Making a small fortune is really fun. You can do so more easily if you can correctly predict a trend. Not only will you earn a much higher return on your investment, you’ll also suffer less anxiety and grief.
In 1997, I studied abroad in China for six months and realized its economy was on the verge of explosive growth. So I minored in Mandarin and joined the Asian Equities department at a major investment bank to ride the opening up of the region. I was probably the dumbest donkey in the industry, but being Asian, knowing how to speak Mandarin, and having the good sense to hustle for 13 years was good enough for me to retire at the age of 34.
By 2001, after the dotcom bubble burst, it was clear the public’s love affair with the stock market was over. So I shifted the majority of my wealth from stocks to real estate and witnessed SF property prices soar while stocks languished for a decade. Of course, I screwed myself in 2007 by buying a vacation property in Lake Tahoe right before the housing collapse, but the exposure wasn’t large enough to cause me mortal damage.
During the financial crisis, I realized it was now or never to start a website to at least try and take advantage of web 2.0. I had no plan. All I knew was my happy days were numbered due to a structural decline in the banking industry. Increased regulation and narrowing spreads made work less fun. Eight years later, Financial Samurai is now an established brand in the personal finance space that’s generating a healthy income.
So what’s the next trend already? In my opinion, the next money making trend is investing in the heartland of America through real estate crowdfunding. To escape high prices in the coastal cities, people — often younger and with lower- or middle-class incomes — are looking toward the Inland Empire and nearby states for additional square footage and a lower mortgage payment. With technology enabling geo-arbitrage, the opportunity is ripe for investment!
Investing In The Heartland Of America
Do you know who is guaranteed to lose their job in 2017? Hopefully none of you loyal Financial Samurai readers who don’t let your personal political views cloud your financial goals.
The people who need to find new jobs this year are the approximate 7,000 staffers appointed to U.S. government positions by President Obama’s team. For example, Obama-appointed James Comey, Director of the FBI got fired by Donald Trump on May 9, 2017 so he can install his own man. That’s just the way it is as President Trump takes reign for the next four years and chooses his own people.
Power is ephemeral, which is why in order to promote government harmony, the Hatch Act of 1939 restricts the political activities of Federal employees. Basically, the Act says: Don’t bring your politics to the office.
While the private sector operates without a similar Hatch Act restriction, common sense says it’s still better not to go crazy if your boss has a different political point of view.
The uncertainty of power is why large corporations donate to both political parties every year. They are hedging their bets. Money curries favor from politicians who need money to win and stay in power. Even if you donated $1,000,000 to Hillary, you’re not screwed if you also donated $1,000,000 to Ivanka’s charity of choice; Donald should still be willing to take your phone call.
Who Else Wins Or Loses?
Now that we know from a personnel level who the winners and losers are of a Trump victory, let’s take a look at the election results from a macro level.
The below chart is the final electoral college tally. As you can see from the map, the losers are California, Oregon, Washington, Nevada, Colorado, New Mexico, Minnesota, Illinois, New Hampshire, Vermont, New York, Maine, Massachusetts, Rhode Island, Connecticut, New Jersey, Delaware, Maryland, Washington D.C. and Hawaii.
The winners are obviously those states in red.
Blue states are losers for the next 4 years at least
Now let’s drill down to the election results by county. Not every county in every losing state voted for Hillary. For example, just eyeball California on the map below and you will see the state is pretty divided. But given we have a winner take all system, Hillary was able to gain all 55 of California’s electoral votes.
The real shock from the county-level results is how much of a landslide it was for Trump. If you were just listening to the mass media, you would have been lead to believe the outcome was much more balanced. But as we know, the mass media and firms like Facebook and Twitter lean left. Therefore, you’ve got to constantly be aware of potential bias and think for yourself.
You might now be wondering, how can there be such a county-level landslide victory for Trump when Hillary won the popular vote by close to 2.9 million? The answer simply lies in demographics.
About half of the U.S. population lives in the blue areas seen below, and the other half of the population lives in the gray areas. Folks in the blue areas underestimated the desire of folks living in the gray areas to want something other than a career politician. With globalization, a lot of people living in the gray areas have not been able to take advantage of the economic boom.
Half the country lives in the blue areas, the other half of the country lives in the grey areas
Facing Reality
Now that we know the basics of what’s going on, it’s important to face the reality that you are a loser if you live in one of the losing counties or states in America.
I’ve lived in San Francisco for 16 years, have property in Hawaii, and want to return to Hawaii permanently within the next 5 years to live the dream life.
Therefore, under the Trump presidency, I am a DOUBLE LOSER, whether I supported him or not. But since I believe the government is inefficient and filled with corrupt politicians from both parties who practice crony capitalism, I’m all about facing reality and finding solutions to building greater wealth so I never have to depend on the government.
San Francisco is a “sanctuary city,” i.e. a city that has adopted a policy of protecting undocumented immigrants by not prosecuting them solely for violating the federal immigration laws of the country they are now living in illegally. Obviously, this is a hot topic since struggling U.S. citizens are understandably upset with illegal immigrants who occupy jobs or coveted spots at great universities. On the other hand, except for felons, how can we be so cruel and deport people who came to America as children and have the potential to become great contributing citizens?
San Francisco receives about $1 billion annually from the federal government. If I was an illegal immigrant, of course I’d choose a sanctuary city to set up roots. As there are 41 sanctuary cities in America today, you yourself may be living in a losing sanctuary city.
If President Trump takes some or all of that $1 billion funding away, all San Francisco residents will lose because we’ll all be forced to pay higher taxes to help fund our inefficient city government and its underfunded pension system. Higher taxes will result in less consumer spending, less corporate spending, less hiring and a slowdown in growth. A loss of sanctuary status also means potentially less supply of labor for lower paying jobs.
A list of sanctuary cities in America which may lose funding under a Trump Presidency
One solution for those who live in one of the 41 sanctuary cities is to just relocate to one of the winning counties/states. It’s clear that Donald will try to take care of the states that backed his campaign. He’s been incredibly vocal about punishing American companies that set up factories abroad and sell those products in America. But given I’ve got friends and property in San Francisco, uprooting my life is not that easy.
Hence, the obvious solution is to accept my situation and instead move CAPITAL towards America’s most favorable cities and states instead.
The Easiest Way To Move Capital To Winning Cities, Counties And States
An easy way to invest in a Trump Presidency is to look at the sectors that should benefit from his victory. These winning sectors include biotech, banks, energy, infrastructure and defense. The idea is that less regulation and more government spending should be a boon for these five industries. We’ve seen these sectors perform quite well since the election victory. They could potentially continue to outperform if earnings surprise on the upside.
The other way to invest in Donald’s America is to fly around the country and invest in commercial or residential properties. The problem with this method is that it’s not only inefficient, it requires a lot of capital and a ton of follow-on maintenance once a property is purchased.
Donald Trump’s America by Tim Wallace at The NYT
Instead of flying all around the country investing in locations where I have zero expertise, the simple solution is to leverage real estate crowdsourcing platforms like RealtyShares to search for investments in Trump’s America instead. They enable investors looking to diversify into real estate to invest as little as $5,000 – $10,000 into various pre-vetted deals around the country.
Here’s a snapshot of some exited deals on RealtyShares. All deals had successful returns, and all deals except for the New Jersey deal qualify as an investment in Trump’s America.
Investing in the heartland of America made easy
There are plenty more deals in the pipeline each month that usually have only $5,000 minimum investment requirements. That’s much more affordable than having to fly to Newnan, Georgia to poke at some sheetrock before making a much larger cash investment.
Every project is different, so spend time reading the research each sponsor puts together on the platform before making a decision.
For those of you who want to just have a fund manager invest in the heartland for you, Fundrise created a Heartland eREIT that specifically focuses on the middle regions of America.
Take Advantage Of The Trend
Blue state real estate prices exploded over the past eight years with Obama in office. With his term now over, the good times must wait until the next wave of mega IPOs and hungry foreign investors enrich tens of thousands of lucky blue denizens again.
Top 5 fastest growing real estate markets due to income growth. Source: Forbes and Local Monitor
Good investors always think about secular changes, regardless of where they stand on the political spectrum. Thus, I believe Red state real estate should outperform over the next 4+ years because:
- A Republican president will give back to the people who got him there through the theme, “Hire American, Buy American.”
- There will be a net migration out of Blue states into Red states as more people realize it’s a great deal living in Texas if you can get 3X as much for 1/3rd the price.
- As our country gets older, more retirees will move out of Blue states to stretch their retirement dollar.
- The remote work trend will continue due to technology and a tight labor market.
