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 as mortgage rates plummet and money rotates out of the stock market and into the real estate market for more safety and less volatility.
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 in 2020.
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 2Q2020.
3) The stock market went to all-time highs in 2019. The S&P 500 closed 2019 up an incredible 31%. A lot of money was gained in 2019, which means a lot of people have equity to buy real estate.
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 personally sold $1 million worth of stock in the second half of 2019 to buy a new primary residence with cash. It felt like I was getting the house for at least $300,000 off!
I’m now personally looking to diversify into “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.
With the coronavirus pandemic, there is shelter-in-place for millions. However, thanks to stimulus checks, generous unemployment benefits by state, and the Paychecks Protection Program, I’m’ confident that many Americans will survive this temporary lockdown and keep paying rent or eventually pay their rent to prevent having their credit ruined. In some states, you can earn $5,000+ a month in unemployment benefits.
So far, all my tenants have paid on time in 2020 as all still have their jobs and are working from home.
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) 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.
9) 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.
10) The current recession won’t be as long. 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.
The self-inflicted recession of 2020 to combat the coronavirus means that the recovery should be much quicker since we have the power to open up the economy. This recession is very different from the last one, which took years to unwind over-leverage in the system.
11) 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, mortgage rates down, and stocks weak, money is flowing into the real estate market if you pay close attention to the latest sales data. I want to find the real estate seller who was the Dow Jones seller at under 20,000 and the S&P 500 seller at 2,250.
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
ha ha– this guy was so dead wrong. SF real estate will collapse to nothing –Even more will be defecating on the streets!
I’m sorry if you are losing money in the stock market or whatever. It’s a tough time and I know things can be very nerve-racking. Just know that not everybody can afford to live in San Francisco. So don’t feel bad.
But here are some real time examples of some awesome price performance and sales during the middle of the pandemic.
https://www.financialsamurai.com/real-estate-outperformance-examples-during-a-coronavirus-pandemic/
I do feel fortunate to do well in a pandemic and won’t take it for granted.
GL!
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.