Back in 2017, I had a very difficult decision to make. My rowdy tenants gave notice and I had to decide whether to sell my rental property or try and find new tenants.
The house had been rented between 2014 – 2017 for $8,200 – $8,800 a month. But when I went to find new tenants at a similar rent in 2017, none were to be found. Instead, I got a couple of offers for only $7,500 a month after 45 days of looking.
Because my tenant situation gave me stress and my son was just born, I really felt that 2017 was a good time to sell. Further, I was running up against the $500,000 tax-free profit exclusion limit.
Earlier, in 2012, I had tried to sell the house for $1.7 million and received zero offers. My agent at the time told me one couple was looking to lowball me at $1.5 million and I told them don’t bother. Fast forward five years, I was able to find my one and only offer for $2.75 million so I took it.
After paying fees, taxes, and the $800,000 mortgage, I was left with about $1,800,000 in proceeds. Over the next 60 days, I invested $600,000 into dividend-paying stocks, $600,000 into CA municipal bonds, $550,000 into real estate crowdfunding, and left ~$50,000 in cash.
So far, the reinvested proceeds have done well. But most of all, the reinvested proceeds have provided a greater amount of passive income with minimal work on my part. I’m extremely thankful I was able to free up time since mid-2017 to be a stay at home dad.
I’m also thankful to the FS community for sharing their thoughts about whether or not to sell back in 2017. After over 1,000 votes, 75% of you said sell, which gave me added confidence to let my once beloved property go.
In this post, I will argue that a golden opportunity to buy real estate is once again upon us. My spidey senses are telling me it’s time to buy at least one property before January 1, 2021.
After I finish telling you why I’m getting bullish on real estate, I’d love for those of you who are bearish to blow my arguments to smithereens.
Why It’s Time To Buy Property Again
1) Prices have softened all across the country. It turns out, selling in 2017 looks to have been the recent median sales price peak according to the Federal Reserve Economic Data (FRED). See chart below.
If we look what happened after the previous peak in late 2006, we saw the median sales price go from $255,000 down to $210,000 (-17%) over the course of 2.5 years. Some time in 2H2009, home prices bottomed.
Home prices gradually ticked higher from late 2009 until 2012, before exploding ~55% higher from $220,000 to $340,000 in 2H2017.
The median sales price has since fallen from $340,000 to roughly $310,000 in 4Q2019, a 9% decline.
2) Mortgage rates have collapsed. Mortgage rates have declined by over 1% across various mortgage types since their highs in 2018. Although the average mortgage rate for a 30-year fixed is 3.49% and 3.25% for a 5/1 ARM according to Freddie Mac below, if you employ my mortgage rate strategies, you can do better.
I refinanced to a no-cost, 7/1 ARM at 2.625%, which is going to save me over $1,000 a month in cash flow until 2027. With hundreds of thousands of homeowners wisely refinancing their mortgages in 2H2019, more money will be spent to help prop up the economy.
If you’re looking to refinance or get a new mortgage, I recommend checking out Credible. They are a premier lending marketplace that allows you to compare multiple real mortgage quotes from various qualified lenders. The 30-year bond yield and the 10-year bond yield have declined to all-time lows as of 1Q2020.
3) The stock market is back to an all-time high. The S&P 500 closed 2019 up an incredible 31%. The S&P 500 is one indicator of the economy’s health. Unless analysts and CEOs are wrong about earnings growth going forward, the economic outlook still looks strong. If U.S. corporates are doing well, unemployment will remain low and wage growth should continue to grow.
It is unlikely the stock market’s performance and the physical real estate market’s performance will remained decoupled for long. In fact, take a look at various REITs, homebuilders, and Home Depot. They are mostly outperforming the S&P 500 YTD.
Below is the chart of VNQ, the Vanguard Real Estate Index Fund. I see the chart as a forward looking indicator for real estate prices. As mortgage rates collapse, the demand for real estate increases. Rental income also becomes more attractive relative to lower yielding assets.
So much wealth has been created in the stock market that it is inevitable some of that wealth will move to real estate, which lagged in 2019.
I’m personally looking to continue investing in “18-hour cities” across the heartland of America. CrowdStreet is my favorite platform for accredited investors while Fundrise is my favorite platform for non-accredited investors. Both are free to sign up and explore.
4) 2020 is a presidential election year. If we know one thing about power-hungry politicians, it’s that in order to stay in power, they will do everything possible to help ensure the economy keeps growing. The only caveat is if a candidate from the far left wins. If this happens, the S&P 500 will likely decline by 20%+ as investors anticipate higher taxes and business unfriendly policies in the future. The stock market and economy prefer certainty over uncertainty.
5) The devil you know is better than the devil you don’t. Once the state income and property tax deduction limit of $10,000 was introduced and the mortgage interest deduction limit was lowered from $1,000,000 to $750,000 for 2018, there was a lot of uncertainty regarding how this would affect a homeowner’s tax bill. Now that homeowners have gotten to see what the exact damage is, homeowners and tax experts can now make more calculated homeownership decisions going forward.
In my opinion, the SALT cap limit hasn’t hurt as badly as some people feared due to the doubling of the standard deduction and the decline in mortgage rates. I personally haven’t noticed any difference and even got a small federal tax refund.
6) Rents continue to tick up. The value of a property is ultimately based on its rental income. Some coastal cities will have lower cap rates due to faster property price appreciation. While heartland cities will have higher cap rates, which offer tremendous value to income-seeking investors.
As a landlord in San Francisco, rents have stabilized since peaking in early 2016. Rents are now starting to creep back up a little. The below chart now clearly shows what I experienced in 2017. I aggressively marketed my place for 45 days, and the best I could do was a 14.7% drop.
Given I knew in real-time that rents were weak, it was straightforward to conclude that property prices were likely capped in the short-run and may weaken as well.
7) The Millennial generation is in its prime buying years. Millennials are now in their 30s, which means they’ve had 10+ years to save for a downpayment. They’re also at a stage where they are settling down and having children. There’s probably no bigger catalyst to own a property than children. Your nesting instincts go into overdrive as you strive for stability.
You can see from the chart below by the National Association of Realtors® Home Buyer and Seller Generational Trends study that married couples dominate the home buyer demographic, followed by single females. No surprise, the single male is way behind the single female when it comes to home buying.
I’ve mentioned this before, but there are now eight males over the age of 25 still living at home with their parents within a six-block area around my house. One of my biggest fears as a dad is raising a son who does not grow up to be an independent man by 25. I cannot be too soft.
Below is another interesting graphic I found that shows where millennials are buying the most homes. They certainly aren’t buying as many homes in California or Washington, Hawaii, Florida, New York, New Jersey, Washington D.C. or Boston.
This buying trend gives me confidence that buying property in non-coastal cities is a good long-term trend. I’ve now got Ogden, Grand Rapids, and Des Moines on the top of my radar when I look at deals on CrowdStreet (mostly for accredited investors) and Fundrise (accredited and non-accredited) my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Just like how stock investors shouldn’t fight the Fed, real estate investors shouldn’t fight multi-decade demographic trends.
Google is spending $13 billion on real estate in Nevada, Ohio, Texas, and Nebraska in 2019 and beyond. Uber signed a 450,000-square-foot lease within The Epic, a mixed-use development in Dallas, Texas. Their office is set to open in 2022. The trend towards the heartland is as clear as day.
8) Wave of tech IPO liquidity coming due. Companies such as Uber, Lyft, and Pinterest went IPO in 1H2019. Their 6-month lockup is expiring in 4Q2019. I’ve spoken to a dozen employees at these companies and they all plan to sell some stock to diversify their net worth. Thousands of employees have sold stock at the end of 2019 and will in 2020 to diversify their net worth.
The common reinvestment theme for their tech IPO proceeds is to buy a property somewhere in the Bay Area or back home where they originally came from. The other theme is to join a new startup and try to get rich again. After going public, Uber, Lyft, and Slack have been disappointments, which is making employees more anxious to sell and diversify.
9) Wage growth is reaching new highs. Real median household income finally broke out to new all-time highs in 2017. The latest data is $63,179 at the end of 2018. I’m confident when the 2019 data comes out in 2020, the real median household income will go up further.
10) Winter is here again. Winter is my favorite time to buy property because anybody listing during this time tends to be a more desperate seller. Think about it. The weather is usually at its worst during winter. The holidays put people in wind down mode. Fewer people are graduating from school during the winter. And people are waiting for their year-end bonuses to be paid in the new year.
11) Hot foreign money has cooled off. Before 2017, a lot of coastal city buyers had to compete with wealthy foreign money, especially from China. Foreign buyers caused bidding wars and a lot of competition for potential local buyers. The Chinese government has since clamped down on hot money outflow to purchase foreign property. As a result, Chinese buyers of U.S. real estate is down over 50% YoY in 2019.
