harisrid Tech News

Oh My god I’m in my 20’s and I’ll never afford a Single Family Home ( today ) but I can afford a starter-home?

And how the heck did everyone else get a head start building up real-estate portfolio and a strong long-term equity basis?

NOTE – do not misconstrue any of this as financial advice, this is my own musings ( and questionable ideas ). Go to investopedia.com or somewhere with credentialing and institutional backing

But realistically, do you need to start with a SFH ( single-family home ) in your 20’s? First, there’s the debate of renting versus buying. And secondly, maybe not?

When I first came to San Francisco, I went to websites like Zillow.com ( and a reccomendation from a real estate agent, Zenlist.com – purpoted to be better ) to analyze the FMV ( Fair Market Value ) of prices for real estate – start-home condominiums, SFH ( Single Family Homes ), and MFH ( Multi Family Homes ). And my god, what prices they commanded. I saw averages hovering in these windows :

• Starter-Home Condominium FMV : [$400K,$800K]
• Single Family Home FMV : [$1MIL, $2.5MIL ]

Now don’t get me wrong – I’m young, and I’m not there ( yet as of today ) for such large-scale financial purchases.

But I have cursory understandings. And it’s how folks get started, and the maneuvers they take to building up their real estate portfolio over time. Let’s begin

The Ladder

World 1 : Your 20s or your 30s, 5-10 years, starting with the start-home at $500K

Let’s suppose a family exists and want a home worth $1.0 USD million – $2.0 million USD in the future ( at the age of 40? 50? 60? It doesn’t matter, just get there for me eventually, ok 🙂 )? Well, they don’t have $2 million today. but they almost paid off their first mortgage, originally taken at a value of $500K, now appreciated and netting a capital gain of $700K ( really good years of home appreciation and well-negotiated closing costs with agents respecting the fiduciary duty )

World 2 : Your 30’s or 40’s, 10-years later : start-home’s paid off, now to the next 5-10 years at a $1Mil home

Ok, now they want to go to the $1Mil dollar home. But wait a second, they don’t need to take on a loan of $1Mil. They have $700K from their previous transaction, and if there’s something I recall about 1031c exchanges ( or another rule, don’t quote me ), they can “migrate” the funds over from the previous home to the new home. That leaves about $300K outstanding.

Oh no $300K in a mortgage loan. That’s a lot to pay … or maybe not, if you do things right and focus on aggressively paying down the debt over a 10-year horizon ( combined with the savings netted from standardized deductions or itemized deductions, depending on current tax laws ), you can knock it out quickly.

But even better, you’re in a home worth $1M, not $500K. That’s not just $500K of a delta in the principal. That’s also with respect to long-term capital appreciation. There’s a world of a difference with $500K*(1.06)^10 in theoretical appreciation. Let’s do math!

500K*(1.04)^10 = 740,122.142459
1M*(1.04)^10 = 1,480,244.28492
… wow a world of a difference

So you’re telling me that some of those people who live in the $1M dollar home actually took on really low loan values? … YEP! They’re just transferring equity built up from earlier.

Now again, is this realistic? I don’t know. I’m thinking theoretically, ok. Actual rates capital appreciation rates are far far different; 4% for a good bear market is about right to most folks 🙂

World 3 : Your 40’s and your 50’s, 10-years later again: paid off 1Mil with appreciation, incomes and portfolios have build up, now to $2M?

Now to world three. The family wants to move to a higher-valued home of $2 Mil. They apply the same maneuver again, using the net profits from their current home sale, yielding around $1,300,000 ( conservatively ).

Ok but they also have 10-years of their own investments or other portfolio funds, meaning an additional $100,000 sitting somewhere. That gets them to $1,4000,000 funds available.

Perfect. Let’s pay of 1.4M out of the 2M home’s FMV, netting us a $600K outstanding loan balance. Ok it’s a huger loan again, but, … let’s think, not only have familial incomes most likely risen up ( with tenure, seniority, and time ), but, the family also originally took on a $500K value loan for their first home 20 years ago! Taking on $600K isn’t that far fetched to do again.

World three is one of the best world’s, because at this point, theoretically going higher exponentially ( to $4M, $8M ) nearly puts you in a very, very small percentage of the world’s population. There’s some ungodly point to which you can’t keep doing this, BUT, you go doing other things ( cuz you don’t know what else to really be doing, I’ll get back to you when I figure that out, please don’t file chapter 9 or chapter 13 ).

So … what’s my takeaway for my 20’s? What do I do with this?

I’m told that you’re supposed to … feel less anxiety and to stop holding yourself to ungodly, unfounded expectations that you have to get somewhere that very few of us actually get to. Or … do? I dunno. There’s also MFH ( Multi-Family Home ) investing, house hacking, and investing in duplexes.

You start off small for a couple years, BUT, you gradually build up. And if all the stars in the universe align, things should … work?

The old-construction SFH of ( mostly good ) quality with a FMV of $1MIL at bare minimum in a San Franciscan neighborhood is an immediate stretch goal. You need to procure a Down Payment in the 20% ( $200K ) for most conventional lending ( unless you qualify for exceptions ), 5%-6% in CC ( closing costs ), and then account for PITI ( principal, interest, property taxes, and home insurance ) on a per annum basis. It’s a hard ask, even for a DINK [ Dual-Income No Kids ] situation.

So, let’s start easier with some lower-hanging fruit. It’s not ideal, but, why not a start-home condominium, equivalent to a 2Br2B setting, hovering around $500K-$600K in up-and-coming neighborhoods with solid appreciation rates ? This option seems cheaper.

And congrats. You just learned how to become a (non-liquid in net worth) millionaire. Because a lot of us expect to become ( liquid in net worth ) millionaires. Which is a story for another day and time.