- Sanctuary cities are at risk of seeing their federal funding pulled and reallocated to Red cities.
- Income growth should be higher in Red states due to demographic shifts.
- Trump’s tax plan calls for an elimination of State and property tax deductions, hitting California, New York and New Jersey the hardest, while benefitting cheaper states with no state income taxes to deduct e.g. Texas.
- Now that investing in real estate is more efficient, Red State 10%+ cap rates compared to <4% cap rates in Blue cities are too hard to ignore. The spread should narrow.
- A potential expansion of who can invest in real estate crowdsourcing will lead to an increase in demand and prices.
- The rise of real estate crowdsourcing platforms increases the supply of capital, thereby increasing the demand and prices of previously hard to tap investments.
I’ve currently allocated $250,000 with RealtyShares in order to diversify my real estate exposure to less expensive parts of the country. The goal is to seek a 8% – 15% annual return. If all goes well into 2018, I plan to increase my allocation to $500,000 with exposure to roughly 20 different properties in order to generate $40,000 – $75,000 a year in returns.
Interesting perspective, Sam. One of my goals for 2017 is to expand my investment in real estate crowdsourcing. Although not quite as aggressive as you. I keep hearing that restrictions allowing only accredited investors to invest will be relaxed, but I haven’t found anything on when this might actually be implemented. Have you heard anything on when regular Joe’s will be able to invest more in investments like real estate crowdsourcing? There are a few platforms set up slightly different that are able to allow it, but it would be nice to see more options with the accredited investor status relaxed.
Sam, I’d second any recommendations you have with this issue. I’m 30, single with no debt and bought my first property a year ago with another one on the way in the next year. I was looking into Realty Shares but the restrictions are too high for me at this point. You need at least $1m net worth not including primary residence and/or annual income of $200k. I’m close on income, but not net worth. Are there any good investment opportunities with real estate crowdsourcing that you are aware of? I’m interested in P2P lending as well, but I would prefer to go the real estate crowdsourcing.
I’ve turned cold on P2P lending for several reasons:
1) I can’t stand it when people welch on their debt
2) When they welch, they disappear forever. At least w/ real estate, there is an asset that can be worked out to recover some principal
3) The pool of loans for P2P seem to have shrunk after the Lending Club issue in 2016
4) My average annual return for the past 4 years has been ~7.2%. Not bad, but not that exciting.
I’m aware of Fundrise’s eREIT. Check it out and let me know what you think.
Fundrise’s eReit (or the one I chose) is fantastic. I’m at a 12% return for the year, I’d highly recommend.
but do places that accept non accredited investors like fundrise have less liquidity for longer periods of time? Seems like the screen shots Sam gave above return have shorter maturity.
I got into Fundrise’s growth eReit with a small investment to test the waters at the end of last year. Right now, only the income eReits are open to invest in, which aren’t as attractive to me as I’d rather be in growth over income at this point. Hoping they open up another growth investment in the near future!
Sam – thanks for suggesting. I gave Fundrise a try and they just accepted by initial investment. They have a heartland fund so I threw some money at that. Will keep you posted on progress.
I’m reading Fundrise’s heartland eREIT offering document and landing page and it looks like a great fit. I’ll write a review in the near future.
Hey Financial Samurai! This is my first comment here, so looking forward to getting through some of your previous articles soon. I just made a small experimental investment in Fundrise. I think it has tons of potential, but also a lot of downsides. After reading the circular, some of the bigger problems that stood out to me were the massive organizational fees, lack of transparency, and potential for share dilution.
(I wrote a review on my blog, and I’m also writing another post to track the performance of my experimental investment. I’m not here to promote my blog, but I can post a link if you’re interested in reading further.)
Take care!
Hi Sam,
I got my first quarterly dividend and it looks more like a 4-5 annualized percentage vs. the claimed 8-10 percent. I suppose it is not bad given specialty investment.
Separately, have you seen any Heartland publicly traded REITs?
Thanks,
GWF
You sure about that? It might be because You didn’t start at the very beginning of the quarter. So it is analyzed less for the quarter. Did you have a full 3 months?
Thanks for sharing.
It would be interesting to know who watches and what the punishment is for accidentally declaring you have an accredited investor income? So some corrupt politicians and their bureaucrats says you can’t do this – pretty sure I don’t care what they think. Not sure they have the right to restrict me that way.
No one. It’s all B.S.. It’s an open secret that there’s no enforcement and determined investors find creative ways to prove compliance. The JOBS Act did at least make verification affirmative by the sell side for the online portals instead of mere self-affirmation as before. Some firms are real anal about it, wanting signed signed statements from “licensed financial authorities”, but others can be as lax as relying on a screenshot show the total of all your accounts at Personal Capital, etc.. Use your imagination.
Keep in mind the accredited requirement is a legacy from FDR and the 1930’s to protect you from rapacious Wall Street funds. Different world, different era. Thank goodness the $1 million net worth requirement wasn’t inflation adjusted for 80+ years.
Good question, and one I will definitely explore deeper on Feb 1, 2017 when I host a panel in SF with the founders of several crowdsourcing platforms. You’re welcome to be my guest if you want to sign up here. All you can eat and drink!
Here are some questions I will try to ask:
How does a rising interest-rate environment positively or negatively affect returns for investors in your platform?
What would you recommend to be a proper asset allocation of crowd sourced investments in one’s portfolio? (How should an investor approach a crowd sourced investment versus an investment in their 401(k) or Ira, and an investment in public equities and fixed income and so forth? )
—> What is the latest on who is allowed to invest in your platform? Will the definition of an accredited investor expand to include more people? What are your thoughts on the definition of accredited investor and is it fair? Is it ironic that someone who works at your company is not allowed to invest in their own products or competitor products if they don’t have a certain income or net worth?
Who is the typical Investor on your platform in terms of age, gender, income, network, geographic location, occupation and anything else you might have to share.
How does an investor overcome the risk of investing in your platform, when your platform is not that old to begin with?
What is your competitive advantage to attract the best borrowers and lenders on your platform?
How many of you have started funds that invest in your product offering? How is it going?
What is the right ratio of institutional investor demand and retail investor demand? Which type of capital is more fickle than the other?
What are larger financial institutions doing in the space? We’ve seen all the major investment banks start their own robo advisers. Will they be starting their own crowdsourcing investment platform as well?
Do you believe that there will be more investment opportunities in Donald Trump’s America, instead of the coastal cities now that he is president? –> I’ll send them this article!
It’s my belief that the government will expand the definition of accredited investor. When this happens, there will be a large increase in capital that will flood various crowdsourcing platforms. With more capital, comes a higher demand and an increase in prices until the opportunities are eventually arbitraged away. We’ve got a long ways to go, hence why I’m doing the heavy lifting now.
Always be grinding!
Sam — I regret that I won’t be able to make it, but I’d love to hear what thoughts the panel generates! Might you be able to record the discussion? Do you expect to write a summary article after the event?
I just signed up for the event! Looking forward to it.
Living in Minnesota, there are definitely opportunities as the Minneapolis/St. Paul area has a number of Fortune 500 companies. While yes, last week we had some days it barely got over 0 degrees, that isn’t the norm for winter. Humans are great at adapting; just have to bundle up! Summers are amazing here. Yes it’s a little humid, but most days are 80 and sunny.
I definitely agree with you, the heartland will see gains as people move inwards from NYC and the West Coast in an effort to cut costs. I seems in the recent years, people moved to California to be a part of the tech industry. Once you made your money through an IPO and prices skyrocketed, now people are hesitant to stay (sell high, buy low)
Here’s what I imagine:
Working from your deck in Honolulu in 79 degree winter weather. You’ve just gone for a 45 minute swim in the ocean a block away. Now it’s time to get to work on your laptop as you sip a cold beer and eat some fresh poke salmon.
Instead of suffering through sub 0 temperatures for 3 months a year to earn money from Minneapolis-based Target, Best Buy, United Health Group, 3M, or Medtronic, you work remotely because you’ve got mad skills. Given you’ve still got to kiss the ring once a year in Minneapolis, you’re familiar with the areas with the greatest growth potential. As a result, you go onto your favorite real estate crowdsourcing platform and commit $10,000 in capital that ends up earning 14% a year for three years all while you enjoy living in Hawaii.
I see this scenario happening very clearly in my mind. Maybe I’m crazy. Or maybe I’ve come back from the future!
