Can you afford to live in California? That’s a fair question and one that has been raised in directly and indirectly since we’ve announced our desire to move there. I get it. Money is the first thing that comes up when people talk about moving or living in California, especially with the price of real estate.
Let me say that while this is a passionate dream, we obviously want to make sure we’re making wise financial decisions along the way. We believe we have an important job as financial stewards, and honestly, that’s the last thing I would ever want us to take lightly or disregard.
With a dream to live by the ocean in Southern California, we have set out to tear the numbers apart to see if we can really afford our dream. We’ve created a new household budget based on our estimated costs and research. We know what it’s going to take to live there initially as renters, and hopefully one day as property owners.
This article lays out all the areas of cost we’re considering. I’ve left our personal numbers out for obvious reasons, but this should give you an idea of what’s gone into planning our finances. And maybe it will help your planning if you ever consider a relocation to California or elsewhere
Overall, the numbers are an estimate and I’ve learned from my career in project management that an estimate is just a guess. But the more research, the better the guess. So please drop me a note below if you think I’m missing something we should consider.
Cost of Living in California
Renting a property – We’ve decided to rent to get started in California. Based on research we can rent about half as much square feet we have today for about $500 more per month. Renting provides us more flexibility initially. We can find a property faster and spend the next 6 months to a year really deciding where we want to live out there.
Buying a property – Buying a property in Southern California is certainly not cheap, although this is a great time to do so. There are currently a lot of short sells on the market and interest rates are also still very good. When we’re ready to buy we’ll essentially be starting over, meaning we’ll be looking for a starter home or even a town home or condo. In looking at current property values, a starter in a nice area of Orange County will be about all we can afford. And that’s obviously fine by us or we wouldn’t be going. The bottom line, moving to California will be a big lifestyle change in that we accept we’ll never own the same size house we own in Dallas and we’ll live in twice less the space!
Property taxes and Mello-Roos – While I’m on the subject of buying a house, we’ve done quite a bit of research on property taxes and what’s called a Mello-Roos tax in some areas. Amazingly, property taxes are in-line with what we’re used to paying in Texas. We don’t have state tax in Texas but we do have school taxes, so call it a state or school tax, we’re paying it. Mello-Roos would cause property taxes to go up quite a bit more. So we’ll keep this in mind as we start shopping. Some areas such as San Clemente don’t have it. Overall, the property tax estimate without Mello-Roos is 1.3% of appraised value and with it is 1.9%. By the way, this mortgage calculator from Zillow is a pretty good one to estimate mortgage costs. Do you live in California? If so, what are your thoughts on these estimates?
Buying vs renting and the tax deductions – Our mortgage interest and taxes provide a nice tax deduction for us and allow us to itemize. We’ll obviously lose these deductions as renters but it’s unlikely to impact us too much this year having been owners in Texas the majority of the time. Of course the longer we rent will require me to start making other adjustments, like decreasing or removing any withholding allowances from my paycheck. This will reduce my take home pay which has budget implications. All this can be offset by increased income from my job or actually buying a property. I know there is some risk here but without sharing too many personal details, I believe we have some options to keep our budget in balance, even if we do need to rent for more than a year and lose our deductions.
Food, Transportation, etc. – Not only does it cost more to buy real estate but other things cost more too. I’ve run some cost of living calculations using calculators on the web (check out Bankrate or Payscale) and for the most part we’ll be within 10% more for what we spend today in these areas. I’ve also talked to some friends in California and they didn’t feel food was all that different. Gas is at least 50 cents more per gallon. So how do we account for these increases? For transportation and food, we’ve increased our budget by 10%.
State taxes and deductions – State tax will reduce my take home pay. Again, we don’t pay this in Texas (or do we?). So to figure out my take home pay in California I used the ADP salary calculator. I also put in a call to H&R Block’s Irvine, CA office to ask about before tax deductions (health insurance, 401K, etc.) and California’s treatment of them. Some states don’t consider certain before tax deductions, but the good news here is that California state income tax deductions align with the federal treatment. And so that means no additional impact to my paycheck other than the state tax reduction.
Our goal when selling our house is to walk away with enough to cover our selling costs, moving expenses and still have enough for a down payment on a future condo or town home in 1 – 2 years time (again, starter home).
