The Math Behind Geographic Freedom

It sucks to admit, but we really feel priced out of the SF Bay Area.  Even when I was working, I always felt like rent and home prices were just too darn high.  I suppose it makes sense due to all of the high-paying jobs, but we were never really fit for the rat race and keeping up with the Joneses.  But the Bay Area is still a great place to live.  The weather is nice year round — not too cold in the winter and not too hot in the summer.  Plenty of good food and natural beauty.  Very diverse and well educated neighbors.  Plus our families are based there.  That’s a combination of factors that’s hard to match anywhere else.  It’s with a bit of a feeling of defeat that I’m looking at other places to settle down.

I’ve been investigating the following areas, which are in striking distance of our families in the Bay Area, but significantly less expensive:

  1. Scottsdale / Phoenix
  2. Portland / Vancouver
  3. Sacramento / Folsom
  4. San Diego / Carlsbad

None of these places meets all of our criteria, although I admit we have not spent a lot of time in any of them. I’ve looked at real estate listings and read up on City-data.org forums. We also went on scouting trips to a few locations last year.  Here’s my glass-half-empty assessment of each place:

1.  Phoenix / Scottsdale

Visited once for work and once for pleasure during shoulder season.  Biggest issue is weather.  Realistically, I’m not a hot weather person.  I get heat stroke pretty easily.  Also PHX is not the most diverse area, but I never felt uncomfortable when visiting.  Great place for golf though.  Also the least expensive place we considered.  Can get a 2 bed/2 bath condo for $175 to 225k.  Schools are generally not good outside Scottsdale.

2. Portland / Vancouver

We visited last year in May and there was quite a bit of rain, but also breaks of sunshine.  Living here year round might get depressing.  Playing golf in the mud is also no fun.  The second least expensive place on the list.  I wanted to focus on the WA side to avoid income taxes.  The town of Camas looks interesting, but never visited.  There are risks of natural disasters including earthquakes and tsunamis due to the Cascadia Subduction Zone.  Also has active volcanoes (e.g. Mt. St. Helens). Not that diverse. Great schools on paper in Camas.

Sacramento / Folsom

I haven’t been to Sac for quite a few years now.  But I hear good things about Folsom and the surrounding areas.  The weather is reasonable, but not as good as the Bay Area as it seems to get a lot hotter in the summer in Sac.  Housing prices are a little high, but still doable.  Schools look good too.  Year-round golf is definitely in the cards.  Also within an easy drive of the Bay Area.

San Diego / Carlsbad

Love this area!!!  Weather is perfect and also close to L.A. where we have a lot of friends.  But the most expensive on the list.

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Ideally, we would only live in one area, but another option is to snowbird.  For example, live in Scottsdale but escape to Portland in the summer.  But I’m leaning away from this option because of the added cost and complexity. The cost can be offset by doing things like Airbnb, but that adds to the complexity.

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I used a reverse SWR calculation to determine how much house would offset the $2k we paid a month in rent in the Bay Area.  We are using a SWR of 3%, even though that gives a bigger number than 4% for the amount of house we can afford.

Here’s an example to show why the Bay Area doesn’t work for us.  Let’s say we’re looking to buy in the Bay Area where property tax rates are approximately 1% and we’re looking at maintenance fees of $400 per month.  Our annual rent payments of $24k divided by 3% is $792k.  That’s how much we can spend on base housing expenses inclusive of purchase price, recurring HOA / maintenance fees and recurring property taxes.  To account for those recurring expenses, you have to subtract $400*12 divided by 3% or $160k and 1% of the purchase price divided by 3% from the $792k, leaving a maximum allowable purchase price of $390k.  There’s no realistic way we could find a place for that price in any reasonable part of the Bay Area.  Alternatively, you could look for a single family home that does not have maintenance fees, but that only increases the maximum purchase price to $550k, which is still not doable.  As an aside, it’s amazing how much of an impact the maintenance fee has on the allowable purchase price.