Now with coronavirus fears in 2020, you know that the wealthy Chinese are trying to do everything they can to diversify away from the Chinese economy.
From a foreign capital competition perspective, the time to buy is when their spigots have been shut off. Eventually, foreign money will come flooding into America again, especially if there is a resolution with the trade war. There have been over two years of pent up demand for U.S. property. When the demand is finally unleashed, it will probably result in all-cash bidding wars once again.
12) The next recession won’t be as severe. During the 2008-2009 financial crisis, the median home price in America declined by ~17% over a 2.5 year period. I do not believe we will go through a downturn of a similar magnitude because lending standards have been so incredibly tight post the 2008-2009 recession. For example, I got rejected for a refinance back in 2014 because my 1099 income was too abysmal. Yet, I had enough in my investment account with the bank who rejected me to pay off my entire mortgage times two!
Since 2009, only people with excellent credit scores have been able to get mortgages. Negative amortizing liar loans have disappeared. It has also become common practice to buy a home with a 20% or greater downpayment again.
With so much home equity that has been accumulated since 2009 by very creditworthy borrowers, most homeowners should be able to weather a financial crisis much easier than in the past.
Since its late-2016 peak, the median sales price in America is already down ~9%. Even if home prices continue to decline and reach the same magnitude as the previous recession, there’s only 8% left to go.
13) Conforming loan limits are going up. The Federal Housing Finance Agency (FHFA) announced the maximum conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac in 2020. In most of the U.S., the 2020 maximum conforming loan limit for one-unit properties will be $510,400, an increase from $484,350 in 2019.
In high-cost areas, the maximum loan limit for mortgages acquired by Fannie Mae and Freddie Mac will be $765,600. Higher conforming loan limits means homebuyers are able to buy more house at the same conforming loan rate. Further, higher limits signifies the government recognizes real estate prices have room for upside, as their loan limits follow inflation.
Real Estate Looks Attractive
I’m thankful to have sold my rental property in 2017. Although paying the commission was painful, the peace of mind I received from not having to manage the property as a first-time dad was priceless. Further, the reinvested proceeds have done well so far with no work needed on my part.
With wages up, home prices down, and mortgage rates down, I plan to buy another property very soon. All I ask is that nobody buy property until I take down another home with an ocean view. The opportunity to profit, have a bigger home for a larger family, and pass down cheap property to my children 30 years from now is too tantalizing not to take action.
I invest in everything from stocks, bonds, private equity, venture debt, metals & mining, and real estate. I don’t play favorites. I’m mainly interested in maximizing my investments to make the most amount of possible with the least amount of stress as possible.
If you don’t want to take out a loan to buy real estate, that’s understandable. Consider investing in real estate with a real estate crowdfunding platform like Fundrise.
With Fundrise, you can invest in real estate for as little as $500, and you don’t need to leverage up at all. This way, you can easily diversify your real estate exposure and earn income passively. Fundrise is open to all investors.
Loading ...If you’re an accredited investor, take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities. These cities include Denver, Austin, Memphis, and Charleston. Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.
Great post. This, and some of your other work, has impressed upon me that the best opprtunities for real estate lie outside of the coasts and towards the middle of the country.
As for the timing, is it too perfect of a time?
We’ve basically had a 10 year bull market in just about everything so that gives me pause.The Coronavirus has the potential to be a major jolt in terms of economic output. But whether the Coronavirus or some other as-of-yet unforseen catalyst, the odds of a pullback or substantial pullback may be higher or more substantial after such a long-run higher. You mentioned the divergence between the stock market and real estate, but I wonder if real estate is the more telling indicator? Are Tesla and Virgin Galactic signalling that the stock market the one a bit out-of-touch with fundamentals? Thoughts? Always appreciate when others take time to point out flaws in my thinking.
Sam!
It’s been almost a decade (2010), since I I bought my first of 3 rental properties and 1/2 ownership of my office building. I am sitting on the beach drinking Dos X in Cancun as I write this, treating my entire family and parent to a much needed vacation. Thanks in part, to my real estate investments. As much as I I love Real estate, and want to agree with you, I feel like it’s not quite time to buy, just yet.
Yes, rates are unbelievable. There is also some fear in the air of what’s to come (Corona virus, earnings, etc). But prices are still to high. Atleast in my area (Colorado).
When I began purchasing property, prices were on sale. By on sale, I mean 50% off sale! I understand this may have been a once in a generation deal, but it’s hard for me to pull the trigger on property that is selling for 100%+ more than it did just a few years ago. Something just doesn’t sit well, for me.
When we look at Replacenment Cost, or the price to build/rebuild/produce the disparity versus sales price seems astonishing and artificial to me.
I get that everybody is making money right now. I understand it’s been a good ride over the last 10+ years, but prices are inflated and I believe they will come down. The question is when and what will rates look like?
Im sitting on the sideline, with cash. Maybe because I’m ten years older and now in my mid 40s. Perhaps because I have 3 daughters nearing college. Either way, my guess is, 12-24 months and we’ll see a price correction. Anyways, really enjoy and appreciate your work Sam.
Jim
Sam,
What are your thoughts about being a private lender in this lower interest environment? You state that you want to be “overweight” and “maintain overweight” in real estate, but does that only mean physical assets? What do think about private people who lend to buyers of real estate?
Thanks,
MP
I own an apartment outright in SF and have been struggling with whether to sell since ‘17 (which I regret not doing). Any advise on whether to try to do it before the election? Is it more defensive to be liquid in cash or to keep a property I have no debt on, and I rent out? Is there a sell high, buy low opportunity here?
Sorry, without knowing when you bought it, the price you paid, the price you could get, etc, I have no way of providing an informed opinion.
In general, I think the best holding period for real estate is forever. But life happens.
See: Why I Sold My Rental In 2017, Had To Live For Today
This Fred new starts Western region chart sums up my position on the RE market.
The new starts have just started to peak up over 400k. The chart shows a number of years above 500k to call it quits in RE. Enjoy the ride.
As long as you have the money to cover the expenses if something goes wrong it ALWAYS the right time to buy real estate :)
If you wish to invest in real estate then this might be the time for it. As mortgage rates have decreased and prices have decreased, 2020 might be a perfect year to dive into real estate. Thanks for this wonderful article as I have been thinking about taking a plunge in this aspect. This had been insightful.
At a young age I was foolish enough to invest all my spare time, sweat, party money & a lot of knuckle skin & blood into run down rental properties. My at work colleagues & my all-knowing MBA Management type bosses warned me of my impending financial demise (interest rates were @ 18-19%).
So, in ’98 I pissed them all off by retiring very early & they all said I’d be back. To this day I’ve yet to cash in any of my tax deferred retirement savings (at least until RMD clicks in).
As of ’98 I was jobless & ‘at home’ watching our kids grow up & we NEVER missed a game or event they were in. We took them on annual vacations, all over the world. In fact, while visiting family in Australia for 3 weeks, my agent & I did 3 deals over the phone, (@ 2am Aussie time), that paid for our entire vacation. We now spend THE required 12-18 days every year, on Marco Island, to just chill with all our kids & grandkids.
None of our kids graduated with college loans & all owned their own homes (which we built or rehabbed) a couple of years after they graduated. Two are self-employed, all have real estate investments & ALL their homes are within their Italian Mother’s required 6-mile radius.
Pull-backs/recessions/inflation & the absolute insanity of politics has never made a dent in any of our REI values or income streams & everything we own has been free & clear for many many years. My wife GC’d the building of our current home & when the construction loan draws were complete, we paid it off cash, NO mortgage.
Sure, we were crass enough to sell high, raise rents & deal firmly with tenants/evictions & take advantage of EVERY legal tax deduction we could conjure up. But we have also financed & mentored a lot of young kids into their own homes & investment properties. In fact, several young veterans have a home & a couple of rentals ONLY because of us. In fact, one young kid (25yrs old), that we are mentoring & helped finance, now has >40 positive cash-flowing rental units. His 2018 W-2 was $120k, (my wife does his Tax Returns), so you would assume he doesn’t need the demands & aggravation of being a landlord, but like some of us he thrives on it.
Over the last 18 months we have slowed down but still dropped another $500k CASH into new properties with a COCROI of 15-20%. Another project we hope to finalize this month will return $117k, over 10 years, just in interest.
Apart from our Florida home we did buy that Lakehouse, (mentioned above), & we personally did all the re-wiring/re-plumbing & complete rehabbing. That old decrepit 1 bed/1 bath 2 story ‘cottage’ is now 2000 sq. ft with 4 bedroom/2.5 baths. Then my wife designed & we personally built her 23×12 kitchen overlooking the Lake. We are now < mile from several of our friends for the many tranquil sunset Happy Hours, as others fight traffic to rush home from their JOBS !!!