Hi Sam I’m 19 and live in Minnesota I love it all except the winter. Don’t move here!; there is no sugarcoating the weather I’d move just because of it. What is your opinion on other places to live specifically California and Hawaii? They may have better weather but would I be penny smart pound foolish to move (such as better weather a few months of the year as a pro in exchange for drought and poverty as the con)? The other thing is I am taking my year off and trying to figure out what to do for a living. I’ve been thinking about becoming a electrician or some trade since I have been more average in school, and don’t think I would enjoy collage classes or the cost. As of financially I’m currently a janitor/maintenance and have saved my entire salary the entire year and a half I’ve been working. Sorry if this isn’t relevant to the article I was just trying to find a recent post to ask. Thank you.
Pansy!! :)
In Wisconsin we just sit outside and mediate when the sun is out and the temp is -19. The planet is awesome – three months in the great white north is way cooler then visiting the artic. Can’t do an annual polar plunge in Hawaii.
Hi Brandon,
Nice to hear from you. I really think Hawaii is the best place to live in America, if not the world. This is after visiting 60+ countries and traveling all around the states. Life is very good there! See: If You Can Make It In Hawaii, You Can Make It Anywhere and Never Stop Dreaming About Living The Dream.
I think it’s too early in your life to take a year off. Take a week off, sure, but a year is too precious at 19. Use your week of to brainstorm, talk to friends, meditate, try new things, apprentice. Have you seen this post? Do You Make As Much As A Union Electrician? or Abolish Welfare Mentality: A Janitor Makes $271,000 A Year. You can make good money in many different professions without a college degree. You just need to hone your craft and stick with things long enough to reap the benefits.
Good luck! And remember: Never fail due to a lack of effort because effort requires no skill!
Let us know how you like the mañana, mañana biz atmosphere, the poisonous centipedes and the distaste the locals have for the haoles.
Love your attitude! The good thing is that I can totally relate to not doing things today if you can do things tomorrow. Have trained my emotional intelligence well.
Not sure I understand your last bit about haoles. Are you saying I look like one with my dark hair and coconut brown skin?
Hey Sam,
I’ve been following your blog for the past couple of years and love it. I really resonate with your story in moving from wall street to retiring to work online & help others.
I recently moved to Hawaii a few months ago after hearing from people with more experience to follow our dreams & go do the things we really want to do. It has been an eye opening experience for sure! We really took the leap of faith but we didn’t want to look back at our lives with any regret.
My background is with finance & sales B2B. The money was great, I had the BMW, house in the hills, traveled pretty much when I wanted, but it was killing me inside & I wasn’t happy. The job I was doing wasn’t fulfilling despite the $. I knew that there was something more out there for me besides just giving businesses loans & trying to make money from them.
Fast Forward & my wife & I sold our house last year & traveled for a bit & then moved to Hawaii in January. I negotiated to stay with my finance company part time & still work with some existing clients. My focus now is on growing our online business, helping others move from corporate jobs that they are dissatisfied with to creating a business for more freedom.
Love your blog, keep it up!
Jason
That’s wonderful to hear! You actually are a couple years ahead of me and moving back to Hawaii to live my dream there as well too. See: https://www.financialsamurai.com/its-always-good-to-dream-about-living-the-dream/
What are some of things that are different from your expectations? Any feeling of Island fever and missing the action back where you were? Every time I go back I just love it, and I’m pretty confident that I will enjoy running an online business there. I did six weeks at a time stand what are some of things that are different from your expectations? Any feeling of Island fever and missing the action back where you were? Every time I go back I just love it, and I’m pretty confident that I will enjoy running an online business there. I did six weeks at a time stints and it was no problem.
For some of us it’s hard to get out. My family has lived in Maryland since before the American Revolution. Our family roots here are very deep. There are plenty of reasons to leave – taxes are extremely high, especially if you are retired, and crime just gets worse and worse. The economy here is pretty strong, but to be perfectly frank there is almost zero private sector jobs. Everything is propped up by federal spending due to proximity to DC. This place is home to me, but I want desperately to move to central Florida which is my happy place. Can’t seem to get the wife on board yet.
Sam, we’re settling in the midwest this summer. Gorgeous homes at about $110-$125 / square foot and first-class schools. You should join us and we can meet at Porsche Club events when you get your new Macan!
Thanks for the invite! But if the price for a fantastic 3,000 sqft home is only $350,000, are people allowed to buy a $70,000 Porsche Macan since my Fiscal Responsibility Ratio indicates a house should be worth at least 20X one’s car? :)
In my opinion, people should be able to purchase what they can afford and what they will enjoy (enjoy in the truest sense, with actual deliberation). I think there is a great deal of artificiality to the notion that a house should be valued at X rate more than some other thing, since I might be able to derive the vast majority of the enjoyment out of a $350,000 house than I would be a $1,000,000 house. In fact, I might actually derive more, as it will be less of a burden to clean, there will be less property taxes, any HOA fees might be lower, I might be tempted to “keep up with Joneses” in my expensive neighborhood, etc. The financial argument for both as a depreciating / appreciating asset makes sense, but doesn’t necessarily trump the lifestyle design argument. I think all of this is a long way to say, “… in all things moderation” and buy a used Macan ;).
One can also argue that because home prices are so much cheaper there, one can spend a lot more money on wants!
We can justify anything. I just would feel a little silly if my car cost one fourth the price of my house.
But all is good!
But does that justify a larger house or a smaller car?
Hahaha Sam in my hood I know people that have cars worth at least 25% of their home. A lot of nice large older style homes can be had for $500-800k. There’s a few people with Ferraris and Lambo’s running around. So I guess the car to house value ratio is what you make of it. I’d guarantee most people never look at it that way.
On a side note just come join us in the midwest. Yeah there is snow, but it makes for a fun workout! Look at the bright side of everything!!!
This is really fascinating analysis that I feel like you’ve been hinting out for awhile. I have to admit that the flyover states have not really been on my radar but that’s probably because of my coastal bias. I also can’t say that I have had any friends move to the heartland in the last fifteen years so I haven’t been exposed to these areas. But it’ll definitely be interesting to see how Trump “rewards” those that supported him.
I live in one of those bleeding red states, although in a county that was decidedly blue. I can only speak to Texas, since I’ve lived here over 15 years now. As far as the large cities are concerned, they’ve already seen a significant increase in real estate prices over the past 5 years. In fact my current city (Dallas) has already blown past peak 2007 average prices. Construction is booming again, and it’s starting to feel frothy. Good deals are very difficult to come by in hot neighborhoods. When we moved in 2009 prices in my neighborhood were around $180/sq ft (please don’t smile)….now they’re up to $300/sq ft. Sure they can go higher, but the jobs will have to justify the increases.
Thanks for sharing your perspective on Dallas.
Here’s the important thing I didn’t mention in the article, but I will mention now: Everything is relative!
For example, even though Portland and Seattle real estate prices have gone up 80% – 100% in the past 6-7 years, they are still cheap compared to those of us from San Francisco. As a result, San Franciscans are still moving there and buying in droves.
$300 is still dirt cheap for coastal city investors who are paying $800 – $3,000/sqft. If we can get a 10%+ annual yield, the trend is to buy until the returns are not worth the risk.
I can foresee a BACKLASH against Blue state capital making Red state real estate less affordable for locals. It’s what’s going on with the residents of Vancouver slapping a 15% foreign investor tax as mainland China hot money pours without regards to economic fundamentals.
Everything has gone up since the bottom, hence the definition of the bottom. But what I think we’ll see an OUTPERFORMANCE in certain Red cities compared to the CLEAR weakening in real estate prices being seen in SF, NYC, etc at the moment.
The rise of real estate crowdsourcing now makes it easier to allocate capital across the country. If the government expands the definition of accredited investor, that capital source will simply expand. Therefore, my goal is to get AHEAD of the curve and invest before everybody else realizes the opportunity.
Related: To Get Rich, Practice Predicting The Future!
Thank you for the Informative read Sam. i did have a question for some of the folks like me who don’t have enough assets to be classified as an accredited investor. For those of us making under $100K from our combined sources of income, do you think its better to simply focus on investing in a few key places for passive growth or having our money spread out by investing a little bit into a lot of different sources?
Hi John – It depends on your risk tolerance and your ability to keep track of your investments. If you haven’t downloaded my Investment Tracker Spreadsheet yet, please do so.
My heart is in real estate, so roughly 40% of my net worth is allocated towards real estate. I love everything about real estate except for the taxes and tenants part of it! If I didn’t have an online business, my real estate would take up ~60% of my net worth given I bought a fixer in 2014.
