I am always researching and learning more about FIRE mostly from reading other FIRE blogs. Following other blogs helps me get more ideas about investment strategies and income streams that I hope to create someday. It also keeps me motivated knowing that there are different ways to achieve FIRE. My way, of course, is with owning rental properties. A lot of readers are surprised to learn that I own homes in Silicon Valley. I agree that it has the most expensive cost of living on the planet where average home values are north of $1 Million since 2018. But this is where I grew up and have always lived. My plans have always been the same which is to raise my family in the Bay Area.
Related Post: How Much Home Can You Afford
Real estate has been good to me. During the subprime mortgage financial crisis, I acquired two key investment properties. In 2010, I purchased a foreclosed 2-bedroom 2-bath condominium in an abandoned complex. In 2011, I purchased a short-sale townhome that was desperate for a buyer after a failed deal. Owning the properties have not only created the rental income stream my wife and I were looking for but also increased our overall net worth. Which is a great segway into the topic of what I want to present in this post. Afford to buy a home in Silicon Valley with an ADU.
Shop for a Home with ADU
If you are determined to stay in the Silicon Valley, you should expect to pay $1.2M or more for a decent home in a low crime neighborhood. Waiting for another subprime mortgage financial crisis to buy property on the cheap is probably not going to be a good strategy. Instead, I would advise buying a home with an ADU in the backyard. If you have been reading my blog long enough, you already know that I am a big proponent of Accessory Dwelling Units or ADU for short. By renting out an ADU in the backyard, the monthly mortgage will be as low if not lower than renting an equivalent size home. Don’t believe me? Let me show you the math.
Use ADU Rental Income to lower the Monthly Mortgage
How about owning a 3 bed 2 bath home in South San Francisco that is cheaper than paying rent. The following math will show you how to afford a house in the Bay Area at $1.2M but paying less than $4,200 which includes property tax and insurance.
Your total monthly reduces to $5,938 – $1,800 = $4,138 per month. http://Hotpads.com shows me rent median of $4,300 for 3 bed 2 bath.
RenttheMortgage.com
Here is home for sale in South San Francisco that is 3 bed 2 bath with a legal ADU in the backyard. It will likely sell for closer to the estimated value of $1.25M.
- A mortgage rate of 3.238% for 30-year fixed is $4,345 per month
- Assuming 20% down payment of $250,000.
- Property Tax of 1.31% and Insurance of 0.22%
- $4,345 mortgage + $1,364 tax + $229 insurance = $5,938 per month.
- Using http://Hotpads.com for 1-bed or studios in same area asking $2,500 is median value. Therefore this ADU studio can probably rent for $1,800.
- Your total monthly reduces to $5,938 – $1,800 = $4,138 per month.
- http://Hotpads.com shows me rent median of $4,300 for 3 bed 2 bath. 😉
Welcome to the club of Homeowners in Silicon Valley
Congratulations. You can officially join the exclusive club of homeowners in Silicon Valley if you follow my advice and purchase a home with an ADU. It is the same price as renting so it really is a no brainer. Renting has a 0% ROI where paying rent has the same result as burning your money in a campfire to stay warm.
Quick Summary
Afford to buy a home in Silicon Valley by shopping for homes with an legal ADU in the backyard. By renting out an ADU, your monthly mortgage will reduce to as low if not lower than renting an equivalent size home. Learn to make the numbers work for you to own instead of burning money on rent.
My wife likes to remind me that, Rent money is paying a mortgage for somebody else in the game of Monopoly except in-real-life (IRL).
What do you think of the math from this post? Let me know in the comments.
