patrick.net

I'd pay the downpayment, he'd pay the mortgage.

Assuming 20% down, since when can a guy "who just graduated college this month" afford a 680K mortgage?

:) Sheesh, somebody's mind is not far out of grade school. I've heard of a case of Mr. She marrying a Ms. He.

I suppose it's all karmic. The Chinese really garble up foreign names and make a most assinine assumptions based on translation.

I would put 35% down ozajh. His payments would be around $2,500/month, which is a lot, but considering his base is $65,000, and bonus will be $30-70,000 next year, he can manage. I’m making him get a roommate too.

Wow, aside from the disconnect from reality with respect to housing prices, you sure have your son on a short leash... You've got yourself quite a momma's boy! I'd hate to be the woman he eventually wants to bring home to meet the momma...

Happy mother's day, btw!

I would put 35% down ozajh. His payments would be around $2,500/month, which is a lot, but considering his base is $65,000, and bonus will be $30-70,000 next year, he can manage. I’m making him get a roommate too.

May I ask how you are going structure the downpayment tax-wise? I know someone who is in a similar situation but he wants to be careful about it being a tax event, in particular, gift tax.

?? or will the 50%-of-base-bonus happen each and every year for the life of the loan??

For many people, the bonus is a good portion of their total compensation. 50% to 100+% of base is not uncommon.

WealthyWoman: What does your son do? That's quite a hefty bonus to get every year.

WealthyWoman,

Do you intend to take out an ARM or I/O mortgage?

$850k X 65% = $552,500 (remaining mortgage after 35% down)

At about $600 per $100k of mortgage (for a 30 year fixed), this is $3300/month ($2500/month as you state).

After Federal, state and FICA withholding, your son making $65k will be bringing home just enough to make the monthly payment.

The roommate who will live with him will probably just cover the property taxes.

Throughout the year your son will be forced to borrow from you for all living expenses. At the end of the year I'm sure he will be happy to hand his bonus back over to you.

While someone might conceivably make $65K + bonus in IB or similar, it boggles my mind why they would do so. If they were frugal, they have student loans to pay off and Roth IRA/401K to dump their money. If they were extravagant, they're in a good position to live it up and enjoy it. In either case, an IB associate is likely to go to business school or law school in a few years, so why tie himself or herself to a McAlbatross?

Exactly, and my estimates may be on the conservative side too, because it doesn’t take into account the implosion of the tech boom, and the return back to the dirty 30’s. Once, the apples and the googles go away, this town is going to look like Detroit in a 3rd world country.

I love the imagery. Care to back this up with any real macroeconomics aside from correlative chartism? We really have no way to compare or predict what would happen in another secular deflationary depression period, because historical precedents probably rest upon outdated assumptions. For example, this area and most of inhabited CA fared quite a bit better in the 30s than did the Midwest or NorthEast.

Anyway, there is not going to be a deflationary depression in my lifetime, and probably not for at least another 100 years, if ever. More likely is a long period of sustained stagflation and high unemployment. "Great Depressions" are like "World Wars". They can happen again, but the stakes have risen so high that previously unthinkable alternatives have become preferable.

astrid: Maybe WealthyWoman's son is a recent MBA grad, who will soon marry another recent MBA grad. There are a lot of those couples in the Bay Area.

(Brand calls it right now: MPFRCROPBBWW)

Those salaries and bonuses are not in line with Ivy / Ivy Plus according to any data I've heard of or seen.

http://www.ft.com/businesseducation/mba

Full time MBA grads certainly make good money, but no where near that much even averaging 3 years post graduation from the top-5 global schools. It takes a couple years to work up to anything near a $50K bonus, even in investment banking/strategy consulting.

I just interviewed a couple MBAs last week (Haas & Stanford). Both Beta Gamma Sigma honors. Neither is making that kind of money and both were applying to work for me for equity-only pre funding.

What is the deal with people buying apartments? Condos have never made any sense to me at all. Buy an apartment so I can have people living ontop/below/beside me all the time?

What's next? Buying hotel rooms and just eating out forever?

What’s next? Buying hotel rooms and just eating out forever?

You can do that in Hawaii. You purchase the hotel room, and then they rent it out like a hotel when you're not there. I stayed in a studio for a week that had no kitchen.

Hey, it's better than those kids in Tokyo just renting out little cubicles in the cyber cafes!

That got me thinking, probably some units available in the place I stayed at last year. Sure enough, the Aqua Aloha Surf down by Waikiki Beach has some units...

http://www.hawaiiinformation.com/REsearch/IDX/mlsHawaii/IndividualListing.asp?page=1&MLS=2708951

I was wondering that too, Hermann. Things must have sure changed a lot from when I was a kid, lower middle class (and occasionally poorer), growing up in rural Ohio -- yet unable to get anywhere near enough scholarship money to even think about attending the prestigious East coast school which had accepted my application. All for the better. Big state school for undergrad then elite Ivy for grad gives one a real sixth sense for bs.

