How to Buy a House in Bay Area (Interview with a New Grad Software Engineer)

so how does a 25-year-old afford this $2.6 million quadplex in the best parts of Sunnyville we're going to have a sitdown interview so that you can learn some of the tricks of the trade but also some of the ways that it can work for you now you may not be interested in buying up to 2.65 but this is going to be really helpful to get the inside of the thought process The Lending options how much you really need to save why this may be a better option than a traditional single family or a condo in town roll let's jump into the [Music] interview [Music] [Music] all right Richard well thanks for being on this show I'd love to get a little bit of your backstory right so it's incred and this is what I tell a lot of people and a lot of people on this channel it's not about the age I mean money is part of it but it's quite frankly more the mentality than anything else right so please tell us a little bit story so high level when you were 25 so I guess was two years ago you bought a quadplex in Sunnyville now before we talk about the real estate side let's talk about like the origin side how long have you been in the bay and where are you working or what was the story so my story is pretty traditional uh I'm from like a traditional Asian family and uh my parents wanted me to be traditionally successful right so I studied software engineering in college uh from a pretty good school carne melan University uh then I came out of uh college at 21 and then joined Facebook um 2018 and so I moved over to the Bay Area um but one of the formative experiences for me was in 2016 Summer I was interning uh in the Bay Area and I was stuffed like sardines into a uh four-bedroom house um so it was an Airbnb and they stuffed 22 people in that four bedroom now who who stuffed you the company or youself to save money uh there was um it was like some guy own a house uh through through airb be so he was running this hacker house and I was like uh if he gets a k from each of us that's like 20,000 a month and just rent right so over those three months you can make back the mortgage for the entire year um so at that time I was like okay I want to be like this guy and I want to have my own house right so at first I started looking for like a four-bedroom house cuz I wanted to do the same thing right but then uh people started cracking down on airbnbs and people really frowned upon that right um and utilization is hard and it's a lot of work um if you're going to actively manage a house like that so I learned about fourplexes um and then so uh I started looking for the search um for a fourplex wow and that that was one of the questions I was going to bring up did you run the math of like condos Town Homes which would be way cheaper versus obviously a fourplex is a lot more like what was the decision was it because it wasn't the price itself it was what your the potential of total rents to the value of the home would be is that part of the logic or why a fourplex why not a duplex Triplex yeah so um fourplex so in computer science is a concept called linear programming where basically the optimal solution to a problem usually lies at one of the vertices so at one either uh one extreme or the other right so um in this case uh four four bedrooms or four Apartments is basically the you can get before you hit commercial real estate so once you hit commercial real estate um you know the loans are different and like much worse yeah exactly so um so kind of uh that's why we don't go beyond four right so four um was kind of the maximum and then uh so single family homes are nice uh but um like I said the the r renting out for the run to the value it wasn't really working for you at that at that point okay and then so how did you land up one this price uh and want to you share how much it is to why like Sunnyville right you can go Santa Clara's cheaper San Jose is even cheaper you can go like Fremont or whatever there's a lot of different options that are are still quad plexes but uh that they're also cheaper like what was the thought process of here to you right so um when I first moved to the Bay Area uh since I worked at Facebook up in menow park and so I thought the center of the bay was kind of like Mountain View AO obviously C is yeah those are obviously the most expensive right um so um but however as I've been in the Bay Area longer longer I feel like a lot of my friends have gravitated South and maybe now Sunny Bell is kind of like the central area though I kind of wanted to be Central um and this place cost me 2.65 million um at the time and uh yeah basically I didn't let price be an issue um and I just bought uh what I could afford uh with a good uh like with the good value um I calculated the cap rates and the the gross revenue multipliers the grms um and this one worked uh yeah and walk us through about the cap rate for this and for those that don't know generally cap rate is kind of simple to calculate right you take the monthly rent total monthly rent but that's also something we'll talk about separately is like there's many ways to calculate monthly rents you can do it by a family renting out each individual whole unit but the thing with like a multif family like this is not just a it's not all a one bedroom right it could be two bedrooms could be three bedrooms so you could and we'll talk about this a little