The intricacies & idiosyncrasies of a hard-core real estate portfolio are definitely NOT for everyone, but over the years our Tax advantaged/leveraged Passive income stream has provided an amazing exponential return for our immediate family, both in TIME together & $$$.
Thanks for sharing!
I’m interested to learn more about this! I work full time everyday and have small business on the side. Would like another stream of income. What ways can one find money to purchase and rehab buildings for rent?
you have got to be kidding me with this
I have a home house that is currently vacant. It’s 3 bedrooms, 2 baths, basement and detached garage. I’m thinking of renting since markets are not good now for sellers. Its located in rural VA where they’re are not many Property management companies. I had one years ago that was in town, and it did not work out. Curious if I should look an hour away for property management companies or rent to section 8? I’d like to find a way to make money with it. Interested to know your suggestions. Thanks in advance
My properties in northern VA do very well. Location. Location. Location
That good to know BB! I’m interested in occupying my home with good responsible renters this time. Do you know of any good property managers or realtors that manage in the area? I’m in the outskirts of Richmond, VA but the home is further south.
Prices have only gone up in South Florida. There has been no pause. So I am not sure what down turn you are referring to. It hasn’t been seen in 33486 or 33432.
I agree 100%. The South Florida market and in particular Boca Raton keeps going up an up and up. In my mind the prices are absolutely ridiculous. Complete dumps that should cost no more than $100-$200K are going for $500-$600K. The job market in South Florida can in no way support such real estate costs. There are not that many high paying jobs here.
The city is very well run and EVERYONE wants to live there. Everyone in FL. Everyone in NY and NJ. Everyone everywhere. What do you expect, you live in paradise. Plus, the city hits well above it’s weight class and has given much focus to improving economy/jobs resiliency and improving schools… all A rated for the city, first time ever. Call me biased ..
CD
Hi Sam, Rising Interest rates do not always mean a gangbusters economy. Look back to 1981- 1985 when interest rates were at what would be an unimaginable rate today . When my wife and purchased our first home in Colma/
Broadmoor Village in 1984, we got an adjustable rate of 12% , fixed rates at the time were14%. The economy was not good.
Thanks for your input.
Good article. As others have mentioned, RE is local, so it depends on where you are thinking of buying, down to the neighborhood.
I’ve been investing in RE for over 20 years and I’ve never seen such uncertainty in the future and a dichotomy in economic statistics. RE supply is very low and not really improving. There are a host of reasons, but it is almost impossible to build a SFH now at or below the median home price, so there are few affordable homes and not likely many more coming online soon. However, lending standards are still fairly tight and could be loosened to help those on the edge be able to afford homes. Finally, interest rates are low and will likely stay that way for some time. So, demand is strong, supply is low and rates are low, all of which are good for RE prices.
However, as mentioned above, affordability is a real problem. Even if Millennials that are settling down WANT to buy a house, unless their college debt is forgiven or loan standards loosen or we figure out how to build more affordable housing, they can’t buy. If/when the recession hits, those same Millennials will lose their jobs. Due to automation, some of those jobs won’t come back. I don’t believe the AI horror stories and I think the economy, jobs and people will adapt, but some jobs simply won’t come back.
So, there is little supply, rates and low and there is solid demand. But, prices are at near, all-time highs and most people can’t afford to buy a home. We’re also near a recession. Recessions tend to make people play defense and put off large purchases.
So, my long-winded theory is that we will have a recession coming and that it will cause a mild contraction, or maybe just stagnation, in RE prices. Demand/supply will balance out more. Once we come out of that, I believe it will be a great time to own RE, as the Millennials will be in better financial shape, price/income ratios should be better and the economy will start back on an upswing.
Hey Sam, I think the title should more accurately be “A Golden Opportunity to Buy Non-Coastal Real Estate is Upon Us.” :) I realize that’s a bit less catchy, but I think that’s what this post is saying.
I have a family and am renting a single family home on the peninsula in the bay area. Even with a softening market for home prices (it feels intuitively like prices have come down 5-10%), the total principle, interest, tax, and insurance cost to live in our house would be 2x what we can rent it for. I’m not particularly interested in maintaining the property with my scant free time and love that I can call someone to fix stuff. I’m even more enthusiastic that I can save an additional $4-5k/mo and put that money into other investments that have higher rates of return (namely index funds at the moment, but hopefully heartland real estate and angel investing in the next year or two).
In the past, the benefit of a mortgage to hedge against inflation was a big deal, but I think we’re entering a prolonged period of low growth/low inflation. Would love your thoughts on the topic though!
I love the article, your homework and Optimism !
So many valid points and a majority of negative votes show a lot of concern.
I’m going sit on 70% cash, a 10 % equities 10% cds 10% gold a few nice rentals in SLC and ABQ and a bunch of seasoned low income real estate contracts, in NM. If Yang is correct and AI jobs take overs & cause chaos I’ll stay put here in the Philippines.
Great post, Sam. To clarify your article, you are recommending buying property not in the major coastal cities (Silicon Valley, LA, NYC et al), but in the heartland, correct? You don’t explicitly state it above and wanted to clarify.
Although the Bay Area market has cooled substantially since 2017 (intuitively, -10% feels about right), among moderately sized single family homes above 3 bedrooms at conservative interest rates (~3%), the total principal, interest, tax and insurance cost is hovering around 1.5-2x the yearly cost of renting. I’ve been reading a lot about possible future paths for inflation and have become convinced that inflation and stock returns are likely to be much lower in the next 30 years than in the past 30 years. That means that a mortgage won’t be a big help as an inflation hedge since inflation will be pretty low. And even at a nominal 4% long run return on stocks, there’s a 1% spread between a 3% mortgage interest rate and stock market returns that can be arbitraged.
For context, I currently have a family and rent a home on the peninsula. We have been saving for a down payment for 2 years and could afford to buy, but are increasingly leaning towards not doing it for the reasons above. I AM, however, considering whether to buy a rental home in my home state of Ohio for the reasons you present here.
I think a lot of folks myself included are held back by the fact that they don’t know enough about it. In my case, there are also fears of bad tenants that folks I know have had to deal with. This is why REITs are my happy medium where we earn less, but I have less problems. That being said, I am adding more and more to my REIT investments for the very reasons that you are talking about.
I didn’t read through the massive list of comments but here’s my take.
I live in a military driven town, largest military(navy base) in the country right here. If the military were to disappear the economy of this entire place would collapse. This history lesson is given to explain that even one here is living in a real estate bubble that very rarely bursts. Houses are overpriced and sell fast. Captains wives want southern charm with open floor plans and streets where you can walk to little quaint bistros. That’s what we have.
I live in a 2300sq ft home that just got valued at over 475,000 and my mortgage is killing me. Literally. My husband and I found the absolute sketchiest house on the nicest street in the second nicest neighborhood and completely renovated this 200 yr old house. Now I’m in a nightmare. My goal was to live in it for a few years, then rent it, but keep the house because holding onto property is the easiest form of retirement. My parents have a duplex 3 blocks from here that is paid off, but needs work, but will give me at least $4000 a month in a few years when my dad can’t manage the place anymore.
My problem is my husband. He’s convinced that if we sell this house we will be “free” and everything will be rainbows and stars. I keep telling him that I’m the real world houses like ours are 1/2 the price and that we should just rent the stupid thing and start fresh somewhere cheap like North Carolina or one of the square states.
I’m interested to see if you respond or if you have an opinion about this issue.
Property will stay predictable for the next 20-30 years. Until the memory of the Great recession is gone.
My best guess is a 20% correction on NY, JC, SFBA real estate in the next 2-3 years as people realize either their tech stock isn’t worth as much as they think it is, or that their tech stock is worth a lot and that means a multiple 6 figure state tax bill. The impact of the SALT deduction limit is massive.
Gotcha, so another 20% down from here for the most devastating real estate collapse in the history of America – more so than the 2008-2009 financial crisis.
Can you share your housing situation: renter/owner and for how long? It’s good to understand your background to understand your call. Have you been shorting the stock market and housing market given your view? If so, what have you been short?
thanks!