Invest in what interests you the most because that interest will make you smarter than if you invested in something with no interest. I could not have come up with this 2,100 word article without having a passion for real estate. It’s just too hard to think dynamically to come up with an investment thesis if you just don’t care. I went through multiple re-writes and edits of this article over weeks, for example. You need the passion to make better investment decisions.
Have you checked out Fundrise’s eREIT? I don’t think it has any restrictions on who can invest.
See: Ranking The Best Passive Income Streams
Great article. My husband and I do a lot of investing and this is the first article I have read that has looked at the voting demographics on a micro level. Your theory makes sense. We will definitely take your suggestions to heart.
Great article as usual Sam! You give such details on a weekly basis that would be a month long project for most people. You have a keen sense of the future and I agree with your assessment, although I disagree that Trump or any politician will do as much to reward the people who got him in office compared to rewarding donors and PACs.
For my trend spotting, I have been thinking about geriatrics as our population gets older. I like medical devices, healthcare, home healthcare, assisted living etc. I worry about the impact of boomers selling out of the market on mandatory minimum IRA withdraws and I also worry about oversupply of housing as boomers downsize or move into over 55 communities and shared living spaces.
How would you play an aging population into your strategies?
Thanks for everything!
My one investment that specifically plays on the “greying of America” is Omega Healthcare Investors (OHI) REIT. I bought a sizable position in December 2016 in my SEP IRA after bonds and REITs were selling off. They have now a 7.5% dividend yield (was 8.5%), and invests in healthcare facilities, primarily in long-term healthcare facilities in order to create its portfolio. Omega Healthcare Investors, Inc. was founded in 1992 and is based in Maryland, United States.
I should do more due diligence on geriatrics. What are some specific names you are looking at?
A lot of healthcare REITs (and other REITs in general) were overvalued in mid 2016, but they had a nice sell-off and are more reasonably priced now compared to the S&P 500 which has gone up.
I have a position in Ventas (VTR) which I initiated after the sell-off. One of the other big names in the industry. Lots of senior housing and medical office properties, along with a few hospitals and life science buildings.
Healthcare was 12% of US GDP back in 1990 but 18% today, with estimates that it’ll hit 20% within a few years at the current rate.
Thanks for the ideas on healthcare REITS. I like Stryker NYSE:SYK and CVS NYSE:CVS (which I think is even undervalued at the moment). The funny thing with Stryker is that things like hip replacements are becoming more common in my 45 year old friends let alone seniors.
I live in a blue state in an area that’s really red. I like that you went down a level. So many people look at states and think it’s a state thing. It’s really voting between major cities and the less populated regions of the country. The mid states seem to be bigger examples of it but even here on the east coast there are large pockets of red. Having grown up in such an area I advise you to take a deeper look at the mindset in addition to the demographics. Ignore the media position on racists, because there are two many people voting for Trump for that to be a real argument. The things I’ve found by living here is self sufficiency or the perception thereof is considered a highly valued trait. As is loyalty. There are probably industries that appeal to that. I don’t use such trends to invest as frankly no politician really is what people vote for, but if you truly believe that think about his supporters underlying values.
I have never seen RealtyShares.com before, very interesting.
That said, I feel I missed something in your post.
The premise of investing in the heartland is interesting (your alpha in this real estate investment), but how does your proposed solution achieve that?
It seems instead, your solution is just to invest in real estate in a more liquid manner than directly, and with a more guaranteed return than a REIT. Therefore, your entire investment is BETA.
Maybe my understanding of the actual investments on RealtyShares is lacking, but I assume each investment will earn somewhere around 9-11%.
Good comment. Keep thinking things through to discover the alpha and check out their platform and other platforms while you’re at it to learn more. The more you know, the clearer you’ll find my investment thesis.
We’re in a blue city and there is going to be a huge protest party tomorrow.
Interesting point about blue and red states. I haven’t thought of that in term of investment. Avoiding the blue cities as far as real estate investment is probably a good idea. I’ll look for those at Realty Shares. Will you make any adjustment to your local real estate holdings?
I’m unfortunately stuck with my blue state real estate holdings. I missed my small window to sell one property in May 2016 when my tenants turned over. Now I’m just going to ride the fade until Uber and Airbnb go public by Dec 31, 2018 to kick start the frenzy again.
Also, I don’t plan to ever sell any of my properties so long as real estate selling commissions are at 5% or higher. If it gets down to 1% or 2%, I’ll consider it. But paying $50,000 to sell a $1M condo is stupid.
See: The True Cost Of Selling Property Today
Great news for someone looking to settle down in a blue state, to be near family. Hopefully home prices are depressed at least back to normal levels over the next 4-8 years. I would be interested to see a historical analysis of macro-economic shifts from states supporting the loser to states supporting the victor after landslide elections involving party change. Please keep tabs on whats happening for us!
Great post and interesting perspective as always Sam. I have been thinking the same thing as you for a while here, as a young investor in real estate who owns my own condo in an outer borough of NYC plus an interest in 3 multifamily rental properties in a different borough of NYC, I have been feeling like I want to get more invested in real estate but don’t want any further exposure to NYC/the northeast in general as I fear they may be overheated/tapped out, I’ve been exploring what platform to use to invest in other cities but I think that the sun belt and rust belt cities are going to be big for at least the next 10 years, a couple of cities that I think are going to get ‘hot’ (just anecdotally, I’m not an expert) or may already be ‘hot’ but that will continue to see appreciation in price are Nashville, Kansas City, Memphis, Orlando, Jacksonville, and perhaps some of the cities in Ohio. It’s always best to zig when others zag!
Your premise is sound but I have trouble with seeing the county as good geographical unit. There is no uniformity in size or population among counties. There urban counties with more people than entire states and there are western counties the size of Delaware. When it comes to spending money, the county is only one unit involved in the allocation of federal spending to local level. The areas most likely to get money are the Congressional Districts that went Trump; Representatives are an important conduit for pork barrel spending and pet projects.
This was an interesting read and I look forward to seeing your framework post. Here I am, sitting back all comfy, enjoying my lazy index funds when along you come enticing me to get off my lazy butt and explore a whole new area!
I like the way you think. One thing you didn’t mention though is interest rates. Many of Trump’s policies are inflationary. I’d like to hear your thoughts on how our investing strategies should change in an environment of rising rates. No need to limit your answer to real estate.
On a short-term basis, we saw a hit to REITs and bonds by ~5% since the election. On a long term basis, real estate inflates with inflation and will therefore benefit. Hence, one should be investing for the long term. I’m looking to invest in deals with a 3-5 year time horizon.
On real estate crowdsourcing specifically, I have started to see sponsors (operators that bring the deals onto the platform) RAISE their preferred return by 1% to make their investment more attractive. I’ll be looking out for these deals.
Long time follower here. I’ve lived in the midwest almost all of my life, except for a short corporate stint in NY in my 20s. Every time you talk about real estate you need to explain to readers how different San Francisco is from the rest of the country. There are only a handful of counties in the country were real estate has produced consistent long term gains in excess of what is available from the stock market – you are fortunate enough to live in one of them. Anyone thinking they are going double their money in 5-7 years by investing in residential real estate in a rust belt city is dreaming. Yes there are opportunities, but you really need to know the market and look for bargains. There is no strong general uptrend.
Trump is not going change the problems that face most midwestern cities (i) intellectual capital will continue to accumulate in the larger cities because intellectual capital seeks opportunities more than low taxes and low cost of living and (ii) financial capital will continue aggregate in large cities because that is where it has been headed since the founding of the country and information technology only makes that easier. There could be an upswing in manufacturing output in the midwest, but the financial capital will come from the coasts and these plants will produce very few jobs given their high levels of automation and efficiency.
If you want to make money in real estate, the better play is to time the market in SF by looking for opportunities during the downturn that you predict is coming. Just my two cents. In the interest of transparency, I don’t have a dime invested in actual real estate. 10% allocated to REIT ETFs and I don’t consider my home equity an investment.
Good perspective! I’d love to get as much Midwestern feedback as possible before committing large amounts of capital.
To use an analogy, I see Blue state real estate like growth stocks that have had their run. I see Red state real estate as dividend paying stocks that provide higher cap rates than Red state real estate. I DO NOT expect Red state real estate to replicate what Blue State real estate has done over the past 10+ years. That said, why can’t places like Austin or Nashville become a new innovate tech hub that shows massive growth like SF in the future?
Technology and economics (too high pricing) dictates change. All these crazy priced areas in the SF Bay Area were once cow pastures and corn fields in the 70s. Things change. The goal for all of us is to identify which area may change the most. This is where I’m hoping folks will pitch in their ideas and thoughts.
Which city to you live in? And how is your net worth currently allocated?
Thanks!