bit rent out still individually per room and do different things like that right now when you ran the cap race were you what were your metric were you assuming I'm just going to do a family each and that's it or were you going to truly even optimize it more or this is technically almost like a eight or nine bedroom and just go individually rent like individual rooms like what was the thought process there yeah so um those are very good points uh so when when I looked at it I wanted to optimize for the most amount of money for the least amount of work okay um so I was willing to invest money I don't have that much time to invest so um I decided to just read these out normally as like each unit um to different families and then I had the current rents uh and then I had what I estimated I thought were the market rates and then uh I just calculated out and it it works well and so walk us through the numbers back then when you bought it like what were you projecting it toal rents for um fortunately a few years ago the rates were lower so what was the math like there was it was it already Break Even was it still a monthly loss uh and then walk us through like the whole thought process yeah so in Sunnyville everything is pretty well uh arbitraged what's yeah it's like there's no real like yeah opportunity yeah there's no real Val especially if you're want to me a good parts right just to be mindful where he off for this price this is in the southern parts of Sunnyville the southern parts of Sunnyville is the best parts of Sunnyville so it's also the most expensive right now if you are living maybe in Lakewood which is the Northern parts um there's not that many multi4 plexes there anyways uh but that's the idea if you really want to me the best parts you're not necessarily paying like absolutely premium prices but you're not going to be able to don't don't be disillusioned to be like you're going to buy these things out a massive discount just because you want to yeah I heard Northern sunal has like a lot of toxic waste from like the Silicon production or something like that yeah they have these potential super fun sites and to be fair M has the same palal some of these areas are very expensive and they still have that but yeah keep going and and I heard Sunny Bell is one of the safest places in the entire nation so that is kind of answering your previous question but I'm sure yes so uh I heard Sunny Bell is one of the safest place of the entire nation so um that uh that factored in a lot to my purchasing decision um the rates at the time were 3299 for me um so uh actually for multi family home it's more expensive than single family home uh my friend bought a 2.65 uh million place at 2.79 a little after a little after yeah so like um when the rates were like about the same so uh that that's kind of like the Delta you're looking at uh for single family versus multi family um yeah so actually walk us through the numbers like how much did you put down uh was it 20 plus per down was it less like wel us through that first yeah so it put down 20% uh because I wanted to avoid the uh private mortgage in the PMI um and so that was kind of like a minimum for me so if I couldn't afford that then I wasn't going to buy or I was going to buy something cheaper um so I really spamed around I live pretty frugally so um I saved for basically like three or four years um from the software engineer salary uh at meta and uh you know I think anyone saving a lot uh can afford it uh I definitely had to give up a lot of things like hanging out with friends or like a lot of times I would go to restaurants and not eat um but all towards like this kind of end goal um and uh yeah the the monthly payment I have is like 9700 okay I think I think I I do want to drill this down a little bit more right because this is very important for a lot of people to understand so people that work in big Tech uh whether they're engineers and starting Engineers you weren't like I maybe you are but you weren't like um some sort of AI specific person where those incomes are like million dollar plus a year like it wasn't like that kind of situation but you all you have very good income I mean the people that are graduating straight out of CMU straight out of school and they work at Big Tech they're making very very good money but the it's not about making the money it's also about like how do you actually save the money right and I want people to really understand this there are plenty of your co-workers that live in mou of you today for a two-bedroom really really nice place that spend between four to six grand a month right and think about that think about that over just the same time that you spent like if you if you just multiply that by three years how much money is that that's like what 150,000 plus now what did you do during that time I might guess is there's no way that you uh stayed in one of those super luxury places what did you do cuz you already have the mindset so maybe a little bit on the extreme side of not like going out and and not like eating that's a extreme which is okay that's that's that's that's okay uh spending all this money on clubs is pretty crazy too but what did you do from a living perspective to minimize that to not pay that $46,000 a month lavish apartment life mhm for sure yeah so that's brings up a really nice Point uh when I first moved here um I was under the impression that the