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Here is how the math might work out for the four areas discussed above from cheapest to most expensive.

Scottsdale – 2 bed/2 bath townhouse for $225k with a $200 a month fee and a tax rate of 1.15%.  The fees and taxes total $5,407 a year and the purchase price is equivalent to $6,750 in spending a year, for a total of $12,157.50.  That’s about half of what we spent on rent in the Bay Area for a 1 bed 1 bath apartment straight out of the 1950s.

Portland / Vancouver

In Camas just west of Vancouver, we can get a 3 bed 2 bath house for $375k and no HOA fees.  Prop tax rate is 1.41%.  That works out to an equivalent annual expenditure of $16,500, which is 2/3rds of our former rent payment.

Sacramento / Folsom

Going back to California, we’re looking at a 3 bed 2 bath house in Folsom for $425k.  No HOA and prop tax rate of about 1%.  The equivalent annual expenditure is $16,600, which is close to that of the cheaper Camas place due to the 0.4% difference in property tax rates.

San Diego / Carlsbad

Finally, we get to my personal favorite area.  We’re looking at 2 bed 2 bad condos for $420k and a $220 monthly fee.  The condo is pretty small at about 1,000 sqft.  Prop tax rate is about 1%.  The equivalent annual expenditure is about $20k, which is really close to our rent payment.

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No formal conclusions right now.  But I am leaning against Scottsdale due to the hot weather.  We would have to spend at least a year in Portland to see if we are OK with the rain, but for now it is closer to the bottom of the list.  Ideally, we would end up in the San Diego area, but it is probably too expensive.  I would like to create more breathing room in our budget in case we have to fit the cost of one or more kids in our plans.  That leaves Folsom as the prime candidate right now simply due to the process of elimination.

 

 

 

 

20 thoughts on “The Math Behind Geographic Freedom

  1. Sounds like a pretty thorough analysis. San Diego was on our list too but is very expensive. I actually found that LA could be cheaper – I guess it’s just more spread out? But I noticed it’s not on your list.

    I visited Sacramento recently and thought it was a very livable city. If you’re interested in staying in the Bay Area, that seems like a pretty solid option that lets you get down to SF when you want, explore wine country, etc. It’s amusing to me that you think Sacramento might get too hot in the summer. For that reason alone, I think you have to eliminate Phoenix.

    Our favorite city is Austin, but again, don’t think the weather would work for you.

    My vote is for San Diego. Best weather of all of them!

    • I kinda sorta looked at L.A. My wife doesn’t really like it there, and I’m not sure I can handle the traffic (although I hear San Diego is getting that way too). Phoenix was a bit of a stretch. Was hoping I could adapt, but probably not!

  2. I feel like the rent/own comparison here is apples/oranges. Your $2k rent covers not only taxes but also homeowner’s insurance and non-CAM maintenance (e.g., appliance breakdown or in-unit plumbing issues) and there aren’t 5-7% transaction costs to rent like when buying. In addition, by renting, you’re not losing asset diversification like you are if you buy (hard to quantify this) or the return of more productive assets like equities rather than non-income producing real estate.

    Also, just because there isn’t a mandatory maintenance fee for a SFH doesn’t mean you can assume you won’t have to budget for maintenance. The CAM items covered by the condo maintenance fee would now be your responsibility (e.g., roof, building exterior, structural components, etc.).

    Wanted to end on a positive note by saying your story and blog are very inspirational for those of us who have decided the law firm rat race isn’t for them. Please keep up the blog!

    • Thanks for the comment! I agree that rent covers more than the obvious costs of home ownership. We’ve never owned property before so don’t have a good sense of how much maintenance might vary between homes of different sizes, etc. For now figured we could at least compare the fixed costs of various places in the way we’re doing. It’s another reason why the San Diego place will be too expensive as that $4k gap between renting and buying will probably get eaten up by the increase in maintenance costs and even utility bills. We’re not opposed to continuing to rent either, but want to make sure we can afford to lateral to a home in the same locale.