I think your arguments are a bit confusing, because some of them apply almost exclusively to the Bay Area (e.g. IPO money) and some don’t. I am now selling my longtime residence in a top zip code in LA because of bumping up against the cap gains deadline, but also because renting over 50 miles from home is a hassle, even when it’s high end and you know the people. But I was getting rent of over $7k a month. Imagine now renting in Michigan. You would have to rent and maintain several houses to match that rent. Have you ever lived in a place with winter, and the maintenance issues involved? I think, despite your heartland arguments, there can be good buys in CA and other West Coast, because this is where many of the high paying jobs are. I am selling to a gay couple of new UCLA professors from the east coast because they have $$$ and feel comfortable in CA (they ain’t moving to Ogden). I have downsized into a beach house in Ventura County that I bought during the depths of the recession in 2010. Meanwhile, prices in the rest of the country can seem shockingly cheap, but the salaries are low, property taxes aren’t capped by Prop 13, they have terrible weather, etc. I think you sound a little cocky, perhaps due to your relatively young age. I worked for many very lucrative years in the DVD business, where everyone thought they were a genius when we were just in a lucky moment. Be careful, because, while your research and thinking are quite thorough, you are ignoring the sheer lucky timing component (the Big One didn’t hit SF!) and the sheer other luck component (what if you had a family health issue? If you are not working you give up many perks including disability insurance, perhaps). You should also consider that if you are raising a family you have to be able to support them through thick and thin, so beware of over-extending yourself on risk and stress. When you stop working you face a lot of the problems that older retired people face. You should focus on making sure your family is housed and secure no matter what. Have you already fully funded 529 plans for your kids (I paid for top private schools and just finished paying my kid’s Stanford tuition, with grad school on the horizon, and yes, I feel great about my kid not having debt–but that cost a fortune)? Then you can think about fancy real estate investments (watch the crowdfunders when the cap gains rate is raised to 39%!). Then worry about seeing how many people approve of your blog entry. Just writing this reminds me to re-focus on life and financial priorities, because I have one life to live. Oh, yeah, and my mother is 100, so I also have pre-paid high-end long-term care insurance–do you? Good luck and be wise.
Sorry to write a confusing article. I thought only one point, #8, and a couple anecdotes was related to San Francisco regarding the tech IPO liquidity. The rest affect us all.
But real estate is local. So you need to pay attention to your local economy.
I should have said I was also thinking of your points about record high wages, the ability to even think about monthly rents above $5K, the degree of sensitivity to tax deduction caps (certainly came up with young families looking at my LA house in an excellent elementary school district, and is certainly impacting several East Coast markets), and also the irrelevance of that cap to the vast majority of homes in places like Utah and Michigan because the buyers there will never see those house value numbers that start triggering the caps–when one lives in the Silicon Valley bubble, some things seem almost normal that are amazing to outsiders. My son just moved from Menlo Park, where a Coffeebar breakfast for 2 easily hits $50, standing room only. I believe you should spend some time in these places you are thinking of investing in and consider how different they are from the Bay Area. I know someone who started snapping up cheap tax auctioned houses in rural PA and wanted to rent them. It seems you can’t make enough rent to overcome the damage that can be done to a cheap rental in such an area, so he had to start flipping instead, but all hard to handle from a distance and there’s a reason that winter is not a good real estate season in these places!
Perhaps I can give some perspective on flyover country relative to coastal metropolis living.
I was born and raised in Fairfax County, VA (Washington, DC for those who don’t know). Went to college in VA, Medical School in VA, and then Residency training in San Francisco and Bethesda, MD. I then worked for the first few years of my career in Washington, DC. while I was serving in the U.S. Army at Walter Reed (in return for an Army medical school scholarship).
At age 33 I was free to select my geography for the first time in my adult life. In my particular field, I could make twice as much income, with half the time to equity partnership in flyover country due to supply/demand for physician specialists.
I looked at many locations and settled in Tulsa, OK. I had never been to Oklahoma before the job interview.
From 1997-2007 I lived and raised my children to school age here. At that point, I moved back to Northern Virginia since all of our extended family lived there and we wanted the kids to be around their family. We loved living in Tulsa, however.
After 2 years, we found that life was immeasurably better in Tulsa than DC. Tulsa is a city of about 400,000 with an MSA population of about 1 million. Beautiful. Cosmopolitan. Great people. No traffic. Great schools. Airport easy as pie to park next to terminal 30min before departure with no crowds.
Due to the traffic on I-95 in Virginia, we only saw family on special occasions because no one wanted to sit in an interstate parking lot for an unpredictably long period.
After 2 years back “home”, I got a call from the hospital CEO in Tulsa, and long story short, I returned to my old job in Oklahoma. That was in January 2007 and we have happily lived here since. Like many heartland cities there is a renaissance going on in our downtown that is amazing. Walkable cafes, restaurants, craft breweries, outdoor spaces, etc. that are growing like mad. What was a really good place has become much better.
I also own outright 4 SFH rentals in the best school district in the state. All are less than 10 years old, 3-4 BR/2-3 BA homes in great neighborhoods with high relative rents and attract higher end renters with no drama. I paid on average $150,000 for each home, and the gross rents average $1550/mo for each.
I’ve recently bought land to build a second home in Colorado Springs where my oldest daughter settled. I plan to keep my home in Tulsa for part year living, and also all of my rental properties which are slowly but reliably appreciating. I’m considering committing additional capital to the rental realty market due to the high income it produces here.
Just some thoughts for those who have no experience in this part of the county.
Hold your cash and wait for the crash after the 2020 election, then buy!
I have a lot of respect for the author however, I’m going to very much disagree with him. I’m not declaring to be an expert or I know it all, however I’ve been a student of AI / Robotics mostly about the economics of it for 12 years. Owning a media company has given me the opportunity to interview CEO’s from AI companies along with Robotic Engineers. I could write for a day about it – the short from most major think tanks: As of June 2019 human jobs were 71% Vs. 29% automated. They all agree by 2022 it’s going to be 58% human Vs. 42% automated. There just waiting for a recession. We all know if a major company laid off 20K to automate, it would be bad PR – in a recession, cost cutting measures are expected. I think when it comes to Real Estate … it’s going to be simply supply Vs. demand. If there’s a lack of jobs, millennials will not buy homes. We currently have approx. 64% home ownership in this country .. over half is by boomers. The largest group taking social security is the ones at age 62 it’s 34% – full SS or waiting to age 70 … both are under 10%. I’ve sold my Silicon Valley home before the market went down. I’ve sold all rental property. I’m living in a state that’s cheap. I’m going to sit it out until 2025. This is my prediction when jobs vs. AI will be 50-50. With AI it’s no longer a question of not if but when – it’s now how much pain and who will suffer the most. Recessions are part of the biz cycle, political policy cannot keep the recession at bay much longer. All the articles you read that say AI will destroy i.e. 70 million however it’s going to create 100 million. It’s called disruption, displacement. I recently interviewed a CEO in the hospitality arena – they’ve started however will be very everywhere in Vegas hotels soon. Immigration laws and minimum wage is accelerating it. I told him what he would tell me “the jobs will stay (robots will take them) however the task will change – meaning employees will find other jobs. I asked, so all of those housekeepers etc. in Vegas, will they get jobs at the casino’s in finance? HR? – he admitted it’s a job killer. It’s just my wife and I we’re late 50’s never had kids. I think cash will be king. Anyway, again, lots of respect for the author, I know he’s written about great value in the central part of the company buying RE Crowd funding. In the central part of U.S. & rust belt, lots of those manufacture jobs are going to disappear. It’s a different type of AI – it’s smart AI not dumb like what you see in a car plant with a robot doing one function. Foxconn Apples largest supplier replaced employees with 60,000 robots who can do 20 task. We already have Robotic Bartenders, AI Hotels, Amazon will be launching over 3K AI grocery stores, soon your Amazon delivers will be by drones – testing mini blimps for larger items. The CFO of Ford admitted, they don’t want to sell cars, they want to lease for $1 a mile … says they only make around $30K when they sell. He’s not my favorite however Mark Z of FB commencement speech to Harvard’s graduating class of 2017 – first item, there’s not going to be jobs, went into UBI. I don’t have the answers to everything – I’m lucky my wife & I have done well, we have enough money, I have my own biz and she’s still working. There’s going to be a lot of people in a bad place in the future! Sorry, for the long explanation – but I would not go long term in RE
Jim,
Thanks for your informative and thoughtful comment. Quick question, with the ways things are going with AI and negative interest rate, where should people put their money in?
First, I must apologize, I should of proofed what I wrote … it was a little sloppy. My humble but honest answer is I don’t know. For my wife & I, it’s our age. We’re late 50’s never had kids, did above average in the investment world. Fortunately, I have my own biz and my wife still works. We made the decision, after quarterly results to sell mutual funds that we’ve had with Fidelity for over 25 years. Pulled the plug on the rental property. Even though Google is buying buildings all around us, we decided to sell our home in Silicon Valley … however, we did also want to experience living on the east coast. I’m very concerned for young people these days. I see young adults graduating from law schools paying out over $50K a year while IBM has developed AI technology that will review millions of legal documents in minutes. The biggest cost for a law firm is preparation for trial … the list goes on and on. If I was in the market … I’d probably take a look at where VC’s are putting their money and with which AI companies. Perhaps, Sam can chime in, he perhaps would have a better vision regarding investing. I’d also be curious on his take.