And for anyone wondering, the weighted 3-year post degree top-MBA school salary data, as of 2007:

1. Wharton: $160K
2. Columbia: $149K
3. Harvard: $157K
4. Standford: $167K
5. London Business School: $136K
6. Univ Chicago: $139K
7. Insead: $140K
8. NYU Stern: $131K
9. Dartmouth Tuck: $145K
10. Yale: $135K

***Note: the top end salaries in this list are skewed by the large number of graduates who work in Manhattan. The median salaries are about 15% lower, across the board.

why do people think its really that important to buy a house right away after college? Having that huge mortgage payment really kills any kind of financial freedom and limits your choice in life. I would understand if he's married and has kids, but he's fresh out of college. Its a time to be independent and enjoy the single working life in the city, not live paycheck to paycheck just to have a house.

if you give your son $262k (35% $750k) of to invest conservativly in the stock market, the gains will be higher then the $12k a year in rental income.

serpentor: Have you factored in the cost of renting? It would be Stock Gains - Rent vs. Mortgage Tax Refund + (Roommate Income - Tax on Profit) + Appreciation - Mortgage Payment.

Just making sure we're apples to apples.

It's silly to own a house right out of college, unless you know exactly where you want to live, who you will marry and what you will be doing for the next 5-10 years. And if you are a rookie college grad who is that sure, you have a 50% chance of being wrong just thanks to your inexperience.

If I understand the Bay Area rental market, the former side of the equation wins. Even if it was slightly negative, one cannot underestimate flexibility. If you suddenly decide to go back to school or take off a year and backpack across Europe, now your options are hugely limited. Young people should be willing to pay a premium for financial flexibility until they have major commitments.

Why not have him rent a a place for year and see if he really likes living in SF. Let him discover the city life of a young successful professional, pay off debt (if any), go on dates or go out with friends, enjoy restaurants, enjoy life! If the mother is so wealthy and so optimistic about the RE market, why don't the mother buy the house and have him rent it from you for a year. If he likes living in SF, then he can buy it for you for a good price later on.

He mentioned to me last year’s 1st year employees received $50-70,000 bonuses, and this year, the economy is doing better, so we shall see.

WW,
Sounds like everyone's picking on you, and sorry for piling on, but I do have a couple of other issues with your posts.

First, the economy is decidedly NOT doing better than last year. We are clearly in a slowdown. Even our usually obtusely upbeat former Fed chairman Greenspan has predicted a sizable risk of recession this year.

Second, coming onto a blog and using a posting name of "Wealthy Woman" is asking to get virtually pummeled. It comes off as crass. Truly wealthy most often do not wish to advertise their wealth. Of the truly wealthy I know, they are all about understatement, and often it would be difficult to pick them out in a crowd. It's usually the nouveau riche who like to make sure everyone around them realizes how rich they are. Your screen name is the blog equivalent of desperate bling-wearing: couture clothing with all the labels on the outside, Chanel bags with the double-C logo hugely displayed, gauche jewelry on every limb, etc.

Why buy a house straight out of college? Investment. It worked for me in '96, and past performance is as good an indicator of future results as any. I vividly remember my parents’ speeches about needing to get on the RE ladder ASAP. True words of wisdom.

Only thing is now I have a son, and at what point does he need to get on the ladder? Or do I just need to cough up 1/3 of his place in 20 years? What about his offspring? And theirs? All this priced out bullshit fear mongering mentality really makes me want to get medieval on people.

Silly me. In the ancient past (1990) no one bought a house right out of college. Not even right out of grad school. Seldom even if they had daddy and mommy warbux. Kids without money had to actually earn some before they could qualify for a mortgage. Kids with money usually went to top schools and were working jobs where they traveled 100% of the time. Lots of my colleagues in Management Consulting, all of us right out of school, didn't even rent. They "lived at home" technically, but we all actually lived out of a suitcase in hotels.

I just ran $65K through the deflator and it's only about 15% more than what I made out of undergrad in 1990 without an MBA. Factor in the above-normal inflation in housing, and $65K buys less. Compared to 1996 when we bought in CA, had about 4x that adjusted salary (dual income), and purchased half the cost adjusted house, we had difficulty qualifying with perfect credit and 20% down. Of course, back then they wanted you to have under 25% AGI to PITI. What a crazy notion. Glad they dropped that "afford it" part of the equation.

as a new comer to the board and skimming through several of these threads, many of the topics, pictures, and treatment of those who made financial misteps is very crass. Would you not admit?

