My Neighbor Pays $1,000 in Taxes on a $2M Home
And why I'm still bullish on SF real estate
Technically, he’s not my neighbor because he doesn’t actually live there. No one does.
In 1978, California passed Prop 13 to protect homeowners from getting taxed out of their houses. Property taxes got capped at 1% of purchase price, and assessments could only rise 2% per year. The idea was simple: you shouldn't lose your home just because your neighborhood got expensive
But this is obviously a ridiculously good deal. Such a good deal, that it allows my neighbor to just leave it empty for years.
California eventually realized this problem. In 2020, voters passed Prop 19, which limits inherited tax benefits to homes the children actually live in. But anyone who inherited it before 2021 got grandfathered in.
Isn’t it ridiculous that there’s now a housing crisis formed by a law meant to protect people from getting evicted from their own homes?
They have no incentive to rent their home. Becoming a landlord means dealing with tenants, maintenance, SF's renter protection laws. And selling a house with a tenant in it makes it much harder
The intention was protection. The outcome is vacancy.
My other neighbor lost $675K on his home because of return-to-office policies
I toured a home that was selling late last year. Two years ago a couple bought their forever home in San Francisco for $2.5 million.
But six months ago they got hit with return-to-office. Their commute to San Jose is 90 minutes each way sitting in unbearable traffic.
So they had to move and the home eventually sold for less at $2.275M.
On face value it looks like they only lost $225K, right?
But on top of losing on the sale, they had to pay for:
~$50K in mortgage interest paid
~$15K in property taxes
~$150K in transaction costs
AND the opportunity cost of not having their downpayment in the stock market.
The market has ripped since they bought their home back in January 2024. The 20% downpayment for the house invested in the S&P 500 would have turned into $734K today: a $234K opportunity cost.
A total loss of $675K.
Lesson to learn: if you’re buying a home, stress-test it against the worst case: What would force you to move in 18 months?
Do you want to be my neighbor?
I saw an open house last year for a house that looked exactly like my unit. Same floor plan and everything. But in April 2022, they purchased the duplex for $2.7 million which for reference is almost twice the price that I bought mine for. They were listing for $2.55 million.
I did the same calculation again: let’s say they sold for $2.55 after buying and holding for three years now. What would be the opportunity cost?
Scenario 1: Buying the Duplex - Step by Step
What you actually pay out of pocket:
Down payment: $540,000 (upfront)
Mortgage, Tax, Insurance (P&I): $13,894/month
Rental income from the bottom unit: $5150/month
Net monthly cash out of your pocket after rental income: $8,744/month
Over 3 years:
Total cash spent: = $854,798
When you sell:
Sale proceeds after paying off loan: $449,413
Your net position: $449,413 - $854,798 = -$405,385
You’re down $405k because you put in $855k total and only got back $449k.
Scenario 2: Renting + Investing
Monthly rent: $5,150/month
Over 3 years:
Total rent paid: $185,400
Investments:
Down payment ($540k) invested → grows to $831,600 in the S&P 500
Monthly savings: Buyer spends $8,744/month, you spend $5,150/month
You save $3,594/month to invest → grows to $165,306
Your net position: $831,600 + $165,306 = $996,906
The buyer lost $405k while the renter gained $997k in assets.
Renting + investing wins by $1.4 million. And I’m not counting real estate fees here.
That’s if the buyer sells at $2.55 million. They clearly massively overpaid because they delisted the sale after three months and never getting the price they wanted.
It’s time to buy
So why am I still bullish on SF real estate?
Because both of these stories are about timing, not fundamentals.
The fundamentals in SF are simple: supply is frozen. Housing regulations make it nearly impossible to build new housing, let alone single-family homes. The city will never permit another single-family home when it has a public liability to build multi-family housing on every plot of available land. Average building permit time is three years. This isn't a bug. It's a feature. San Francisco does not want to build.
And demand is about to spike. The AI boom started in early 2023 and tech wealth creation historically has an 18-month lag before it hits housing. We are entering that window now. A generation of mid-to-senior engineers and tech workers are about to get very liquid. OpenAI, which is headquartered in SF, pays their 4000+ employees an average wage of $1.5 million a year. For context were only 5000+ home sales in San Francisco last year.
Let’s tack on the fact that this demand will create a bifurcation of wealth inequality. Rising housing prices have generally been complemented with adding renter protections to existing residents. Add in another factor of rapidly growing senior citizen count in San Francisco and the gap continues to widen between the haves and have-nots.
The goal to prevent this of course, is to build more housing. But the not building is a feature of San Francisco and not a bug. Part of the value of SF is like the value of Rome, living in a landscape of it’s time that does not change. The people in the city want it this way.
The cautionary tales above aren’t arguments against buying. They’re arguments against buying without a 10-year horizon.
So frozen supply. Incoming liquidity. Do the math.