Boristspider’s comment is reflective of a common misunderstanding among those who aren’t as actively involved in real estate investments. It is easy to latch on to home price appreciation as the indicator of returns, so looking at a coastal city where prices may have doubled in 5-7 years looks achievable in more central locations. But in real estate appreciation and cash returns are typically inversely proportional.
The statement “Anyone thinking they are going double their money in 5-7 years by investing in residential real estate in a rust belt city is dreaming.” is pretty far off, as I’d expect most serious investors would hope to achieve just that.
As an example, within my portfolio of properties in August, GA prices may have only increased 10-12% over the last 5 years, but I’ve also had cash returns of 20+% of capital invested over that period, so I have absolutely doubled my money in the last 5 years
It’s understandable to fear or be negative on things we don’t understand. It’s just human nature.
10-12% per annum growth in August, GA is like SF and NYC growth actually. I’ve never heard of that strength there before. Just goes to show there’s money making opportunities EVERYWHERE. Just got to go look.
Hey Sam. Have you been to Austin? I lived there for 3 years, and have spent most of my life in the midwest (Kansas, Oklahoma, Texas, now Colorado). I’d say the Austin economy is already pretty heavily driven by the tech industry. FWIW, it’s that blue dot in the middle of Texas on your votes by county map. I’d also say that the rest of Texas views Austin in a similar light that, say, Oklahoma City views San Francisco. I’d look at transit-oriented development or areas close to downtown in Austin as lack of infrastructure development coupled with an exploding population has created a traffic problem they really can’t build their way out of. Here in Colorado, which is a blue state with many red counties, the economy is driven by a blend of ag, tech, and energy. As much as Trump might hate the fact that Denver is a sanctuary city, unless he intends to crush the oil and gas industry the area will likely benefit from his energy policy. The state also benefits mightily from severance taxes on extractive industries.
I have, many times. I feel like Austin is where San Francisco was maybe 20 years ago in terms of the number of companies, and the price of real estate.
Given everybody has seen how things turned out in San Francisco, I simply want to go back in the future. The same thing tends to happen over, and over, and over again.
Once a city gain some momentum, it’s hard to stop it unless it’s a massive financial crisis.
The accredited investor thing is a problem for me too. Kind of ironic anyone can buy a business which is highly risky and get loans but cant invest in pooled real estate that is backed by physical assets…other options for unaccredited is fundrise(structured as non traded reit) but not aure about them
I wrote an article on the economy in Tucson AZ and it most likely is valid for other areas which are “less recovered” than sf/nyc/bay area/ etc
People – with any location you want to invest in check out the bureau of labor statistics site. You will see that all major cities have very different labor markets! For instance in the North you might notice a very seasonal change in employment where in places with year round good weather not so much fluctuation during any calendar year. Do some research!
Long story short – I am glad Sam agrees with me; though he equates much of the bullish feeling to politics whereas I attribute the available opportunity to economics. Who cares as long as it’s a win?
In real estate, the most important variable for determining price appreciation is income growth. Income growth is determined by a number of factors, including, but not limited to: government policy initiatives, foreign and local business investment, pricing arbitrage, and technological advancements.
How bullish are you on Tuscon, AZ? And where in Tuscon exactly would you be looking at?
check comment later:
I am glad you asked Sam! Long time fan of yours right here by the way.
I am not as much speculating on short term real estate as investing for the long haul. That being said, I think we both agree on income growth driving the market, we just came to the same conclusion different ways. I have a simple write up on my site but for some reason this comment won’t accept if I link to it…
Tucson real estate has been up about 15% in the Northwest area in the last 2 years. I am betting it will pass 7% growth this year by a small/medium margin. Outside chance it will be above 12% but it is possible. My favorite area is the “Northwest” as they call it because they have a huge inventory of homes that have been built within the last 20-25 years and the prices are still not anywhere close to recovered compared to their pre-recession highs.
This is pretty good because newer homes inevitably need less maintenance, and a surplus of homes of the same type leads to a buyers market. Prices for these homes hover around 170k and up in general, so there is room for small timers to get in and still make it worth their while. Investors with more money probably wouldn’t waste their time with these small potatoes. There are many other reasons why this works for certain situations, but I’m sure you get the gist of it.
Again thanks for the great article, glad we came to the same conclusion. Gives me hope!
I am from Upstate New York originally and consider upstate more like the Midwest than NYC or Boston. I follow your logic but would be very hesitant to invest in places going through long term secular decline. I don’t think any candidate will save manufacturing jobs in the Midwest in the long run.
Also the demographic trend has been moving South and West as well as to cities from the countryside in the US for the last 50-60 years. I agree that large liberal cities will struggle to see real estate appreciation for the next few years but would focus more on secondary cities as hubs that offer jobs and more affordable housing.
In other words I believe a proportion of the population will move not to the countryside or small towns from places like SF and NYC but to cities that offer similar opportunities but are cheaper such as Seattle, Austin, Sacramento, Atlanta and San Antonio. In fact if you take a look at the fastest growing cities right now they are almost all in Texas.
Seattle real estate has already popped due to this phenomenon but there are other cities waiting in the wings. Nashville is expected to be one of the best markets this year according to a survey of realtors.
Good thoughts, and I agree. I’ve got my Real Estate Crowdsourcing Investment Framework post in the wings which will go through some of these screens/issues.
I just invested $25,000 on RealtyShares in an Austin, TX multi-property deal as mentioned in my newsletter this past weekend. All those cities you mention, I’m bullish on. Income growth is strong!
I’m going to be so pissed if our insanely high taxes go under even more. I know that we (people in sf) could be paying higher federal taxes. They should take into account the cost of living when levying a 33% tax. Either way I’m looking into buying a property in the Charlotte area to rent out in the next year. I can’t afford my own place in SF right now but I am under rent control and the price to rent ratios here are extra high. Any advice for a first time property owner?
If you are buying any property you are on the right track to lower taxes friend. First time buyer advice:
-shop the rate on the mortgage (you won’t do great right now but you can try) maybe use nerdwallet i have in the past for refinances and it worked ok for comparing rates
-Get a lower maintenance & move in ready place. its worth the extra money per sqft
-just accept the 10% management fee for a property manager (some might give you 8% if you find a good one go for it).
-buy in the nicest, cleanest part of town you can afford! you may have to go out there 2 or 3 times to look at places to get a feel for the town and the demographics
-Buy a home warranty with the purchase. Most property management companies work directly with them and you should only be out of pocket ~60$ whenever something breaks. I have a nice place and I have used my 2-10 maybe 5 times in 2 years it easily pays for itself with hassle free repairs.
-Your taxes, specifically related to the cost basis of the property really aren’t a cakewalk the first time, so find a good tax guy and save all your receipts for him
good luck! Also note that right when you get burned out on the idea, it will start working for you. That is to say, when you finally get a tenant in there, you will be emotionally exhausted and probably not as pumped as you were when you went looking at houses the first time ;) its all part of the ride friend
Thank you DDave. Great advice.
Beware Austin, TX does not apply to your Texas comment. Real estate in Austin is ridiculously expensive for being in Texas.
Agree. Relative to the rest of TX, Austin is expensive. But relative to Blue state capital, Austin is cheap. Cities get expensive mainly due to job growth and income growth. Thoughts on where Austin is going and better investments in TX? Dallas perhaps? I see Dallas as #1 on many job income growth lists. Where are you based?
Interesting article, Sam.
I’ve been looking at real estate in Texas for a few weeks now as housing in Los Angeles and San Francisco are ridiculously expensive. I can purchase a decent sized house in a nice area for $250,000 in Texas instead of one for $500,000+ for a small house in a somewhat sketchy neighborhood.
It’ll be interesting to see how the next four years go regardless.
Thanks Sam. I am dubious that Trump will actually bring meaningful jobs back to the Midwest, or at least that all of the jobs he does bring back will be in such concentrated small towns that it won’t move the needle much. Just my skepticism.
I live in Chicago and it’s just blowing up right now. The value of my primary residence is up 140%+ over the past 4 years and I now own 2 other units in my same building that just keep going up.
millennialmoney.com/better-rent-or-buy/
So many people want to live downtown in cities, so they can walk to work and have easy access to cultural activities. In Chicago there are also so few places to buy downtown (over 20,000 new units downtown this year with 90% of them being rentals only), that I’m bullish on Chicago becoming as expensive as DC and Seattle, and maybe even LA. Tough to say, but huge growth. Chicago is the New York of the Midwest with so many Midwesterners feeding into the city after college.
