Mar 1, 2024
Los Angeles is famously expensive, and you don't have to lead a Hollywood star's lifestyle to feel the pinch of its high living costs.
Former professional skateboarder, now real estate investor, Mikey Taylor, recently took to social media and suggested that an income well into the six figures is necessary to comfortably afford a sub-800-square-foot unit in the City of Angels.
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He posted a video on multiple platforms delving into the numbers.
“The average rent for a 790-square-foot unit in L.A. is $2,700 per month,” he stated, citing apartment listing website RentCafe.
“So if we're following the 50/30/20 rule, and we're only spending 25% of our expenses on our housing costs, we'll need to be making about $10,800 per month of net income.”
The 50/30/20 rule is a budgeting framework that allocates one’s after-tax income into 50% for needs, 30% for wants and 20% for savings and debt repayment.
Taylor says that to achieve the required $10,800 per month, one would need about $130,000 of net income annually, which translates to “about $200,000 of gross annual income.”
This figure is significant, especially when considering that the real median household income in the U.S. was $74,580 in 2022, according to the latest Census Bureau data.
'One of the most expensive states'
Taylor suggests that there are ways to mitigate these expenses, such as by getting roommates or living outside L.A. However, he emphasizes that the high cost of living is a statewide issue, labeling California “one of the most expensive states” in the country.
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Again, the primary concern is housing.
“What's going to drive expenses up in California is not just the state tax — it's housing,” he said. “California has done a terrible job building. It's reported that our state is short by about two million residential units.”
Taylor referenced a McKinsey & Company 2016 analysis detailing the state's housing shortfalls.
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Newsom's promise
Taylor highlighted California Gov. Gavin Newsom’s campaign promise regarding housing.
“Remember, Gavin Newsom ran on bringing 3.5 million new residential units to the state [by 2025],” he noted. “For context, our state over the last 10 years has averaged 104,000 new residential units per year.”
Newsom has since backed off from that ambitious goal and is now aiming for 2.5 million new units by 2030.
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On screen, Taylor displayed an October 2022 Cal Matters report following up on Newsom’s pledge. According to the report, based on data from the Construction Research Industry Board, in the nearly four years since Newsom had assumed power in January 2019, around 450,000 new units had been approved across the state — an improvement but still well off the desired pace.
Taylor then suggested that at the current rate — Moneywise actually calculated it to be 105,000 new units a year on average over the last decade, based on the Cal Matters report — Newsom’s plan would fall significantly behind schedule.
“So if nothing changes, we won't hit that 3.5 million units until 2090,” he projected.
It’s unclear how Taylor came to that conclusion. If you consider the new units already planned under Newsom at the time, it would in fact take less than 30 years at 105,000 units annually for the governor to fulfill his original promise. It also doesn’t take into account incentives and penalties put in place by the state to spur cooperation by local governments to help meet the new 2.5 million goal.
Taylor remarked that understanding these underlying figures sheds light on “why it’s so expensive” to live in California.
The dynamics of supply and demand in California's housing market manifest clearly through its home prices, especially when compared to the rest of the country. According to real estate marketplace Zillow, the average home value in California is over $750,000, more than double the national average home value of $343,000.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
