We have made the move from Los Angeles to Greensboro, North Carolina. Obviously that’s a huge change. LA is one of the Top 10 cities in the world in terms of cultural relevance; Greensboro is the 3rd largest city in the 9th largest state in the country.
LA is an amazing place to live. Probably the best thing about it (and other super-cool cities) is that everything’s there and it’s all super-high quality. World-class culture: amazing museums, galleries, music venues, restaurants, etc. World-class natural beauty: the ocean and mountains are right there, and the weather is probably the best in the world. World-class sports: the Lakers, Dodgers, Clippers, Kings, Galaxy, Ducks, Angels, USC, UCLA, the Olympics. World-class industry: obviously entertainment, but also financial services, aerospace, transportation.
Across the board, LA has the best of everything. But we know nothing is free in this world, and that certainly applies here. Along with everything I mentioned, LA has among the highest costs of living in the country, especially when it comes to housing. When Foxy Lady and I were thinking about moving, the stratospheric cost of housing definitely played a major part in the calculation.
How much does living in a super-cool city really cost?
In LA we lived in a nice house, but by no means anything off the charts. For an upper middle-class family of four, it was probably a pretty average house: 4 bedrooms, 4 bathrooms, 2900 square feet. But because it was in LA it was really expensive—$1.5 million. That seems crazy, but that’s just the way the real estate market is in LA. Similarly sized houses that weren’t as nice would go for maybe $1.2 million and the ones that were really nice on the inside could go for well over $2 million. It’s like an alternative world out there.
You can compare that to a place like Greensboro. A similar house in a nice neighborhood would probably run you about $400k. That’s a huge difference!!! Over $1.1 million!!!
Now we have something to work with. We know there are huge benefits to living in LA (all the things I mentioned above, plus many more) but we know that comes at a cost (the difference in home prices). If we took that $1.1 million and invested it in the stock market (assume a historic 6% return), that difference comes to about $66,000 per year, which breaks down to about $5500 per month or $1300 per week. That is how much “extra” we were paying to live in LA versus a place like Greensboro.
Is it worth it?
$1300 per week is a lot of money. But just because something is expensive doesn’t mean it’s not worth it. Living in LA is awesome. There’s no question about it. But is it that awesome? When Foxy Lady and I looked at it with the “$1300 per week” premium, it just wasn’t awesome enough.
Raising two little cubs dictates how you spend your time, and we found that while there were amazing opportunities all around us to enjoy things only available in places like LA, we weren’t taking advantage of them. We never went to the super-cool music venues like the Greek Theater or the clubs on Hollywood Boulevard, because . . . well, because we had two little ones. We never went to see the Lakers or Dodgers or Kings because tickets were expensive and getting down there was a hassle. Rather we went to see the local college team play for a couple bucks. A couple times we went to a 4-star restaurant and it was amazing, but mostly we would go to local places that were kid friendly because . . . well, because we had two little guys (McDonald’s playland is pretty popular in our house).
But it’s not like we were hermits. We did stuff and had a lot of fun. We’d go to the local park pretty much every day to play on the swings and slide. We’d enjoy the kid-oriented events at the local library. We did a lot of playdates with friends who had kids of a similar age. We’d go to the beach or go hiking along the nearby trails. We’d go to Universal Studios which was only a couple miles away every once in a while.
On Sunday evenings, after the cubs were asleep in their beds and Foxy Lady and I had a couple peaceful moments to reflect on the weekend, we’d ask ourselves if we got our $1300 worth of LA living that week. The vast majority of the time the answer was “no”. We were living in one of the most amazing cities in the world, and we weren’t taking advantage of it. At this stage of our lives (two little kids) and our personal tastes which tend to be on the pedestrian side, we were perfectly happy living simpler lives.
Once we came to that conclusion, the decision became pretty easy. We could move to a lower-cost area and pocket that $1300 each week. When we did get a hankering for the highlife we could take a vacation to LA (or New York or Boston or Miami or San Francisco or London or Paris or Tokyo); that trip might cost a few thousand dollars but we’d still be well ahead of the game.