I am also looking to invest in Seattle and maybe San Diego, because personally I want to live in San Diego, so buying now to have a chance to get into that market, and Seattle, because there are still some really great deals in the $400K(ish) range that I think will inevitably reach San Francisco price levels in the next 5 years. A lot of people are bullish on Seattle and project it will be city with the biggest home value increase in the country. Dallas is a strong contender as well.
To your points, the Austin and Boulder’s are just fun places to live and will continue to grow given the tech cultures and younger couples moving into those cities, planting roots, and eventually growing families
I love these trends. Thanks for sharing RealtyShares – I’ve never seen a platform like it and have started evaluating a few opportunities on the platform as well.
I’m a big fan of your outside of the box investing ideas. And I don’t question that you’ve been able to score big on some of them throughout your career because of it—good for you!
Now it’s time for me to research the heartland and see how I can profit from Trump’s America for at least the next four years.
Wow. Those political maps are really insightful. Pretty crazy actually, but they make a lot of sense.
I’ve been a P2P investor for several years but really like the concept of real estate crowdsourcing so much more from an investment perspective. Since I live in one of the main coastal cities, venturing into the heartland areas is a great way to diversify. It will be fascinating to watch how the markets change and develop across the country over the next four years.
FYI Being an accredited investor on many of these real estate crowd funding sites is much like being 7 foot basketball star on tinder,you are what you say you are nobody is going through your financials paper work to check
Hilarious! You may enjoy this post: Can Anyone Be An Accredited Investor? The Government Can’t Tell
I’ve invested in private deals since I was 26. No company, fund, sponsor, government has ever verified my income or assets either. And even if they did, how can they properly value the price of your rental property for example. I could say my rental property is worth $1 million to me, even if someone only offers $500,000. Or what if I plan to make $200,000 next year when I’m only making $100,000 today.
At any rate, it’s good to follow the rules. They are there to protect investors and sponsors from getting into financial trouble. This is why I thought getting publicly educated on a deal before buying was a good idea.
Realtyshares actually contacted me a few months back to question my status when I invested in one of their low minimum debt deals. I’m not sure what research they didto come to that conclusion, but they said that they were going to cancel my contribution and return my money. I had to call and convince them that I met the requirement.
Very insightful! Did you have to send him any paperwork or anything? To me, I feel like having to prove my net worth when I invest money feels off. It’s like, “is my money not good enough for you? It’s here right now. What business is it of yours to know where the rest of my money is coming from?”
I thought they were going to ask me to send documentation, but I just had to explain over the phone how I believed my assets qualified me to meet the criteria. I think it helped that I was super polite and friendly on the phone so they didn’t ask too many questions.
Great write up, I’ve been thinking the same thing recently. My biggest problem is deciding what city / state / region to focus on. Several company head quarters here in Los Angeles recently relocated to Texas based on demand from their employees. A lot of tech firms are also opening offices in Colorado and the Mid-West to allow their employees to live in cheaper parts of the U.S. I think the most difficult part of your plan is going to be able to identify which areas are going to boom in real estate and which will stay as they are due to the size of geography that makes up the mid-west. For example St. Louis Missouri is the 18th largest metropolitan statistical area, but that doesn’t mean it’s going to grow. Maybe somewhere smaller like Boulder Colorado or Bozeman Montana is going to explode.
I’m weary of some of the real estate crowdsourcing sites out there like Fundrise, they couldn’t give me good answers on the phone and I can’t really tell what I’m investing in. I like RealtyShares’ platform a lot because they provide very detailed investor packages on the market, the property, the real estate developer the financing and exit strategies. They also provide weekly webinars and the ability to ask questions to the developers. At the end of the day, make sure the platform you use is able to provide you with enough information to allow you to perform your due diligence and make a well informed decision.
I was born and raised in the flyover states, moved to the west coast (San Francisco) and then east coast. Luckily I’ve settled in a lower cost of living area, but am still tempted by the home prices in the Midwest every once in a while. I am very curious to see where our nation will go in the next 4 years.
I’m skeptical to see much improvement in the Midwest, as the structural trends won’t change much. With the addition of automation (retail and transportation jobs primarily), I only see things ending up worse.
As a resident of Chicago, I’m extremely bullish on the bigger cities in the Midwest. As opportunities lessen across the region, I believe the cities will only accelerate growth and absorb much of the talent. Especially now that cities such as New York and San Fran are places where you can not build wealth as easily.
On a side note, I saw Goldman’s Q4 profits tripled from a year ago, so I assume the banking industry is having a field day over Trump’s inauguration.
Overall, I’m 100% optimistic for anyone who takes life by the reigns. The government, or the school we attend, or our parents…none of them will be able to upgrade our lifestyle as much as we can!
I’m also from the Flyover States & Military Bases before heading to the East Coast. I’m with you on the structural problems. My home state has experienced brain drain for most of the past 25 years, and still political leaders and some residents insist that factory jobs are coming back. With the terrible education available in that state, fewer tech jobs will reasonably locate for the cheap COL. You can’t do much with an uneducated work force that has not adapted to the changes of the past 25 years.
You make some good points on demographic trends and i do agree that with the expansion of remote working it would seem that people would flock elsewhere.. but to date that has not materialized as you see yourself in sfo and is seen elsewhere in other high priced cities. People continue to flock to them even if they have the option to live elsewhere for less!
I do have a question for you. You occasionally write how you are “retired”. Do you really think this way? Seems to me more that you gave up regular employment to run your own business and work when and where you please. Maybe overall work less, but still work Does writing and managing yoru blog and advertisers and sponsors ever feel like work?
Dave, I’m looking towards the future. SF has had a tremendous run, but prices have now slowed and have started to decline on the high end ($2.5M and condos). That will slowly compress downwards. People ARE fleeing SF for places like Texas, CO, Oregon, Washington, and more.
Unfortunately, or fortunately, I still have cash flow during this slowing down period in SF to put to work. Therefore, I’m diversifying away to try and capture higher cap rates in the meantime.
Are you based in SF as well and have you not been observing the slowing? If so, please share with my some bullish datapoints/anecdotes on where you are seeing price strength. There is still strength for SFHs on the west side in SF under $1.5-$2M as noted here.
Regarding retiring from Corporate America, I’m actually curious to know what is your definition of retired is? I have been thinking about doing less work for a while now. One of them is commenting less and publishing more. But then this year’s theme is to Always Be Grinding, regardless of your situation.
What is your current financial situation and how have you allocated your net worth? What are you investing in this year? Thanks
I am in DC. What i see is a very expensive place to live whether owning or renting yet despite massive building of new apartments they quickly fill even when a 1br costs about 3x what it would in texas as you stated.
Personally i am “taking a break” from corporate america for a year, then back to the grind for a while. I dont think there is one single definition of retired, but in general i think it means that you are not using a significant part of your time for financially gainful work whether it is your own business or someone else’s.
Where to invest? The only time in the past 20 years i have been bullish was late 2008 and early 2009. All other times i just look for ‘whats best among choices”. But to offer something specific i would agree with yiu for RE focus on 2nd tier cities that have not run up as much and for stocks i would look for markets with lower PE ratio yet still strong and stable economies.
Forgive me for my ignorance, but why would one invest in RealtyShares/Fundrise over VGSIX?
No problem. To answer, please share your investment thesis for VGSIX and we can make a thorough comparison. Thx
I’m not invested in REIT’s at the moment, but I’m curious what some other folks think. A few quick points – VGSIX has a low expense ratio (.26%), anyone can invest with a minimum of $3000, and I personally like the equity sector isn’t focused solely on 1 residential or commerical property….it’s made up of 8 sectors & is delivering 8-10% return averages depending on your term. Similar returns to RealtyShares/FundRise, but you’re diversified, which may minimize some risk. On a side note, I’m a bit biased towards Vanguard since they’re well….Vanguard.
Sounds like a good way to get broad REIT exposure through REIT. But as I write in this article, I want to surgically focus on the heartland trend. My hope is by investing in projects in the heartland, run by experienced operators, I’ll earn a higher return. The RE crowdsourcing returns are closer to 13% – 15% recently net of fees. I’m just trying to be more conservative by expecting 8%.
I’m a Vanguard enthusiast as well. I think we all are. I was buying VYM all first half of 2016 per my Investment Tracker post.
I would say VGSIX represents speculative growth, not a cap rate return. And also subject to equity market risk. Publically-traded REIT’s just seem to be a completely different beast than direct investments in real estate. Fundrise appears to be in the middle. I suppose the lack of a secondary market prevents dumb money from pushing up the price and lowering the yields — highly annoying feature.