Maybe I’m wrong but when people claim to know that AI currently has 29% automation (in the US) my bs detector goes off. Really 29% not 28%? Not 30%. Big lack on knowledge indicator – excess precision in an very hard to measure area. How would one measure this now to see what the 29% really is?
Going forward looking at all jobs and saying we are going to replace around 20% of jobs with AI in 2.5 years? Really? Have you ever seen IT projects role out? Your AI will replace house cleaners? More challenging the justice AI, and if you are going to replace 1million bed makers and bath tub washers in that time frame there should be solid beta testing now – and maybe a unicorn or two pre selling them. So no dice there.
Maybe in banking? If ATMs didn’t wipe out all the crazy tellers in the last twenty years who would believe they are going to vanish from magical AI in a couple years?
Seems like the same over hype we had with 3D printers, or Y2K stocks. AI will impact jobs but I will bet large sums of money that it will be slower then that, and like every labor saving device of the last 300 years people will find other ways to add value that the AI can’t do.
Maybe I’m wrong and Bloomberg can teach the AI farming and food will be free. Oh no – we’d have to go fishing for fun instead of food. A great human tragedy. :)
In addition to Grand Rapids, in the Midwest I think lakefront property is a great buy now. More people will shy away from the coasts due to climate change and buy lakefront instead. Northern Michigan (Traverse City, Charlevoix, Petoskey etc) is increasingly becoming the new Hamptons.
I can assure you that —-> your northern Michigan crap lakes will not become the “new hamptons”. Not now…not ever.
Well, you’ve obviously never been to Harbor Springs
I have been to Harbor Springs, but the new Hamptons is a bit much. My parents don’t bother going to their admittedly old family lake house in Northern Michigan. I haven’t been in approximately 20 years. I suspect there are too many little lakes to ever make the real estate exclusive, and who wants to live there year-round.
I had the same thought about lakes versus ocean, so I looked at Lake Tahoe. Climate change will impact lakes as well–less snow-melt, algae and invasive plant growth from warming waters and organic pollutants, and humans fighting over the water needed to replenish. On the sad flip side, the bark beetles have killed so many pine trees due to warming that lake views are opening up where they didn’t exist before! Shorter term, there are plenty of people who don’t research these things like I do, so there is surely money to be made. Longer term, I decided not to sink money into that much concentrated risk. Diversify, diversify, diversify, is my advice to myself, because the crystal ball is cloudy.
I believe prices will continue to weaken because we have already had declines in an environment with lower interest rates and declining unemployment. If interest rates begin to increase as well as unemployment we are looking at asset price crashes.
We also had Treasury Secretary Mnuchin and HUD Secretary Carson testify before congress that loans issued by Fannie and Freddie as well as the FHA are actually higher risk then before the crisis. While the negative amortizing loans are a thing of the past; high debt to income is not.
I’d be curious to get your views on real estate crowdfunding vs. traditional REITs as well. Pros and cons, that sort of thing.
Sure, see: Real Estate Crowdfunding vs REITs
Check out my search box on my homepage, or Google “subject/question Financial Samurai” for more.
thanks
Boston / Arizona / Texas areas of investment. Real estate investing is a long game. There is substantial risk depending on how deep you are leveraged. There are a number things to consider. How deep you will be involved in the property management, maintenance , etc. If you can buy a place and make money from day one do it. If you can survive with the place empty for 6 months that’s border line. Real estate ownership should not be taken halfheartedly. There will be ups and downs. Be prepared for them. My experiences have been mostly positive. There are so many balls juggling in the air with real estate ownership. Be prepared. Here is something I learned if I rent to a great tenant and the rents go up in the area it is not worth driving a good tenant out to chase a small profit. Each month a house is empty is an expense that could take months or years to recover.
I’m in a suburb of Boston, and things are still pretty good here.
On the peninsula feels like the entry level market is seeing later stage buyers (feels like more contingent sales now), while the upper middle to high end where mortgages are less of a factor hasn’t moved much since 2015/2016.
As you say – where lending caps move, the prices tend to move. Is there a place that tracks the 75th percentile of mortgage amounts? That would prob help explain a lot of price movement, and give a sense of where it’s headed.
Hi Sam, I am a big fan! Do you have any thoughts on climate change impact on real estate on coastal cities areas? I prefer to invest inland with higher altitude and close to clean source of water… lake Michigan…I think Chicago is under priced, what is your thoughts?
Hi I have a condo in Chicago right near Michigan Ave..got it for a good price 10 years ago..only make $200 cash flow monthly..but it literally rents within a week…should I sell ( I have approx $80 grand in equity), or should I hold on to it ? Your thoughts ?
Hold on. The quality government there will prevent it from becoming the next San Juan or Detroit.
The last to leave gets hurt the most. ‘The Chicago area’s population declined for the fourth year in a row in 2018, according to the latest Census Bureau estimates.’
Sam,
Love all your content. Currently trying to buy a house in Los Alto/Mountain View area. It’s still quite busy as least for good houses. I wonder, you said in a post a while ago how IPO’s wouldn’t lead to increase in prices (https://www.financialsamurai.com/how-new-tech-ipos-could-actually-accelerate-the-decline-in-sf-bay-area-real-estate-prices/). Has you take on this changed or is there something I’m missing?
Thanks
I’m curious what you think of cities like Bend, OR, for real estate buying. It’s not coastal or heartland, but prices have gotten quite high there. It’s no longer just a tourist or logging town and is seeing explosive population growth (from 20,000 in 1990 to about 100,000 today and expected to hit 140,000 in 2040).
I tend to disagree…I can’t see any significant appreciation happening in the San Francisco market for at least a couple years. The highly desirable neighborhoods like Noe Valley will always be very competitive but given the unprecedented increase in prices over the past 10 years, i think prices will remain flat for some time. Those buyers who paid big for condos between 2015-2018 in SOMA or downtown, and need to sell, are going to struggle to break even. (I’m expecting drops of 10-20 per cent in that market.)
To counter balance, rates are going down and there does appear to be an endless supply of trust fund babies who move to this city!
It’s going to be interesting to see how it all unfolds. I’d wait unless there’s a great deal that you can’t refuse.
Further to your post…the heartland may be a good bet!
Hi Sam,
Great article to think about. However, with the looming presidential elections coming it is likely possible housing and the stock market go down. So, even though I see a good time for housing in the next 6 months, I see it getting hammered once we know who will be in power for the next 4 years. I am telling my friends to be cautious and save money right now. Once the elections are done, then make a choice. Nothing is worse then buying at a relative top and then being forced to sell due to job loss or some other reason. Alternatively, if you can buy and hold for a long time, then buying would work, regardless.
Can you elaborate why Trump winning again will hammer the real estate markets? Are you currently a renter or Owner?
I never said Trump winning would hammer the real estate market. I think it is more likely the Dems winning would hammer the real estate and stock market.
I am an owner.
Gotcha, so you are going against the current odds makers.
You should consider making a bet for the Democrats then because you’re getting at least 3 to 1 odds. That’s a much easier way to make money as the payout will be in one year.
Always put your money where your mouth is. That is the best way to win and to lose, but most importantly to learn.
Sam, your responses seem very odd here. All he is saying is that there is significant uncertainty in an election year which is well documented historically and you are saying that Trump will definitely win and that he should bet against him?
Also, the oddsmakers were wrong last time so why would you put any faith in them this time especially this early? Sounds like you need to put your money where your mouth is and place a bet on Trump.
Already have. Happy to make a side bet with you as well. $100 straight up? We can settle by Paypal.
I think it is common practice to make assumptions based on probable outcomes. So first making the assumption against the odds, and then assuming the housing market crash or two derivatives.
But anything can happen and that is the beauty of the market. What are some bets you are making and are you a renter or a homeowner?
Totally agree with Daniel and Justin here. But just a quick 100% political bias-free comment regarding the election odds. Trump clearly has the best odds of being elected president in 2020 right now. But that’s only because he’s the only republican candidate. Using a tennis analogy, he’s got a BYE into the finals, while the dems have a playoff before they can advance.
But don’t conclude that Trump winning the election is the most likely outcome. Polls are all over the place, but most have it near a 50/50 toss up depending on which candidate the dems put forward.
Approval and impeachment polls suggest Trump is a clear underdog at this point. I don’t see why someone would accept an oddsmaker bet that puts him as an even money or better favorite. That’s got to be a -EV bet.
The socialist Dems will be the ones to destroy the economy..
In 2016, I thought stock market would tank after the election and I wrong. What I have learned is that it swings a lot. I have a lot of cash on hand and would like to see what I can do with it.