Yes, posts on this board may often be rude and crass, but that's no justification. It's fine with me if you want everyone on this board to know you as "WealthyWoman," but don't expect any kindness from anyone here. I was just making an observation and opinion - keep your screen name if you wish - it's a free country.

As for your amateurish analysis of the current macro-economy, I will leave it up to others here with more expertise to pick it apart, but you sound like someone who has merely heard all the bullish analysis from the likes of CNBC and regurgitated them back. Since when has inflation been "non-existant" (sic)? Have you even read any of the Fed minutes over the past 2 years? GDP growth has recently slowed in Q1 2007 below 2%.

BTW, my workplace is more-or-less recession proof.

WW

I haven't been in Mgt. Consulting for many years now. I'm an entrepreneur/VC finance & technology consultant, now running a new startup.

You can find great publications in PDF (you can buy online) at Vault.com. I recommend he read the Career Guides for the fields he's interested in. They also have salary surveys. But the career guides tell you very specifically what the job is all about. Anyone considering investment banking should read the IB guide, especially.

http://www.vault.com/store/store_home.jsp

Most IBs don't make serious $ until they complete their analyst program, return to a top B-School for a 2-year program (usually HBS, Columbia or Wharton), then return for a Post-MBA program. The ridiculous $ doesn't come until probably 3 years after that.

Very few people make it through the process. The working hours are intense. Literally, 80+ hours many weeks. It's not uncommon to find a culture where people never eat lunch, or if they do it's a candy bar at the desk. Those who "go out for lunch" are seen as slackers.

Management Consulting is 100% travel. Great if you want to get international experience. Great if you don't really know what you want to be when you grow up. Companies love to hire these types, though it kind of gets harder to earn a high enough corporate salary post MC if you stay too long. Companies don't like bringing in people who've been a consultant for 10 years because they have no real management experience -- at least not the kind that works in a corporate setting. The exception is corporate development/corporate strategy jobs. But these jobs only are lucrative during M&A cycles, like we're going through now. They tend to get cut when no M&A is happening.

Keep in mind that IB is also cyclical. There were a ton of IBs who couldn't find jobs for even 40% of their IB salaries after the last downturn. We are well into this cycle; not saying it will end next year, but it won't go on forever. Kids who get cut because of the cycle really get screwed, after having invested so much time into their IB career, because the glut of talent overwhelms corporate jobs, and that makes it likely they'll never see that salary again.

Of course, even without the cycle many IBs just drop out, and never see the salary again. We have regulars who post here who are IBs that did maybe 2 years of their analyst program and dropped out to become realtors.

And for the record, I am very partial to the "learn the value of money" school of thought. I grew up without money, had to earn it, and now have more than I ever would have dreamed possible as a kid in high school. I know my son won't and probably shouldn't go through exactly what I went through, but I also won't "buy him a house" when he's 22. I personally don't think that's giving back. I think it's likely robbing him of developing proper financial responsibility. You risk leaving him the legacy of being a trust fund baby. If that doesn't concern you, then I'm not going to judge you for it. I don't portend to know what's best for other people. I just know that, in my life and work, I've seldom met a trustifarian who was half as ambitious as a smart working class kid or immigrant with a decent education. Look at the bios of the VCs and Hedge Fund managers. Lots of Ivy MBAs, Ph.D.s, and published authors ... work for them, yet they more often than not have just a good old State U undergrad.

We have regulars who post here who are IBs that did maybe 2 years of their analyst program and dropped out to become realtors.

Randy, LOL.

It did cross my mind whether or not "WealthyWoman" is "theotherside" back again. There is a slight hint of similarity, particularly the obsession with IB/MBA grad salaries, the "you're all in denial" attitude, and the "gently chastising" comments.

Skibum

TOS claims to be on the East Coast, and did tell something of herself towards the end of her last appearance here. Of course, that could all be hooey. But the similarity is striking in style and tone.

I love how everyone's an investment banker or wants to be one suddenly. Sheesh. It's a very tough way to make a living. For any kid out here, I'd advise him/her to very seriously consider an analyst role with a top-tier VC before going the IB route.

Interesting transcript of a 60 minutes segment on Redfin (and other discount agencies)...

http://www.cbsnews.com/stories/2007/05/11/60minutes/main2790865.shtml

In response to Ha Ha;

I agree with you. I went to school and earned a BS in Nuclear Engineering. Many of my friends/peers earned degree in the arts or business. The peers I did have that earned engineering degrees would look down upon me if they saw what I was doing now.

I work at a nuke power plant as a Power Plant Operator. I have even had other engineers at my work look down on me because of my choice to become a Power Plant Operator. They are amazed that I have an ABET accredited engineering degree. They can't understand why I would take a "blue Collar" job. Truth be told, I am making at least double of what my lib art friends are making and about 50% more than I would as an engineer. I have to work 72 hours a week in some very miserable conditions, work a rolling 12 hour shift routine, and sometimes work holidays to earn this pay, but it is worth it. I believe I will be a better engineer when the time comes for me to change vocations to engineering. The truly skilled people will do ok for them selves and these academic weenies will flounder.

