you will have a roommate helping you out allows you to stretch a bit more for a purchase.  In the table above, I assumed that Kevin would not be able to split the cost evenly if he purchased and therefore he would have to pay extra relative to what he would charge his roommates.   This premium reflects the premium on purchasing vs. renting.  If Kevin is not adverse to living with others, this is the single best way to help make buying more affordable. Roommates also help month to month on utility costs such as electricity, cable, etc. Personally I would choose to live with people regardless of the financial impact - I like having company. When I purchased in 2002, I brought a place that would’ve put a serious crimp in budget had I not had roommate, but because I did I transitition fairly seemlessly between renting and owning. I continued living with the same roommate I had when I rented. The nice thing is that by having a roommate, Kevin doesn’t lock himself in. He can choose later to live alone if he wants to.