Closing costs – Well, there’s no way around these costs. We’ve met with two agents and have received estimates from both of them. Overall, I know these costs are going to be dependent upon which title company we choose. I’ve accounted for them in our final number.
Realtor commissions – I’ll probably cover this in a separate article, but I’m very pleased that we’ve been able to negotiate a lower real estimate commission. To be honest, I was wrestling with selling FSBO or listing with an agent. I think we could list FSBO, but I know there is some additional work involved and considering our situation, I opted not to take on the extra stress. How did I negotiate the lower commissions? I just asked.
Taxes and HOA – Assuming we sell this year, we’re going to need to pay for a portion of the taxes and our HOA dues. This will get taken out at closing, but we’ve also been saving separately for these expenses so we’ll have the money back in hour hands immediately. By the way, this money is going to help cover our rental deposit.
Once we sell our house there are all sorts of moving expenses we’re considering in our plan. The proceeds of our home will have to cover these expenses since this is a personal move.
Finding a place to live – Finding a place to live isn’t that expensive when you’re moving to the same city, but the costs add up quickly when you sell your house and then have to jump on a plane and fly to the West coast to start searching. That being said, we’re budgeting costs for flights out there, food, and hotel stay. This won’t exactly be a getaway weekend to enjoy time on the coast. We’ll be working with a real estate agent narrowing down a short list of properties in a matter of a few days.
Rent deposit – Once we find a property of interest and are ready to make a decision, we’ll have to pay an initial rent deposit which is typically one month’s rent. We have pets so this will likely add to the deposit amount. This is yet another cash outlay we have to plan for and make sure we can cover once our house sells. Can this be negotiated? Let me know if you have any tips.
Renter’s insurance – I’m still up in the air on this one. It’s been a long time since I’ve rented and I’m not sure if this is something we should get or if it’s required by some property managers. I actually saw one property listed where they wanted to see proof of renter’s insurance. My plan here is to work with my insurance broker to see what options we have. Do you have any thoughts? If so, let me know in the comments.
Movers – The biggest moving expense we’re going to face is paying the movers. We’re going to cut some of these costs by driving both cars to California when it’s actually time to move. Still, we’ll pay several thousands of dollars to get our stuff moved across the country. Considering the price tag, we’re getting estimates from 3 moving companies. Have you moved across country and found a reputable mover at a reasonable price? If so, drop me a note below.
Offsetting the higher cost of living
So, how do we offset increased costs for rent (again, this is more than our current mortgage), food, transportation (10% increase) and state taxes considering my salary won’t initially be adjusted for higher cost of living? The good news is for the short-term we’ll be able to reduce a few expenses.
Church building project – Honestly, I’m still wrestling with this one a bit, but we give beyond our tithe today to a building project. We’re obviously not going to be going to the current church when we move to California, so we’ll likely pause this giving. I say pause because we’ll have this opportunity in the future. However, at least for the short-term, we’re going to use this giving beyond our tithe to help with the transition. And I’m still praying about this one. Do you have any thoughts on this?
Pre-school – Pre-school is currently a big expense for us, but we’re not going to have it in California. Our son has one more year before kindergarten. California offers a transitional Kindergarten in the public schools so this cost goes away and can be used to offset additional expenses. Yeah!
Tolls – While there are toll roads in California, I can avoid them easier based on location (we live next to one today) and will be able to work from home a few days out of the week. Unfortunately, this has become a regular bill for us, but fortunately, it looks like it can go away.
Temporary reductions – And we do have to make a few more sacrifices for this journey. We will definitely have less disposable income to balance the budget, but should be able to meet all of our bills and obligations and still have some spending and fun money. If we’re really short because of unplanned expenses, we’ll have to reduce our spending money until I’m able to generate more income or my wife starts a part-time job.
Non-negotiables – There are a couple financial non-negotiables for this journey. We’re not willing to give up tithing, retirement investing or short-term savings for our dream to live by the ocean in California. I’m happy to say that both of these priorities will remain in our monthly budget.
One Income – Another thing we’re trying to do is to continue to remain a one income family to meet our living expenses. My wife has expressed some interest in teaching again part-time after the move and she’ll likely do so when my son is in kindergarten. The goal with any money she makes is to provide for either savings, entertainment or travel money to visit our family.
So there you have it, a closer look at the costs we’re considering on this journey to California. Did we miss anything? What are your thoughts about the costs to move and live in California?