I’m selling what I can of what I own – my most profitable rental and my current home. But only so I can buy more real estate. Those two properties are in non-declining areas and will give me additional capital to expand what I own at hopefully lower risk for the rentals i acquire
Not sure about the timing, but I heartedly agree about the heartland (drum snare, bad joke)… Anecdotally, I see millennials coming through our SF office, getting “tech” on their resume and then retreating to more affordable markets, particularly when kids come into the picture. Previously, those places included the usual suspects (Sacramento, Portland, Austin, SLC) but any geo arbitrage value in those markets has been soaked up over the past 10 years so some of those kids are “going home.” whether that be Florida or Indiana or…
Re the greater Midwest, Minneapolis has a strong economy and good quality of life despite the intense cold. Indianapolis, Grand Rapids, Columbus and Pittsburgh also stood out in my spreadsheet as places with jobs, affordable housing and a good quality of life (lower crime, decent schools, cultural amenities, etc).
The problem with all these places from an investment standpoint (ironically) is that are very stable. Rents tend to rise slowly and there’s a lot of supply because the Rust Belt has been depopulated. Pittsburgh, for example, is half of its peak population in 1960! Therefore, it only makes sense to me as a long term buy and hold, particularly for undervalued historic and walkable neighborhoods close to amenities that may see more upside, kind of how dilapidated Victorians in San Francisco were relatively cheap in the 80s and 90s.
Sam, maybe I am missing something here – but your points – 2,3,4,7,8,9 all indicate that prices are going UP. How is this a golden opportunity to buy?
Sure, because the prices have been going down since 2017, hence the opportunity.
Ah. Thanks! That may be the case for national prices in general. Here in the Bay area I don’t feel price soften until later 2018. My neighbor who own a small 1200 square feet house in Fremont sold at the peak at more than a million mid 2018. The price does feel softer late 2018 – early 2019. However with record low interest rate and good economy I am afraid price is going to rebound.
Our little family is looking in to a bigger house, but I am afraid price wouldn’t come down much, if at all.
Here’s where you are wrong. Prices are not softening nationwide. The Phoenix metro area is still red hot. Multiple offers within days of listing. Flipping rampant.
You’re a real piece of work. Property “ownership” is a farce. Using it as an investment vehicle to generate passive income while charging absurd prices to renters is ethically gray and morally bankrupt. You are creating nothing of value to any real economic system and you are hoarding money from those who are creating real value through their labor.
Even though I have not taken any risks, I deserve to have affordable or free rent. It is my right as an American and I cannot believe people like you make investments for income when I have expenses to pay!
Spot on! I totally agree. These people are utterly oblivious to the daily plight of ordinary workers and renters who are barely hanging on. It’s a cringe of a read!
I assume this post is sarcasm. If so – it is great. You have spoken the mantra of the Progressive Left. (Gimme gimme gimme)
I am Progressive Left. (Yes, that post was sarcasm).
I believe in paying my taxes, absolutely. People who go to the extremes to lower their tax bills are unpatriotic.
I do not believe in gimme gimme gimme. I do believe that society functions better when governments can give a hand up.
Gov’t CANNOT offer a hand up. All gov’t can do is move $ from one group it dislikes (taxpayer) to another group that votes it in.
You would think living in CA you see that first hand every freakin day of your life.
It’s unbelievable how naive some people are.
And we have a winner! You are 100% spot on. Big government ONLY leads to big oppression. It would be nice if big govt lead to only hands up. Nope nope nope. It leads to hand outs for favored groups. And that money has to come from somewhere. Mainly the pockets of the productive. The problem with big powerful government is that it is run by people. Those people bring all their bias, prejudice, and pettiness with them to work. BTW where on earth did anyone get the idea that shelter was a right? A privilege of living in a generous nation maybe. How quickly thank you becomes you owe me.
New blog idea: Social Justice Samurai. Since it would be hypocritical for any blogger to personally profit from greedy corporate advertisers on this site, you may direct all proceeds to my personal non-profit.
Looking to buy something with my wife and brother, 3 incomes will bring our housing costs down below 10% of each of our monthly!
The power being turned off is helping prices go down! A home we looked at was in escrow and the buyer backed out when the power was turned off.
Luckily for me, I love California with every bone in my body and am not phased by this minor inconvenience.
I am a contractor in the gold country and I have noticed recently that every home we work on is owned by someone with money from the Bay Area. I feel this area will be a great investment for the future.
This blog has helped me so much. Thank you for writing. Cheers!
The millennial stat is surprising. Here in the DMV I just see more apartments being built which indicates more rental demand. If I could go back in time in my 20s, I’d rent for dirt cheap longer and save and invest more.
REITs all the way baby!
BUY BUY BUY!
We’re in a recession really but it hasn’t been announced yet, or some kind of dip. It won’t last forever. I just bought a house that would have cost a lot more in 2016 and even if it goes down a little further, so what. Better to buy now than when they start rising again within 2 years I think. Then there will be the crash around 2025, but I doubt it will wipe away the growth from buying NOW.
Great article, one of your best Mr Samurai
Interesting take on how you see millennials becoming home buyers now.
I have read in the past that this generation has been the one bucking the trend to buying homes and prefer renting. They grew up with the housing crash came online and have that fresh in their mind. Also it seems that this generation prefers mobility and freedom which favors renting.
Who knows. Maybe the nesting instinct does take over as you suggested.
Among my family and friends who are all millenials, almost everyone has bought a house or condo and almost everyone has had their first child by now. You cannot fight the bio clock and once that SO starts nearing mid 30s, you start making moves.
Great timely post.
I am closing, in the next 18 days, on a 1.39 M property in San Ramon, CA. I was able to bargain the price down 3% while comparing 2019 average prices (similar floor-plan and area) and about 5-7% from the 2018 reference point. Similar properties in the area, I see, are listed around 1.45 to 1.5 M.
To negate for the potential downturn, and to down-pay 20%, I withdrew my Roth contributions made over the last decade to lock in some 40% growth in the portfolio.
While I am hoping that prices don’t adjust further, I am sure with a long-term horizon it will not hurt much if it does. Having said that, I have witnessed that the days-on-market for any given property has been on the rise and I have also seen price-cuts on pretty much every other property on the sale.
Do you mind commenting on withdrawing retirement funds to make a down-payment considering we are all sitting on a decade of gains?
As someone who stopped working late 50s and manages my retirement stock funds with advisors handling the “income investment” side, I would say that I sure hope that is not all your retirement savings and also I hope you are in your 20s. And I hope you asked your financial advisor to extrapolate for your future needs, comparing historic market date versus real estate projections, and I hope you can stay employed with matching funds (I had old school matching at my employer and that really adds up). What I learned is that maxing out 401k contributions is NOT enough to fund retirement, and if I had it to do over again I would have saved and invested even more. Plus I bought real estate along the way, but only when I had the down payment in cash and secure
job prospects. Priorities!
Maybe you should work a little overtime or pick up a side gig so you do not have to cry as much.
People who provide housing for
other people who do not want or own or know how to purchase are providing a valuable service.
I own 6 rental houses that I have acquired over the last 35 years of working. They are all paid off. Did I forget to mention that I am a Carpenter who went to work the day after I graduated from high school and saved to purchase each one of the homes.
I did not spend my money on travelling to Europe, purchasing $5. coffee or dining out 5 to 6 nites a week.
Si, if you want your piece of the pie, go get it and stop blaming other people for your short Cummings.
Good Luck. Mike
Im impressed !! What area do you live in ?? You inspire me
these trolls are hilarious
For San Francisco specific, my instinct is that there are a lot of extremely leveraged buyers who are depending on the performance of their tech equity to keep up with their payments and monthly spends. I see a big risk of a rotation between growth and value stocks next year especially as we go into an election year and investors prefer more stability. This will hurt tech stocks and therefore hurt prices in the Bay Area too.
From an investment point of view there are other uncorrelated assets you can go into vs real estate which which I prefer and there factoring in opportunity cost I prefer to wait for that 15 percent decrease in SF house prices which has always come in the past and will come in future. These assets are things like music royalties, litigation finance funds, reinsurance catastrophe funds, managed futures mutual funds etc.
I would love to see Sam write a post on non-correlated investments. I know of a private equity fund that lends against collateralized fine art that is interesting.
Without foreign buyers, do you think new demand is drying up from young buyers unable to purchase because they’re overwhelmed with student loan debt?
May partly depend on where you live but based on observation of the market and stagnant incomes how could it be a good time? Not to mention throwing in all time high student loan debt and car loan debt. Housing prices are quite high and in many neighborhoods have approached the previous bubble levels. I think this is the time to lower overhead and build savings IMHO. I live in a near “average” COLA and decent homes in a neighborhood with good schools are 4-600k. That is too much for people with median incomes, especially if you insist on paying for college and retiring a bit early. I really do feel bad for the average person sometimes. Glad your blog is around to help us strive to meet our full potential.