If you invest in real estate in states other than your home state through crowd sourcing, in the event of your death, would your executor then have to deal with probate in multiple states (all the states where you own property)? If so, do you take in to account the estate laws of each state before deciding where to invest?
That is a problem with direct investments in other states, but you can just use a real estate LLC to circumvent probate, and it is also good for the liability issues as well. As for funds, they could probably offer a POD designation if enough people pushed for it. Otherwise, title ownership in a LLC or revocable trust.
But since I believe the government is inefficient and filled with corrupt politicians from both parties who practice crony capitalism, I’m all about facing reality and finding solutions to building greater wealth so I never have to depend on the government. – Truer words have never been spoken.
I live in Illinois and Mike Madigan remains a cancer for this state…thankfully I live in Central Illinois and not in Chicago or Urbana.
You say: “how can we be so cruel and deport people who came to America as children and have the potential to become great contributing citizens?”
-What about the thousands of Americans raped and murdered by Illegals?
-What about the billions in tax dollars we pay Illegals to live here: housing, food stamps, college grants, affirmative action, etc
-What about breaking the law and rewarding bad behavior?
How can WE be so cruel to place the interests of foreigners over the American people?
Why do you think Trump won? We’re making it ‘America First’; your way of thinking is a Globalist Mindset and outdated.
Other than that, a very balanced and excellent article. Red states will boom; blue states will struggle. Hopefully more Blue states will become Red states.
Good points. You may have missed the second sentence where I include the word “felons,” which include rapists and murderers who must go.
-What about the thousands of Americans raped and murdered by AMERICAN CITIZENS?
-What about the billions in tax dollars we pay UNEMPLOYED OR FAKELY DISABLE AMERICANS to live here: housing, food stamps, college grants, affirmative action, etc
-What about breaking the law and rewarding bad behavior? – UMM, BANKERS, 1%er’s, ALL OF TRUMP’S CABINET PICKS.
edited for you. do you think my statements are true as well?
All problems need to be solved, but we are America First. Globalist mindset is so 20th century.
I am definitely looking forward to your post on how you plan to build up to $250,000 and what type/diversification of real estate you are going to allocate it across. I have built up mine to $350,000 over the last 2 1/2 years spread across three different platforms and five different areas. Keep up the good work Sam!!! Always enjoy the reading :)
Sam, you described my family perfectly. Our son is just over 7 months old now, and my (small) company I started about five years ago has gone fully remote as of a couple weeks ago.
I’ve mentioned this before, but we’ll be relocating to Ann Arbor, MI. While this was a red state in this election, Ann Arbor is likely blue. So we’re not exactly moving to a “winning” area.
Ann Arbor isn’t dirt cheap, but it will allow us to get double the house for half the price. Our lot size will also be 10x larger (or more), providing a nice back yard for our son and puppy.
We didn’t decide to make this move because we felt like we’d be losers staying in the Bay Area in a post-Trump America, but if what you’re predicting is right we’ll be positioned to hopefully benefit.
Our plan with our excess cash is to invest it into real estate, likely rehabbing houses to either flip or rent out.
Right one I don’t have the capital to put towards this right now, but eventually if like to have anywhere from $20,000-$50,000 with RealtyShares equity investments. I have property here that I’m saving for, meaning all other investments are on hold.
I’m not sure about solely investing in red states, but I would like to have properties in diversified areas of the country, especially areas that aren’t in decline but have low real estate prices compared to the rest of the country. That may well end up with the same results as your strategy.
Perhaps I’m overly cynical (“NO, really!?”), but I really doubt that the person in the White House will make any long term difference towards one’s investments. In dividend stock investing, which I advocate, these companies will keep selling products and making a profit no matter what.
Sincerely,
ARB–Angry Retail Banker
Obama’s final 8 year compound interest.
Nasdaq – 18.35%
S&P – 13.8%
Tough to beat. I was fortunate enough to consistently invest on his watch. Trump beating those numbers is highly unlikely.
No President really “beats” one another’s numbers when it comes to the stock market because they really don’t control the stock market. Not to any meaningful degree. Like the saying goes (and unlike how it was intended or is commonly used), “business is business”.
Sincerely,
ARB–Angry Retail Banker
If another Great Depression had occurred you wouldn’t be saying that.
Year after year during the entire 8 years people was predicting doom for the market.
I probably would. The President doesn’t control the stock market. It’s the per share price investors are willing to pay to own a publicly traded business.
Over the long term, Coca-Cola will sell its drinks, McDonald’s will sell burgers, so on and so forth. These companies will make and grow profits over the decades regardless of who’s in power.
Sincerely,
ARB–Angry Retail Banker
Not true, Bush created a decade of negative wealth for investors. If a different president had won when Bush initially ran that may have not been the case. His father was negative also (I think). Clinton and Obama are the 2 best presidents in history for public investors. You can look it up yourself. Obama easily could’ve been bad for business like everyone predicted but he wasn’t. I’m not sure where Trump will end up yet. He may end somewhere in Reagan territory but not quite as good as Clinton and Obama. Trump alternatively could do something stupid and end up in negative territory.
I am more a realist. Based on the economic contributions year over year, the blue county losers have been the economic power house powering the country year over year and subsiding the rest of the country with their mighty tax contributions. It’s unlikely Trump will tried to destroy it as it will cause a depression. He will threaten companies to keep manufacturing jobs in middle America but it will only be temporary. Automations and consolidations of industries are in high gear meanwhile robotic technologies are coming. The new jobs will still require a college degree to fix or design the machines. And Amazon will continue to put more retailers out of businesses or downsize it’s physical presence. This is not good news for people who work in retail. Technological advancements are the real job killers. The low hanging fruits in every country/place will feel the pain first. No politicians will save anyone other than the people needs to update our skills to keep ourselves revelent.
At a recent staff meeting, my branch manager flat out told us that all our jobs will be replaced by machines within the next 10-20 years.
He meant for that to motivate us to perform better and differentiate ourselves when it comes to the “people” side of our job (greetings, firm handshakes, offering each customer a product/service, etc). I took it as an insider’s tip to look elsewhere for work.
I’m hoping compliance, AML, suitability review, and risk management are all career paths that will require a human eye for a long time. I also hope that someone with no actual compliance/audit experience but a decade of branch banking experience can make it into those careers.
Sincerely,
ARB–Angry Retail Banker
Hi Sam — thanks once again for another solid post! My focus is on sector ETF investing so, while not the main focus of your post, I’m curious as to why you stated:
“These winning sectors include pharma / biotech, banks, energy, infrastructure and defense. The idea is that less regulation and more government spending should be a boon for these five industries. We’ve seen these sectors perform quite well since the election victory. They could potentially continue to outperform if earnings surprise on the upside.”
A definitely agree with you on infrastructure, and possibly on banks. However, President Trump has recently and repeatedly beat up on pharma & biotech, energy has already made nearly a year’s worth of gains with a strong possibility that OPEC might not honor their promise to cut supply, and he’s questioned the value of several defense contracts (Presidential replacement aircraft, F-35, etc.).
I’m cautiously optimistic that these sectors may continue to perform well, but I think we still need to see what policies Congress will and won’t support, in addition to earnings performance. Are there other factors you were considering in your assessment? Thanks again and congrats on another well-done article!
Excellent point on that tweet he made regarding “Pharma companies getting away with murder” regarding pricing. Let’s see what policies his admin pushes forward.
And related to this article, the biggest thing we got to be aware of our interest-rates, mortgage interest deduction, and jobs.
What are you specifically investing in?
Thanks! Like you (but on a much lower scale), I’m invested in several different things to diversify, but my latest effort has involved value investing in sector ETFs. In this sector ETF portfolio, I’m currently invested in oil production, oil equipment, emerging markets, biotech, and pharma, most of which I picked up early last year after a significant drop in price. If you have a couple of minutes, please check it out on my new website — I’m always open to constructive critiques and thoughts!
Sam, as usual, you are likely correct.
Trump will reward the red states, especially the “blue wall” he broke through with Wisconsin.
I bought Oshkosh Industries in Wisconsin .
They make cool stuff, real handy for the new Trump America. Specifically, tactical vehicles used for border work, riot Control and very desired by police departments in urban centers. Trump rewards wisconsin, pleases the police with Para military vehicles and commits to his pledge of law and order.
And last, I am going to bet there will be moderate, extended civil unrest (riots).
For these reasons, I bought OSK.
That is my Trump bet on red state, law an order, pro-police, left is gonna act up thesis. :)
Also GEO private prison system for border policy, law and order and civil unrest.
