Increasing Passive Income Through Leverage And Arbitrage

Sunset in San Francisco, Golden Gate Heights

Priceless View Of The Sunset In Golden Gate Heights, San Francisco

Earlier in the year, I had a nice conversation with a well-known San Francisco angel investor about risk and reward. I had a chunk of money coming due from an expiring 5-year CD and I wanted to get some advice on what to do with it. I asked him whether he would be leveraging up or paying down debt in this bull market. He responded, “Sam, I always like leveraging up. It’s how I made my fortune.” This angel investor is worth between $50 – $100 million dollars.

Of course you can’t just leverage up into any old investment. The investment has to be something you know fairly well and has a good risk/reward profile. The only thing I have confidence leveraging up on is property. Everything else seems a little bit like funny money.

Although I quit my job a couple years ago to try my hand at entrepreneurship, I’m a relatively risk-averse person because I’ve seen so many fortunes made and lost over the past 15 years. If I was risk-loving, I would have done what so many brave folks do nowadays and quit as soon as I had a business idea, instead of methodically moonlight before and after work for three years before negotiating a severance. The breakfast sandwich guy I used to go to for 10 years while I was working told me he was worth $3 million dollars during the dot com boom in 2000. I went back for old times sake last month and he is still there!

Despite my risk-aversion, I do believe money should be used to increase the quality of your life and the people you care about. As a result, I did something recently that might seem financially risky, but I think the move actually lowers my financial risk profile now that I’ve had a chance to fully process the situation.

I finally found my panoramic ocean view Golden Gate Heights home! A room with a view has been on my bucket list forever. But it never occurred to me to look in San Francisco, despite being so close to the ocean because I thought such homes would be unaffordable. San Francisco already has the highest median single family home price in the nation at $1 million. To add on a panoramic ocean view would make prices outrageous, or so I thought.

It’s the same curmudgeon as never asking out a super model because you think she or he will say no. You’ve just got to ask and I’m sure you’ll be delightfully surprised once you try.

After spending months aggressively looking for my next ideal property within my budget, I found a view home for less than half the cost of my existing home on a price/square foot basis. How is this possible you might ask? The farther west you go from downtown and the established neighborhoods, the cheaper prices are in general (see the graphic I created in The Best Place To Buy Property In San Francisco Today). But the farthest away you’ll ever be is 7 miles because San Francisco is 7 X 7 miles large. Given I’m only going into a downtown office two times a week, I don’t mind the extra 15 commute. To be able to watch the sun go into the ocean every day for the rest of my life is priceless.

Proof Banks Caused The Financial Crash: The Cancer Of MORE

Room With A ViewApplying for a mortgage in 2014 has truly been one of the most eye-opening financial experiences ever. I now know why many consumers had absolutely NO CHANCE in making sound financial choices when it came time to borrowing money from banks before the crisis. Consumers are still being led astray today.

Roughly 25% of homes nationwide are purchased for cash, probably due to the difficulty of getting a mortgage, institutional investors, and a rise in cash rich baby boomers looking to downsize. In San Francisco, the cash buying figure is closer to 35%. I told myself many times during the mortgage qualification process that I would just pay cash. But I soldiered on and swallowed my pride because a 2.5% rate for a 5/1 Jumbo ARM was just too enticing to pass up.

The Best Area To Buy Property In San Francisco (Or Any Major City) Today

Golden Gate Heights View

View From Grand View Park, San Francisco

I realize not everybody lives in San Francisco, but there are insights into this article that can help you find the best area to buy property in your respective city as well. I’m just going to use San Francisco as an example since I live here.

If you want to buy real estate as an investment, it’s important the area not only has a strong domestic demand curve due to a robust labor market, but also a strong international demand curve as well. It’s the international demand curve that really lifts prices higher during good times.

Less than 0.5% of the housing stock is for sale at any given moment. It doesn’t take much to create a property bidding frenzy if you add international buyers to the mix of domestic buyers. Prices in London are being driven by Russian and Middle Eastern tycoons. Prices in Hong Kong are being driven by the wealthy Mainland Chinese. Prices in Singapore are being driven by wealthy Indonesians and expats. While prices in San Francisco are being driven by the tech boom, low interest rates, restrictive building codes, limited land and foreign buyers from China and Russia.

To sell property now is like selling Apple Inc. at $390 a while ago. Your property may have appreciated a lot since purchase, but there’s still a long ways to go if you can hold on. Thankfully for buyers, couples will always get divorced, homeowners will always want to upgrade or downgrade, and companies will always lay off or relocate their employees. There just isn’t enough supply to meet demand in San Francisco, and it’s unlikely there ever will be enough supply with the rise of tech powerhouses such as Facebook, Twitter, Google, and Apple.