Interesting comment about “feeling bad” for the average person. I urge you to look at this a bit differently. One can also say we live in unbelievably good times where the options available to the “average person” are more than ever in human history, especially in USA.
You say houses cost more that the average salary. I say poppycock. Expectations of average person in terms of what should be in said house are much more than in past. Dial back expectations or move to LCOL area. If someone really wants a house, they can make it happen.
You say sky high student debt is a problem. I say poppycock. There are ways to achieve an education without taking on all that debt but the minions do not allow themselves to think of those ways – Go into military for a few years and get GI benefits; start freshman classes at local community college, DON”T go to school and instead concentrate on a trade – that degree in Ancient Lesbian Basket Weaving Techniques ain’t gonna do one much good anyway.
Point is – we have to stop looking at glass half empty and start looking at all the options available to us and then ACT on them If not, we fall for the tripe from fake SJW’s like Bernie, Elisabeth Warren or AOC.
Let rich keep getting rich with all the resources they already have. Average people should focusing on adjusting expectations.
While I agree what you said is the right thing what average people should(and can only) do, but in grand schema of things, it is sad for the society.
All the opportunities you talk about require three things, capital + education + relationship. And all three of them are getting harder and harder for average people to obtain.
The most important thing needed is always HARD WORK!!!
Perspective is important. Based on reviewing the comments, most people on this blog are doing well. I dare say though a flippant poppycock, leave town and go somewhere else is shortsighted.
I do hope the four firefighters renting a flat in San Francisco (because the American Dream of home ownership is unaffordable) don’t take to heart your poppycock perspective when you need them. And feel free to substitute firefighters with teachers, nurses etc.,.
please stop saying poppycock. also you misspelled Liz’s name.
Sam, if you’re looking to buy a bigger home for your family, go for it if it makes sense. But if you’re doing it for investment purposes, don’t.
Why would you invest in physical real estate when you have a vastly superior alternative in real estate crowdfunding? Once me and my friend liquidate our business, i plan to use my share of the proceeds to invest in Fundrise. And that’s mainly because of your discussions on the topic. Why put all my assets into a single concentrated–and likely leveraged–bet that I have to manage and can be wiped out in one wildfire or hurricane? Wouldn’t it be better to have a diverse set of professionally managed commercial properties where you have no responsibilities or obligations? You’re going to manage more tenants when you’re trying to spend as much time with your child as possible? I don’t think that’s a good idea.
Unpopular opinion alert: I think real estate crowdfunding has made owning physical real estate (other than your primary home and your business, of applicable) to be obsolete. I can’t think of a single advantage owning a rental property can have over investing in real estate crowdfunding.
Sincerely,
ARB–Angry Retail Banker
>>I think real estate crowdfunding has made owning physical real estate (other than your primary home and your business, of applicable) to be obsolete.
How about tax benefits through depreciation? Does fundrise provide same level of tax benefits?
It depends on how it is set up, but, yes, you can get both depreciation and leverage using crowdfunding platforms.
I think the main benefit to owning your own RE is that you control your own destiny. You decide how/what to improve, what to rent it for and when/how to sell it. Normally, you can also get better returns owning RE directly, but not really as much now.
> I can’t think of a single advantage owning a rental property can have over investing in real estate crowdfunding.
Uhm, leverage?
I wrote a whole response to this, and then the train went into a tunnel and took my comment away :(
I think I’ll turn my response into a blog post about rental properties vs crowdfunding. I can probably write a better quality blog post than a comment typed on my phone while riding the subway.
Still, I hate it when this happens.
Would enjoy that post, can you provide a link when it’s done.
Will do, good sir.
Curious Newbie,
As you requested: http://www.angryretailbanker.com/2019/11/13/real-estate-crowdfunding-is-physical-real-estate-investing-obsolete/
Look forward to the post! Thanks!
The biggest problem with RE crowdfunding is the management company. Some companies don’t screen the projects well enough. They let some shady projects go through and investors pay the price. Some shady developers inflate their numbers. It’s hard for individual investors to do due diligent on these projects. I don’t know how to value these big hotels/apartment buildings and price the local market. I still like RE crowdfunding, but I’ll limit it to 10% of my portfolio.
On equity deals, they’ll send K1 so you get to write off part of the depreciation.
Leverage – yes, that’s the big advantage of owning a rental property. Assuming the value increase, of course.
Also, option to defer tax through 1031 exchange. RE crowdfunding can’t provide that.
Cant disagree with your points. However, where I’m located in a outer ring suburb, in the midwest, I’ve seen prices continue to rise, but at a slower pace, in the last 6 months. My observations are simply based on searching online houses, no realtor data, at median local prices. I’d say the high end prices, which to me in my area are $650k+, havent seen any appreciation over inflation in the past 3-6years.
From my understanding it usually take 1-2 years for housing trends to make it to the midwest, from the coasts. My gut feeling is next summer we’ll see the slow down here…no rocket science from me. Personally, I’d love to gobble up some more low priced single family rentals, in small midwest college towns.
Cheers
At the end of the day this post really revolves around leverage, cost of capital, perceived opportunity cost and inflation. Cost of capital is a no brainer given rates. Leverage has not really changed that much over time (the distortion around risk adjusted returns and no one talking about it….but that is a different conversation). Perceived opportunity costs is a little harder given everyone has been calling for a market top since 2016…..and inflation (ie borrowing fixed today to pay real tomorrow) seems to be dormant. I Think the hardest part about this post is to talk about buying long and renting short….ie you taking on a long term mortgage at great rates and renting out at short term rates. There are lots of examples of buying long and renting short that have not worked well but we all know them……
I’m 62 and plan to work until I’m 70. I’ve been looking at crowdfunding for real estate investments but have heard that exiting from such investments may not always be easy. Often times there are no buyers for the shares you are selling. I guess if it is long term it is not an issue but intermediate it could be. What day you sir?
I saw this post and just felt compelled to respond. I completely disagree with you for several reasons (and I could be completely wrong), but here is my thinking.
I’ve been a value-add real estate investor for more than 15 years. Over the past few years I have been a seller almost exclusively and have sold most of my real estate investments. My reasoning is a combination of what I would describe as anecdotal, other experts and gut feel.
Anecdotal:
In my niche, the number of buyers/investors has probably doubled or more over the past few years. That in turn has driven down cap rates to crazy valuations on assets. In fact, in many cases the value add has all been priced out of the deal. Increasing demand and limited supply drives prices up as we all know. I’m a seller in this market not a buyer. Based on my first-hand experience, I have never seen prices higher over my 15+ years.
Cash on cash returns can be driven up by using a lot of leverage (i.e. debt). The debt availability and leverage keeps getting easier. When you can drive up the loan to value, you can then pay a higher price to achieve the same returns. I believe this excessive leverage is compounding the price increases.
Other Experts:
I believe all asset values are being driven up right now (small business acquisitions, stocks, real estate, etc.). Warren Buffet would say low interest rates drive the value of other assets up. The reasoning is that if your risk free return on treasuries is very low, the price you are willing to pay for other investments increases. In other words, investors are willing to take a lower return on real estate for example, because the return they can get on a risk free investment is so low in comparison. Therefore they will pay a higher price for the asset. Historically, this has proven to be the case.
Gut Feel:
When I look at where prices have gone, generally, over the past 10 years on real estate I feel like we must be somewhere near the top of the market. Rents at least in my area (Denver metro) have increased a crazy amount based on historicals (with the exception of the last year or so). I don’t think ongoing increases in asset prices or rent based on the past decade (ish) are sustainable moving forward, generally.
My caveat would be that all real estate is local. I think specific, opportunistic or niche investments can be successful still, so my thinking is more general in nature.
Your post seems more specific to you buying a primary residence. I don’t pretend to be able to predict the market and where it is going. Real estate prices might be even higher next year!
But I do think that the probability that prices fall over the next few years seems more likely to me than that they rise. I like to find investments where I am highly confident it is more likely to be a “sure thing”. So you should know my bias is equally in managing downside risk with upside opportunity. I don’t think of my real estate investment temperament as speculative in nature.
My 2 cents…
You’re defiantly more of an expert than I am, however your reply made me think of this Financial Times article from a few months back (link is to a public copy). Good read overall, below is what the author said specific to real estate.
https://news-flash.info/profoundly-low-interest-rates-are-here-to-stay/
”Seventh, demand for housing will rise. It is, after all, the main capital asset that most people use. There are two potential outcomes. Where it is possible to build, permanently lower interest rates will trigger an increase in the housing stock. If it is not possible to build, then houses will behave like assets in fixed supply, and soar in price.“
I just bought a vacant duplex in Oakland as a primary residence. I definitely felt that the market was in correction mode especially given that it’s been flat to negative in Oakland. I borrowed for First Republic bank at 3.15% interest for a 30yr and FR paid $6500 in closing costs. I’m pretty happy with the result. I’m expecting prices to stay flat and then go up again given that my area hasn’t seen as much appreciation as Rockridge, Bushrod like Oakland neighborhoods.
