Everyone seems to think you can’t buy a place and still retire by 40. I’m here to debunk that, because we’re working on that right now. I also live in the 2nd most (if not most) expensive part of the United States: San Francisco Bay Area where the median home price is $742,000. So if we can manage to do this, then so can anyone else.
Here’s our story
We started looking in 2013 for a place to buy, because our rent at the time was $1,900 for a 1-bedroom. We were busy saving and a friend mentioned that there was a complex near where we were living at the time that were turning apartment rentals into condos to sell. We drove over and found out that there was a huge wait list. Despite that we put our names down for a studio.
For the next few months, we visited the complex office every other weekend to just chat with them. We basically told them that we were extremely interested and would not pass if we were offered a condo. After a few weekends of making nice, they contacted us to tell us that 2 final condos were left despite the fact that we were one of the last people on their wait list. They liked us and knew that we had made such an effort to secure a condo, they had confidence that they wouldn’t be wasting their time.
They told us the condo was 565 sq ft for $241,900 and that was it. No price negotiation, no bidding war, just a set price. If you’re heard about all the craziness in the San Francisco area, then you know what we go through to bid for a dump. No one ever under bids in the Bay Area. The realtors will ask you if you’re joking if you even bother to mention under-bidding.
We signed the contract, secured the financing, and put the 20% down payment. 6 months later, we were all moved in!
How will you do this?
Do not buy a house.
Unless you plan to live in the same location for more than 5 years, the cost of home ownership isn’t worth it. Even if you do live there permanently, the cost of maintenance will take a toll on your savings. Assuming you purchased a house for $200,000, HGTV recommends you keep 1% – 3% of the home purchase price for maintenance, which means at least $2,000 a year dedicated to maintenance. In 10 years, that’s $20,000 that could have been invested!
Furthermore, the larger the space you have, the more you’ll feel the need to buy in order to fill the empty space. Part of retiring by 40 also means keep your stuff to a necessary minimum, meaning only purchasing things that are absolutely necessary and will keep you happy. With a home, you’re more likely to end up purchasing more without thinking as thoughtfully.
Also for some newer developments, you might incur monthly HOA costs.
Instead buy an apartment.
The average 1-bedroom is roughly 700 sq ft. This is just enough space to make cleaning easy and maintenance affordable. You have more space than the tiny home movement, but it’s not big enough where you’ll be tempted to buy a ton of furniture to fill empty spaces.
But what about the higher HOA?!?! Well, it’s always going to be there unfortunately, most apartment HOAs cover more than a house HOA. Ours covers water, sewage, gym, dog poop bags, 24/7 security, pool, club house, all external maintenance, and some basic internal maintenance. So, we’re left with having to pay the electric bill and all the extras we want.
Compare the breakdowns.
Now let the numbers show why buying an apartment is worth your investment.
Assuming you buy at 25 and live another 50 years here, you can see the cost of a house is between $625K to $760K depending on where you live. Property tax is the main driver of the difference. According to the New York Times, the most expensive property tax is in New Jersey at 2.35% and medium property tax is in Missouri at 1%.
If you rent forever and right now, we’re seeing average rent of $800 for most people who are working towards retiring early. Assuming you have a pet, you’re looking at least $515,000 over the 50 year lifetime and that doesn’t even include the fact that inflation happens over those 50 years, which means your landlord will raise rent on you some day.
Finally, no matter if you live in the most expensive property tax state or not, purchasing an apartment is the best thing you can do. Assuming you pay the 30 year loan at 4.1% and never refinance for a lower rate, you’ll pay a total of $445K and don’t have to worry about getting kicked out or your landlord raising rent. Not only that, you’ll be able to live as long as you need to and it could surpass 50 years. Furthermore, it’s significantly easier to rent out a 1-bedroom apartment than it is a house, which means you just turned this apartment into an investment and passive income for yourself if you decide to move.
Facing Annual Rent Increases
Going back to our story, the $1,900 was going to go up to $2,000 the next year. After we moved out, we heard the landlord was extremely happy, because they were only able to raise $100 on us. For new tenants, she decided to charge $2,200. The worst part: there was no washer/dryer unit in the apartment and the building was built in 1970. It’s only real attractions were that it was literally across the bridge from San Francisco and it was in a safe quiet neighborhood.
Bottom Line: Renting is cheap in the sense that you don’t have to pay for maintenance, property tax, and HOA, but the landlord sees this as in investment. They will price their rent to cover majority of the expenses and in a way, you’ll lose out when they raise rent and you’re faced with having to move again or pay the higher rent. With an apartment, you’ll be locked into that price for until it’s fully paid off for and no one can tell you to leave.