barrier was super expensive so uh I was looking for the cheapest thing uh obviously splitting with a roommate um that's a great way to reduce cost yeah yes um so when I moved here I was in like a $3,500 Place $3,500 a month place I split with a roommate so 1,700 but then as I got familiar with the area I realized that it doesn't actually have to be that expensive so the next year I was, 1500 um splitting a house with four people and then even after that I was 1,200 living in a room in a house um yeah and that's because you actually weren't that familiar with it right if you knew what you knew on year three on year one you probably wouldn't have even gone through that set up exactly I started at the 1200 yeah at 1200 and that's that's a not a secret per se but kind of like at the end of the day especially you work at a a great tech company or if you're even out and about like you're not in the home that much you're basically your bedroom a lot either sleeping or doing work or whatever it may be right so one of the smartest things and quite frankly the cheapest option is you just rent a bedroom in a house right because it's a it's a win for everybody it's a win for that landlord because they to be fair the math on their end is better for them for you for them to individual rent rooms and then for you it's way cheaper right because like you can share a kitchen how often are you necessarily cooking right especially if you work at Big Tech you can eat all your meals there five days a week so your expenses are actually quite minimal right you can go to the gym there there's plenty of stuff there so optimize that as much as possible right but uh you save a tremendous amount of money even though it was already way cheaper than the alternative of a 3 to $4,000 a month place that it's equivalent alone to what is that about 30 something thousand a year right that's after tax too yeah that's post tax right this is all like post tax which is very very critical so as you can see like there are approaches and this is what I encourage other people to do the Bayer it can be expensive it can be extremely expensive like the 6,000 a month plus is not even the most expensive two-bedroom it could be imagine if you run a three-bedroom or even more lavish place like it can get even more expensive but it doesn't have to be either right just like Richard's goal was like hey look I saw this when I was an intern so one really big kudos to even see at that young age most people when they're intern they're just there to have fun and just enjoy enjoy it because they got a really good opportunity but you already kind of saw you're like wait a second it's actually not bad for me but let me just do some quick math the landlord makes how much holy tell okay I gota I got to get on that position as soon as I can right and so that's how like game plan occurred but that wouldn't have occurred unless you had an initial game plan like all right how do I save as much money as possible during this time I make good money unfortunately meta stock did fairly well over the last couple of years too um and now you own a place in your mid 20s right now that's like the situation right now what are your plans next you you've accomplished their first Milestone right which is you got a place in your mid 20s um and you're already uh you're already in the position of where you thought of that when you first came as an intern what what is next for you like do you do you feel like you just want to roll this again and just rent out this one and move to the next one or do you plan to do something different or have you not thought about it yet so I have thought about it um so I probably won't roll this again just because uh the financial situation is a little bit different now interest rates are like 6 7% they're really high um and frankly it would be a lot of um like basically being too concentr yeah two two invested into like multi family homes in the Bay Area so oh bought a second one exactly yeah yeah so then um next for me is probably uh that this where the lifestyle cre comes in right like you you make yeah exactly you make money to some point so yeah next for me is probably buying a single family house like getting married uh moving in with my then then wife so that would be more a traditional approach then right but this was how you got into your first place this is where you continue to build equity and who knows down the road do you have a vision of potentially selling this into doing an exchange down the road or this is just what it is just leave it so my vision down the road probably I'll keep this one uh and then my single family home that I'll buy it will be like a starter house and I Envision that I'll have to upgrade that so when I upgrade that I'll probably write that one out um in a more traditional manner um but this way I always have this uh locked in with the low interest rate uh for the next 30 Years got it now if fortunately you have the the the early Vision to do this project when rates were lower now if I don't know if you had a chance to to do this but let's say you graduated and start or started two years later and you're in the situation today right the rates are what they are they're out of your control they're out of my control let's assume that even they're in the eights if you didn't have a home how how would you play it today like would you still go for a fourplex because of the uh