Given the current rents in the area I’m predicting a 6.7% cap rate if I rent out at market. That is high as SF is seeing closer to 3%. I’m hoping for appreciation but if that doesn’t come I’m okay with raising rents.
I really hope you are right since I am looking in the Spring.
I’m just worried about a major market correction but I know you cant time these things.
How come you never wanted to be a real estate agent? Seems like you would be great, flexible hours…
Would be interest to see the buying rate for millennials in Hawaii!
Timely post, I was having similar thoughts. I don’t know if it’s a golden opportunity, but for me, it’s good enough to keep buying, which seems to be a contrarian view. In my local HCOL area prices are at all time highs and for that reason many buyers are concerned about a correction, but rents have been skyrocketing even faster than price growth!
I agreed real estate is a good investment, but why the change from crowd funding back to landlording? Tenants are kinder and gentler now?
Also, you talking SFD, multi or commercial?
I cannot fault your terrific post except in one important area. I believe income producing real estate should be the top choice in placing funds but not because the stock market is hitting all time highs. I believe the direction of the market is 50/50 guess but after a ten plus year run it could be vulnerable to a large correction. Just go back in the last 100 year history. Real estate gives the investor at least 3 important things. Cash flow, built in tax advantages that cannot be had in the stock market and last but not least is the efficient use of capital (leverage) which people love when they are buying their home but are told to shy away from when buying an income producing property. They are told this by advisors who invest in real estate but are not allowed to suggest that their clients do the same. One other item is that because of cash flow you are not dependent on the vagaries of appreciation to benefit. Sorry to rant. Just my 2 cents
I will say this, Grand Rapids, Michigan is without a question the greatest city in the state. There is a long list of reasons to support this. It is where many people living in other areas of the state want to end up, truly a gem. Western Michigan is beautiful as well, definitely worth a trip! I have been watching real estate there for quite awhile now and feel as though that I largely missed the boat, mostly due to being priced out of a lot of the opportunity. I will be keeping my eye out for the right opportunity to jump in there however, seems there is lots of growth to the area yet to come.
As far as buying real estate now goes, you make many great points and based off those I believe your conclusion is most likely correct. I think my main reason to stay bearish has more to do with my lack of confidence in the longevity of my main income source, my current employment, that has me skittish.
I don’t have any great quantitative analysis to “blow your argument to smithereens” so I will just offer a quick anecdotal thought.
I’d probably think about selling some equities at these near highs for your projected down payment on this future property, park it for safety, and then wait for the recession to hit and pick up one, of what should be many, low-priced bargains that come on the market. The only other caveat would be if rates start to move appreciably higher, that may encourage you to want to move faster.
Gotcha. Just got to consider the tax consequences.
I highly doubt rates will move significantly higher. But if they do, it means the economy is going gangbusters, which is overall a positive for housing.
Great article, very insightful and concur on nearly all points. I guess RE is ultimately all relative and location driven.
I’m located in the NYC area and am actively looking to buy a primary residence in either Greenwhich CT or the WestChester area. Prices have gotten annihilated, nearly all homeowners (Greenwich specifically and parts of WC) are down over the last 10-15 years. Obviously the rate of decline is not sustainable; but I think the demographics for the northeast have been abysmal pre SALT cap and will only get worse moving forward…I know many would say, top NYC burbs areas with access to quality public education options should be fine, but tell that to the folks who have gotten burned in the last decade. Nearly all of the open houses (in Gren.) price are below what the current owner within last 15 years paid and many have done significant work on them. I have gotten my RE exposure through private deals away from the coasts.
I would be very curious if anyone has any thoughts/perspective on these markets. Thanks!
Wow.. annihilated over the past 10-15 years? I thought the NYC area has been only weak since around 2015 or so?
If what you say is true, that is shocking that nearly all Gren. owners are down from 15 years ago with significant remodeling. Check out this Zillow Home Value chart of Greenwhich, CT. Doesn’t seem that bad.
Are you looking at super luxury $5M+?
The problem I have with waiting too long is that life eventually passes you by and ends. Ideally, I want the combo of profiting from RE and living in a nicer place. But if I can’t profit, at least I want to live in a nicer home.
What is your rental situation like?
I appreciate the quick response and definitely agree with the lifestyle dynamic being part of the decision making process… I am in a growing family, and right now only spend about 3600 a month for rent so I have been kicking the can down the road on ultimately buying. We would likely spend around 1.5Mish so our monthly payment will go up considerably, but our family Will have a forever home … at our price range, there has been softness… The higher end in particular has really gotten crushed, but it seems the further away you are from town, the more property and the more isolated the bigger the discount. You pay a premium for less space, less privacy, but more of a neighborhood feel close to the downtown..
My bigger issue is with the demographic story of the Northeast, it will not get any better and tax policy will not get any better as higher AGI folks continue to leave this area… my bigger issue is with the demographics story of the Northeast, it will not get any better and text policy will not get any better as higher Asian iPhones continue to leave this area. However, I have to live somewhere and the emphasis should be on quality of life even if it is not the best use of capital. That is very hard for me given I have grined so hard for 10+ years to save and responsibly invest.
The market has cooled, but the price is still very high compare to median household income. The millennial new families may want to have a place call home, but unless median income grow significantly, the median 2 income family with $126k gross income can only borrow so much. Assuming $400k is the max loan amount with 20% down. I’m not seeing how home prices will take off anytime soon.
Maybe in SF the story is different with tech companies – but I don’t see how the my local Boston hosing market will keep going up. There’s also a shift in preference to luxury condos with the desirable amenities instead of single house. Developers are building so many luxury condos these days – I am not concern at all that there will be plenty of housing stock to choose from for years to come.
Real estate is still market specific, where I currently live prices didn’t dramatically jump until 2015-2016 and there are few signs of slowing right now. While the median price is down, the total housing price index is still up. I’d like to buy, but still think it’s early. The total number of real estate agents is still climbing as of September 2019.
It would help if you shared where you currently live.
I live in Northern Virginia and prices are cooling, but still strong due to Amazon’s expansion.
It feels nice that we’re in a normal market now, and don’t have to compete with wealthy foreigners.
I’m in Charleston, SC. Northeastern retirees moving spiked the market three years ago, now a lot of new home inventory has come on line and prices aren’t jumping, but I don’t see people cutting prices to sell.
I also looked in Northern Virginia when I moved for retirement, was shocked at the prices in Alexandria/Del Ray
Unless I missed it, did you state the goal of this possible real estate purchase? Seems like that should be a big part of your decision. What are you looking for? Profit, diversification, the “fun” of being a landlord?
Once you know why you want to do this, I then think real estate needs to be weighed against whatever alternatives also answer same desire.
I just recently went through this analysis. Because of an acquaintance, I had opportunity to purchase a beautiful, but dated property in Columbia River Gorge (awesome views) on the Oregon side. IT was offered to me before any listing. With time, sweat equity and probably 30-50K, I could have likely turned made 220-250K (200%) in 3-5 years with not that much risk.
I ultimately passed because I just decided I did not want the hassle/work. ROI was likely great but ultimately it was not what I WANTED to do. Money is important but so is QOL.
Great point you’ve brought up: the why.
I’m writing a top down overview of real estate investing with the main assumption that people want to buy real estate to make money and improve their quality of life. These two reasons are always going to be the case when I write about real estate.
Real estate improved my quality of life by getting out of a rat hole in 2003. Real estate has also improved my net worth.
But now, I put a premium on passive income, which is why I have relatively large positions in real estate crowdfunding ($810,000) and REITs ($500,000+).
But if my family grows… I will need/want a bigger house with one more bedroom and one more bathroom. Trying to anticipate the future, always.
Same here. I want to spend my with my kids more. So passive income is top priority. I have $300k in cash. Should I put in dividend paying stock or should I put in rental?
Thanks
Same here . I am new to this field. I’d like to learn more. Look forward to all your advice. Tks!
Timely post for someome whonks looking to buy investment property within next 6 months!!
Wow such a thorough and thought provoking post! I agree that winter tends to be a great time to buy property. I love doing things off peak in general and have definitely seen good buying opportunities during the slower winter months.
Very insightful info on the decrease in foreign buyers. Foreign interest, competition, and ramped up bids were insane in SF for years but I haven’t had that sense for a while now. Things have quieted down.