So for us it wasn’t worth it to pay the “super-cool city premium”. But for many it is. We had neighbors whose families lived in LA so leaving wasn’t really an option. I totally get it. We had other neighbors who worked in the entertainment industry plus they would go out to banging clubs a few nights a week, so they were really getting the most out of LA. And for them, staying in LA and paying the premium totally makes sense.
Now we’re in Greensboro and I must confess that I really like it. It’s a nice slice of small-town America, but not too small. We have a symphony, an opera, a minor-league baseball team, a children’s museum, a science center, college basketball, and a lot more. But let’s be honest; undeniably, all those would compare unfavorably to their counterpart in LA, and that’s a bummer. However, when you add in that $1300 per week that we’re saving, at least for us that tips the scales.
Personal finance is definitely about investing in stocks and bonds, 401k and IRA accounts, and all that. But a big part is managing your expenses. Some people look at that as budgeting your money and buying one less Starbucks per week or something like that, and there is definitely a place for that. However, we found that probably the biggest impact on our spending is choosing where to live. Places like LA, New York, Boston, Seattle, Chicago, Miami, and Dallas are amazing cities which offer its residents incredible amenities. But, if you’re anything like us, you need to ask yourself how often you will take advantage of them? If the answer is “often” then living in those Alpha cities probably makes sense. For us, the answer wasn’t often enough, so we “downgraded” our city and will pocket the difference.
How about you? What are the amenities in your city that you like the most?
I’ll just point out that your analysis needs to consider a few things. First of all you suggest that it “costs” you about $1,300 per month extra to live in a $1.5mm house vs. a $400k house + investing the $1.1mm difference in the S&P 500. This is only true if you assume that real estate never appreciates, which of course is not very realistic. Consider that In 1965, that $1.5mm house in LA would have cost you only $60k. Accordingly, anyone who bought a house in LA 50 years ago would have seen their investment grow at 6.65% per year, which is better than the 6% historic return you assume on the investment in the S&P 500.
If the homeowner was able to realize any additional benefits of living in LA over the 50 year period like you mention (i.e. better lifestyle or better career opportunities), it is even easier to make the case for owning the home in LA. Finally, since owning real estate is widely considered to be less risky than investing in stocks, a return from a real estate investment is more valuable than a similar return from a stock market investment, all else equal.
One benefit to investing in stocks over real estate is that your investment is more liquid, so it is easy for you to just take the $1,300 monthly returns and spend it on things like vacations as you suggest. However one must evaluate their personal situation to determine whether the added liquidity is indeed valuable. If you’re the type of person who needs that extra income to pay for vacations and the like, then liquid investments (or a reverse mortgage) may be your best option. However by spending that money rather than reinvesting it you are earning a “simple” 6% return rather than a “compound” return. By comparison if you invest in something for a 50 year period that pays a 6% dividend and you reinvest all of your dividends rather than spend them, you will actually realize an 8.5% IRR over the 50 year period. Thus, someone who can afford to reinvest their investment income rather than spend it will do much better.
The Los Angeles homeowner could still very easily earn an 8.5% or better IRR if he simply took out a mortgage upon purchasing the home, which is a very realistic assumption. The IRR that the homeowner realizes would then improve to the extent that the interest rate on the mortgage is below 6.65%, and it would further improve as the homeowner takes out a larger and larger loan. However as the loan gets larger, the risk of the real estate investment gets higher so the real estate may not be the “less risky” investment after all.
Bottom line is that you can’t simply say that having more of your net worth invested in stocks is always going to be better than having more of your net worth invested in real estate. It’s more complicated than that. Sorry to get so in the weeds but I have lived in California my whole life and I’ve seen many of my middle class neighbors make more money on their real estate then they ever could have made over a lifetime of hard work. Accordingly I think these are important concepts for people to understand.