because of that thought process you had before would you start with something just cheaper and and just lower cost like how would you play the game today given other the people that are watching this they may be in the same boat as you but the rat are what they are mhm I would probably uh I'll probably just have to go cheaper um you know this is would be unaffordable based on the numbers like we could afford it based on our salaries but you're paying a lot of uh like morage interests right so um that's like what you want to avoid uh basically even though the interest rates went up just a little bit I think the monthly payment went up from like my 9k to like now 14k or something like that so I wouldn't even be able to afford this place um rening out those three units I make about 10K a month um and so uh that pretty much covers my mortgage uh right and then so I basically live in this unit for free kind of um and but you know you'd have to look look cheaper and put more down I think uh at the current rate my bank interest rate is higher than my mortgage interest rate so like it's advantageous for me to just keep it in my bank account and accumulate interest yeah I mean right now that's a thing this is a a good point for a lot of people listening like any most people that have a loan uh there's no reason to for them to for any of us to pay it off earlier to be fair right because our risk-free return of even a money market account or just some treasury yield it's like between four to 5% and if your rate is under that then you're technically some money even though you're paying a little bit to the mortgage side uh the interest side of things right so that's that's something that people don't really get that there isn't that much distress now obviously if you lose your job and you didn't have any reserves and that's different but if you're just even if you didn't necessarily earn a whole lot more money you just had enough to keep paying the mortgage which as you can as people have seen from this math right if it if your total payments is let's say 9,000 and plus property tax let's say a total of 11,000 or something it's only like a, bucks a month that you're paying which is equivalent to like 10 grand a year right so so there's there's very little distress obviously if everybody can't pay and then there's other issues and that's a different uh black one event but ultimately you can see like so like Richard was already in a strong financial position from back in the day and let's go over this too because some people don't really Factor this did rents actually improve through the last few years like what was it before and then you mentioned now it's kind of a combine of 10,000 for three units what was it when you actually bought it yeah was it even was it even vacant or um what was the situation back then so yeah um I think when when I bought this place it was a pretty unique event uh as I understand it when people buy these multi family homes they usually keep all the tenants or most of the tenants uh but I think the previous landlord treated them pretty badly uh and so all the previous tenant actually left um so it was a pretty stressful time for me I was looking to fill out you know three whole units worth of vacancies uh but when I bought the place I made sure that I was able to afford all the the um mortgage by myself basically um so it you know obviously I don't want to be in a position where I would become insolvent so um I always keep like six months of you know Reserve just in case you know something happens the econom is kind of getting bad now so it's a lot more relevant now um and yeah rents have gone up um so I priced this pretty aggressively so that uh the utilization remains pretty High and the tenants are happy um I'm not trying to nickel and dime any of my tenants but yet um I think the markets have supported like uh you know a maximum like 10% increase year-over-year and uh I think they've been very happy uh have been very happy for sure so I guess from two years ago what do you think the rents were what did what are they now you think they're about I guess now is what is like 3,300 per each one um so so it varies uh let's say a two-bedroom cuz it's a two-bedroom two bath for the other units yeah the units yeah the other one started out at maybe like 2,300 now it's like 2,700 or something like that uh basically like a 10% increase uh for the last two years because inflationist because that's the thing that people have to also get right like even though when you first calculate the math and you you have to run the numbers accordingly Bay Area prices but also Bay Area rents don't typically stay stagnant over an extended period of time there may be months and times where it goes up and down slightly but over an extended period of time is just more likely that the both will rise and most quite frankly rise more than inflation and so that's something that people have to kind of factor in even though uh rates are higher and the numbers may or may not work today it's also the aspect is what is the alternative like you brought up if you were going to you were going to buy in a sense regardless of what rates were right you're just going to make it work now it may not be sunnybell anymore right but it may be then neighboring cities like Santa clar San Jose things like that now what what would you say as we conclude what are some of the Lessons Learned or