  3. I vote against Scottsdale. It’s 114 there today. I’m never moving back there. I think you will be happier at any of the other 3 options.

  4. You note that Camas is about the same annual expenditure as Sacramento, but you forgot that WA has no income tax and bordering OR has no sales tax. So this makes Camas a little cheaper than you’re projecting it.

    Also, looking toward the future, it’s not clear that CA can continue to have low property taxes given all the spending it wants to do. The income tax is already pretty well maxed out, and the sales tax is close as well. Something’s gotta give, and Prop 13 could go bye-bye. Just something to think about.

    • Good point. California is really progressive in its taxation, unlike say Oregon. If we were to report $50k in income, I think our state tax would only be in the mid three figures. The other big difference is cost of healthcare, which without subsidies is higher in CA. That being said, I hear property taxes have gone up quite a bit in Camas in recent years.

      • My point was that you might see California property taxes go up to or exceed Camas levels of taxation in the future. CA is the only progressive “big government” state that has relatively low property taxes, and it’s not clear how much longer that situation can stand. If Prop 13 were overturned, then you’d be stuck paying high sales tax, high income tax, and medium property taxes in CA. Also, I find the ability to use tax arbitrage in Camas intriguing. Live in WA and pay no income tax, but make most purchases in OR to avoid sales tax.

        You are correct that the income tax in CA on $50k is low–it would be low anywhere. But are you confident that you’ll never work again, or always have a low income? Earning slightly more than $100k puts you in the 9.3% bracket in CA (for married filing jointly).

        I don’t think state taxes should drive your decision. But they could serve as a tiebreaker. Either way, keep blogging!

      • True about potential for CA prop taxes to rise, but I think that possibility is outweighed by being closer to family and friends and the weather.

        I can’t say whether we’ll always be low income. Actually I kind of doubt it. Still, I would say the salaries are going to be higher in CA than southern WA/OR.

  5. I thought you would want to continue renting if your goal was to do lots of travelling. Owning a house can involve a lot of maintenance work and the down payment would eat up some of the investment assets that you are using to generate income. I also think we are on the high side of the real estate cycle.
    I left the work force about 9 years ago, lived overseas for a few years, got married, had a kid, and do maintain a home base in SF Bay Area. My expense rate is pretty high though.

    • Yeah we would probably buy in cash since we are unlikely to qualify for a mortgage without working. We would probably rent for a while, but are getting the urge to settle down for a bit (kids, etc.). This trip is definitely scratching the itch to travel. Bigger concern is the timing of any purchase both from the perspective of equity markets since we would sell stocks and the housing market. Will probably post about that soon.

  6. Just curious, why are you looking at cities/suburbs? I’ve always thought that one of the big advantages of retiring early is that you don’t have to be tied to an urban center. If you get a couple of hours out, you could cut your expenses dramatically, and still be close enough for cultural excursions when the mood strikes you.

    I understand that school quality might be a consideration. But there are lots of options outside of suburban school. Even paying for private schools would likely come out way ahead, if you save enough on housing. And, depending on your preferences, home schooling is an obvious option if you’re at home and enjoy teaching your kid.

    • Hi Dan,

      Thanks for the comment. One reason we are looking near cities is because that’s what we’re both used to and enjoy the amenities of living near an international airport, close to parks and restaurants and grocery stores, etc.

      I don’t know what I would do with 10+ acres in the middle of nowhere…

  7. Pingback: Seeds of Doubt? | Thoughts of an Anonymous Lawyer

  8. I’ve been to Camas. It seemed like a neat little town. And Portland would add a whole lot of fun stuff– in my opinion more fun than San Diego. Very different vibe, too. If you’re willing to go that far from the bay area, though, it seems like other sunny but not hot places might be better alternatives, e.g. Colorado.

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