This culture we have that hard work is bad is a poison that will correct itself when we discover that we are the biggest creditor nation on the planet. I have papers that describe how the CPI is bogus and they actually skew the data for the purpose of hiding the truth and sugar coating a very dangerous situation. The government even plays with the math to make things look better than they actually are. They apply math models that are completely inaccurate for the purposes of what they are using it for. If you applied the real inflation numbers with our GDP growth, we have been in a recession for the last 6 months.

WealthyWoman Says:
May 13th, 2007 at 3:58 am
"3117 Buchanan St. 2/1, 930sqft, for $799K. I bid $850K, and wasn’t even in the Top 3! I was buying for my son, who just graduated college this month, and is working in the city for a good salary. I’d pay the downpayment, he’d pay the mortgage. I’m going to keep looking."

You're looking at $850K for this property when in 2005 and 2006 Zillow valued it at $995K, and you are saying values aren't declining?

BTW, the deal as you describe is 100% guranteed to be a disaster IMO, and I do have experience in this. The valuation is obscene, and in your own description you will be subsidizing the boarder. Smart, real smart. :)

skibum says: It did cross my mind whether or not “WealthyWoman” is “theotherside” back again.

Randy H says: But the similarity is striking in style and tone.

Gentlemen, I would just like to point out that I called it a couple posts back. My code MPFRCROPBBWW => the endless aliases of Marina Prime, Face Reality and so forth. I did forget TOS in there. But hell, what's in a name? A troll by any other name, still stinks like feet.

"WealthyWoman Says:
May 13th, 2007 at 5:02 pm
Skibum - I hear your point on my screen name, which does sound crass. But believe me, as a new comer to the board and skimming through several of these threads, many of the topics, pictures, and treatment of those who made financial misteps is very crass. Would you not admit?"

They didn't make financial misteps. The people that you describe jumped off a cliff, and were insulting those who tried to caution them as they took the running leap.

You have no idea how crass it sounds to someone who made a million dollars in real estate to hear someone (they are cautioning) say "it can't go down" when they buy their first house in Phoenix, AZ.
Then that person humbly says, if you believe that then real estate investing might not be for you.

Actually, I think that person says, "My advice is to leverage, leverage, leverage. Then you can be a millionaire like me!" Which is immature, but once you've gotten slapped in the face enough times by the get-rich-quick types (most of whom got extremely lucky), it's kind of fun to watch them set sail on their burning ship and give them advice on what to douse with kerosene.

Since I am not crass, and actually want to be of help to people another piece of advice to think about is the downpayment. Even if you are advancing it at 0% to him, you have just eliminated $10,000 to $15,000 per year of interest income so now even with the unrealistic numbers you can add another $1,000+ for cost of owning. I suspect you will be giving it to him from a line of credit so I suspect that will be a hard cost not just the opportunity cost. Also, you completely ignored the property taxes, add yet another $1,000 per month on a $900K house, and it is a condo, so don't forget your HOA fees. I don't live in SF, but I'll bet they are $200 per month or more.

Another approach; put the $250K in an interest bearing account, and rent the same place with a roomate on just the interest alone. :)

Brand, this scenario as she describes it almost sounds as stupid as the strawberry farmer.

BTW, $250K is more like $2,000 per month if it is borrowed with prop taxes.

No matter how you slice it this is a $5-$6 thousand dollar monthly cost. The cash flow might be different playing with terms, but it is just smoke and mirrors. Then this 'deal' has to go up 10% just to get out of it, let alone it needs to do more to actually make money.

In the end it all comes down to your beliefs, and admittedly I have crossed my own line of hypocrisy because my overall belief is that in order to get rich you must see something that others don't and that normally involves going against the general consensus.

With that said, I do believe I am qualified to render an opinion from experience, and my belief is that the fundamentals don't justify the value. My personal philosophy is to not do a deal on speculation of future increases as that is pure gambling, not investing. Now with that said, the other caveat is that the expected value of future price change has too much cost because the downside is potentially horrendous verses being at the top of a market and NEEDING a 10% gain just to walk away.

The quirks you are comfortable with can come back to bite you. Just because you call a space a bedroom in your valuation; if it doesn't meet the legal definition of a bedroom, you legally can't call it one in selling it, and a bank will not consider it in a future appraisal. Apples to apples, dust to dust.

Brand,

As a very small clarification, I believe that TOS is not the same person as MP/FR/etc. Same idea, though. I like WW's nice touch of being a "Boomer" - knowing if she's skimmed through the posts here that would likely generate animosity instantly.