what are the things that you wish could have been done from this whole journey is there any improvements that you thought I wish I could have done that to but realistically like you can't say I wish I would a little bit earlier you didn't have the foresight per se but is there anything of the process that you feel could have been done better or improved um it definitely wasn't perfect but I feel like I didn't make any huge mistakes um I think as long as you're in this Lane uh it's like you know having a huge behind you um and yeah I think um yeah no super big mistakes I know there was this one fish that Got Away uh it was this $2.8 million place and like it was kind of when I first started looking so obviously when you look uh there's another CS concept called the uh um the secretary problem but basically when you look you discard the first uh ND uh contenders basically and then you look for the best one after that so that was like one of the first ones that I actually analyzed and it may have happened to be the best one but you're like maybe something else comes around or this is like my Baseline yeah exactly it was like my Baseline I didn't know where the market was it was a 2. it was listed at 2.5 it sold for 2.8 um so there's a bit of a markup there but I think the place was much nicer um and the rents were higher and the value increased I think it was like 3.3 uh last I checked um so like the the amount of increase was more so I think um you know really if I had just hold the trigger on that one I think that maybe is like my one kind of regret and and it's a very fair one for a lot of people like right now we have way less homes that are being transacted than even 2008 that's how much it has changed and so what I share with a lot of people with that kind of aspect because everybody starts at a different time there could have been a way but one of the solutions that I have found with a lot of other buyers is even though you are just looking now real estate has been going on every week every months prior to you looking and and definitely after you looking and so what I like to do is okay here is all the things I have actually sold for the last 3 months prior to let's say you just start looking and so that way you had some impression that even if you're looking every single week to three months prior you can see how does this compare to all of those and right and if you had that information or if a lot of other buyers have that they'll be like this is actually pretty darn good it's not a matter of time to find something better it's like I know I'm not looking that long but if I compare this to these other ones I need to have the confidence to move forward with this right but but everybody kind of has to learn on their own right sometimes I I can give you all the information I can tell you everything but you may be like no let me I want to visually see all these and then you may feel that way down the road yourself but it's also very important for those that just start looking at whatever the time frame may be that understand look homes have all sold before when before you started looking today so what has sold and how does that compar to all these other ones F to drive by those other ones and then you can then make a more confident decision hey look actually I'm this was a really good one I need to still give it a try because to be fair the thing also that was brought up was you said it was list at 25 and ultimately sold at 28 like there was no guarantee that you would have got it anyways right maybe you B made a bit at 27 that was your value and you still would have lost right right so even though that one got away per se you weren't even 100% guaranteed to get it mhm right and so that's also a completely different mental thing too for everybody to be mindful of is like just because it came and go gone doesn't didn't mean you were the only buyer clearly or not if there was people that were able to comfortably do that but you still wanted to have the confidence that you wouldn't have the least the regret of not even trying for it exactly right and that's a different story well Richard this has been a great story I also know you have uh your own kind of YouTube channel that you've been growing you can tell the audience a little bit of like what you might have mind and and uh we'll put the link in the description too for sure it sounds good yeah subscribe to my YouTube channel uh Richard Leo um I do kind of unboxings and just stories about my life as a Silicon Valley uh machine learning engineer now so um you know all sorts of crazy stuff uh I bought two McLaren that I rent out on turo um so yeah check it out for uh those kind of videos cool well very good appreciate it it's a lot of fun

Channel: Living in the Bay Area - Spencer Hsu, MBA, Realtor

Views: 3,864

Keywords: real estate investing, real estate, real estate for beginners, BayAreaRealEstate, BuyingAHomeInBayArea, BayAreaHousingMarket, FirstTimeHomeBuyer, RealEstateInvestment, BayAreaNeighborhoods, HomeBuyingTips, MortgageAdvice, PropertyInvestment, BayAreaLiving, SiliconValleyHomes, SanFranciscoRealEstate, RealEstateTrends, LuxuryHomesBayArea, AffordableHomesBayArea, RealEstateGuide, HomeFinance, BayAreaProperty, HomeBuyingProcess, RealEstateAdvice, HomeOwnership, MarketAnalysis, TechHubHomes, HomeTours, BuyInBayArea

Id: fXhcXBdxod0

Length: 25min 24sec (1524 seconds)

Published: Mon Jan 08 2024