Apple alone has gained more than $100 billion in market capitalization in 2014 and employs over 20,000 people in the San Francisco Bay Area. Now imagine what will happen to housing demand when Pinterest, Airbnb, Dropbox, and Uber go public in the next several years? They are hiring like crazy at $70,000 – $200,000 a pop and already have valuations in the $5 – $17 billion dollar range, each.

Why It’s So Hard To Get A Mortgage According To A Loan Officer

Dream KitchenI shared with you my most recent painful journey in qualifying for a mortgage. It’s not over yet as the underwriter now wants a signed copy from my CPA on his company letterhead of all my company’s financials. My CPA said he charges $3,800 for a thorough audit, so I told him to go jump in a lake. Instead, I sent off my company’s financials with my signature and told my bank to take it or leave it. I think they’ll take it because I’ve fulfilled every single item on their 21 point check list. We shall see.

My mortgage pain post was shared around the web and I ended up having a good dialogue with a loan officer. He shared with me some frank insights as to why it’s so hard to get a mortgage nowadays.

If you are easily offended, I suggest skipping this post. But if you can handle the truth, and if you want to gain some perspective from someone who controls millions of dollars in loans to satisfy property buyer’s wishes, then read on. 

Four Strategies For Increasing Your Chances Of Winning A Property Bidding War

Playhouse Real EstateThe San Francisco real estate market is absolutely absurd. I found a new property with panoramic ocean views all the way out in the Central Sunset/Parkside district. It has four bedrooms, four bathrooms, was renovated in 2006, and is roughly 2,200 square feet. The Central Sunset/Parkside district is a middle class neighborhood roughly 25-30 minutes away from downtown San Francisco by car (45 minutes by express bus). It’s often cold and foggy out there, but the views, oh my, the views are amazing if you can find a home on a hill.

I decided to bid 27% above asking all “cash” for the property. My bid would be a record in that area for this size home, which wasn’t something I was feeling too good about. But instead of winning, I got blown out of the water! The winning bidders were a retired couple who offered 50% above asking and a 10 day close. My heart was gutted as this was going to be my “forever home” with ocean views. But at 50% over asking, their price is absolutely ridiculous and I don’t have that kind of money laying around. Note to self: must work harder.

I’m not sure if I should share my four strategies for how to increase your chances of winning a property bidding war since I’m in the middle of my own property hunt. But I’ll tell them to you anyway given I always want to share lessons I’ve learned in difficult situations. I’m sure there are people in Southern California, New York City, Las Vegas, and Miami right now who are frustrated beyond belief with the amount of overbidding going on out there. I feel your pain, and I’m here to help.

No Financing Contingency Offer: A Way To Pay All Cash For A Property Without Having The Cash

Park ViewIt’s official. I lost my first overbid in this crazy San Francisco property market.

The property was a single family house, 3/3, on a small lot, overlooking a park asking $1.299 million (picture). I’ve known the listing agent for a while and she mentioned that $1.35 million would get it done, but I was thinking $1.2 million instead. She had two other over-asking offers, but I couldn’t muster up the courage to bid more than $1.315 million.

It wasn’t a big loss because the property didn’t tug at my heart. I figure, if I’m going to be spending more than a million bucks on a property, I better be excited, or else why bother. Yes, property prices are crazy out here in San Francisco, but this price point is actually relatively good value.

I’ve been agonizing over paying down my existing rental property mortgages or leveraging up to buy more property. The jury is still out, but I’m willing to at least prospect around to see if there’s anything I like before making a decision. Besides, I figure this latest house hunting experience will provide good educational content for other folks looking to buy in a hot property market.

The Best Time To Buy Property Is When You Can Afford It

Historical Nominal Home Prices

Now that I’m back in the property hunt, I realize more than ever that the best time to buy property is when you can afford it. Perhaps my belief is not as true for cities that are dying from the inside. But for those people who want to buy property because their incomes are growing, a baby or two are on the way, or they simple no longer want to be price takers in an ever rising rental market, buying property when you can afford to buy is most likely a good choice.

It’s important to realize that if you rent, you are short the property market. Every time rents and property prices go up, you’re losing. If property and rental prices go down, you’re winning. Over the long run, shorting the property market doesn’t make sense because property prices having been going up since the beginning of property ownership in our country.

Shorting the property market is like shorting population growth or inflation. Bad move if you want to build wealth. I encourage readers to be at least NEUTRAL property. And the easiest way to be neutral property is to own your primary residence. Your asset will rise and fall with the market, and your payments will remain fixed or go down in real dollar terms over time.