Not saying right or wrong, just what I see
Hey FS, great post! Regarding the maps you shared, what a dramatic contrast between rural and urban votes. Of course, so many people (on one side at least) are upset that the winner of the popular vote could lose the election, while calling out the electoral college concept as less democratic. I saw an interesting video though that explained how the purpose behind the electoral college is actually to preserve democracy, and prevent a situation where very small regions of the country, such as isolated urban centres, dictate the vote for the entire country. There was more to it than that, but I find it intriguing.
No, the reason for the electoral college afterthought hack was to appease the slave-owning South. Nothing more, nothing less. Does that mean we need to junk it? It would be hard to not be biased about that. I can think of both pros and cons. We don’t have a democracy — we have a representative republic of crony, corrupt career politicians. Junking the electoral college would indeed mean a democracy — tyranny by the intolerable majority. Is that preferable to tyranny by the deplorable minority? The electoral college hither or tither is not going to be the magical fix for the corruption that plagues us.
Not all red areas are the same, as noted above. We sold in San Antonio and moved to Florida to take advantage of geographic arbitrage. A great site for detailed economic data by region is https://fred.stlouisfed.org/
Check out the all houses price index for San Antonio, TX vs Gainesville, FL. Huge win. Going part-time in March……
The appreciation of real estate to me is a secondary benefit, first the property must cash flow in order to be profitable, the appreciation is like a nice bonus. For instance in 2007 I bought a farm I was renting at the time in South Dakota, I paid 2.5 million for it, took a 2m 30 yr note, the payment was around 160k per year, the total profit I was making before lease payments was about 225k, so I was cash flow positive. Today that same farm is worth about 10m conservatively, now that comes out to an ~16% ARR over the past 9 years, but if it didn’t cash flow I wouldn’t own the property the bank would have had it back by now and I’d have nothing. The valuation of land around me does not not cash flow anymore, you’re looking at an ~2% cap rate, therefore I expect land values to slide in my area by at least 15-20% over the next couple years due to the current low commodity prices, and falling land rents. In fact the last land I bought was in 2012. There are however deals to be made in the residential market here still, I just bought a small apartment complex that I expect to make 16% IRR. Like Sam says there is plenty of opportunity out there. I may just have to check out RealtyShares.)
It’s an interesting hypothesis, but do you have any hard facts to back it up? Did real estate boom only in Red America when Bush Jr. was president for 8-years?
The labor market is not tight. Look at U6 not U3. Underemployment is also widespread. That is why Trump eeked out a win, after all. Obama didn’t deliver any change anyone could believe in.
What demographic shift do you believe will occur in Red America to produce income growth?
Hawaii is a very expensive place to live… the COLA is above average for every category and no category is less expensive than SF, except for housing! It’s also ridiculously expensive for tourists to visit. Pineapples are like $50 a piece and no others are to be found because Costco buys them all up to sell in their local stores. It’s also highly and consistently liberal (i.e. tax the rich) which I guess is “necessary” for supporting all the impoverished, conquered natives. (For the record, I’m for Hawaii to regain its sovereignty from the illegal occupation by the USA, but the welfare state mentality is so deeply ingrained, they still vote against the “scary” reality of independence.)
Sam,
1) correct me if I am wrong but isn’t RealtyShares platform for the bridge lending which was initially serviced locally by hard money lending? So basically it is for the period when the developer buys a fixer-upper and then renovates it to sell it higher after “seasoning” the property. Given that we have had a bull market for so long; I am worried if recession hits and these flippers can’t sell the houses. The last one was bad for the red counties and I dont believe Trump can change that. JObs are lost due to automation and skill gap.
2) And I see only max 10% deals on Realty shares platform so wondering if investing in VNQ does not provide the same benefit at 10%.
3) Also have you explored PeerStreet?
Fantastic post Sam,
I’ve been following a similar mantra here in the UK by moving money from the south to the midlands – the yields are much higher and many major towns and cities are receiving large investments with new train lines and infrastructure also boosting the area.
Interestingly since doing so the premium london market has dropped and the south is starting to look more and more like a bubble.
Sam
Agree with the premise (heartland real estate), don’t agree with the conclusion (crowdsourcing). I believe it is much much better to be in control of your own deal.
I would argue against the assumption that doing your own deal requires flying there any more than crowdsourcing. Another detractor mentioned is the requirement of lots of capital. Do you mean to suggest $250k is not enough? On-going maintenance is an even bigger problem in crowdsourcing – you are just paying extra not to deal with it yourself.
There is certainly more than one correct conclusion – depends on goals, risk, the work you are willing to put in, etc. We still might arrive at different conclusions, but I think some of those intermediate steps can be closely examined. Expanding the two paragraphs about flying around the country could be a whole nother article!
Brian – This is the beauty of the market. Anybody can do what they think is best for their wealth. Where I’ve made the most amount of money is when people weren’t aware or skeptical of a particular asset class or investment thesis. If everybody is bullish, then the spread gets arbitraged out! Related: To Get Rich, Practice Predicting The Future
You’ve decided to live in expensive SF and buy physical real estate in other parts of the country. I decided to buy property in SF to take advantage of the growth and not get punished by rising rents. Now I’m buying real estate around the country via REC that’s been vetted in order to make income for the reasons mentioned in this post.
I think that the older people get, the more people will want simple, hence one of the trends towards crowdsourcing.
PS $250K is what is needed for a 20% downpayment on a median priced home in SF today. I’m not willing to put that much down now AND take out a $900,000 mortgage to buy even more SF property after an 8 year bull run. My SF properties have appreciated out of control. Zillow is saying the house I bought in the Marina for $1.5M in 2005 is now worth $3.4M. That is CRAZY b/c it’s not even that nice. Who can afford that? Instead, I’d rather buy 10 real estate crowdsourcing deals that generate 10% annual returns all through the country.
Sam
So true – the conclusion you make different than the crowd is where there is opportunity for different returns than everyone else.
Regarding crowdsourcing, you are paying for someone’s expertise, platform, management. You are giving up control, leverage, tax benefits. Nice and simple.
Another simple conclusion is paying a local Austin realtor who works with investors to find you a $250k single family home (or multiple with mortgages), and paying a property manager directly. I would expect much greater returns for little more work. In the end it might not be worth it for someone with millions to invest, but it is certainly worth calculating what you are giving up for simplicity. For most people it is well worth their time.
I’m open to introductions from people you trust. It just takes me a long, long time to trust anybody with that type of money.
I’m more than happy to give up some of the upside if the sponsor has been
properly vetted, and I don’t have to do any more legwork beyond what I’m doing now. I’m not talking millions of dollars here. I’m talking $250,000. Remember, I’m a old man now and I’m really focused on simple with. single digit returns. Time is more precious and I’m not willing to spend as much time trying to save extra money.
Just remember, your two properties invested in Atlanta and Tennessee 5.5 and 2.5 years ago were both during the bull market. Your $80,000 in return is great. However, it’s important not to confuse brains with a bull market. I try to tell myself this every single time I’m about to invest because every single time a downtrend comes I’m never quite fully prepared.
I just think the crowdsourcing has the same trust issues, just better diversified. Takes you out of making the decisions and puts someone else in place who might not have the exact same goals.
Great point on brains in a bull market. I’m doing just about the most conservative type of real estate investing – boring cash flow markets. Investing in a market with greater appreciation potential also comes with bigger downside when things go wrong. The Miami condo owners look genius now, but that downtrend is going to hurt.
Did you meet Eric Bowlin at FinCon? He recently moved to Texas, but would be a good horse to back if you are looking beyond crowdsourcing.
The political vitriol of this season is almost unpalatable. Frankly, it’s devicive and unreasonable.
I voted, as someone who was a political science major, voted for no one. I am glad that Clinton didn’t win but I am nervous that trump could take us a very poor direction.
I think your thoughts on mid-America strengthening may be correct. However, everyone always thinks that republican administrations are a positive for the energy industry. In fact, they are not.
My largest concern with trump is an over zealous protectionist regime. In this case, domestic energy prices would surge while global prices would collapse. It would be a bonanza, but only for a short period of time before the hangover set it.
I was curious about your thoughts on the tax implications of investing in REIT’s with RealtyShares. Obviously, REITs tend to be less favorable since they are required to pay out 90% of their profits to shareholders vs. purchasing equities and paying long term capital gains rate when selling shares. You also cannot take part in tax write-offs (ie. depreciation of rental assets, etc) .
Are you basically willing to pay higher taxes on RealtyShares in exchange for not having to manage more of your own properties and getting access to multiple properties in the heartland?
Thanks for the great post. I’m still not the fence about crowd sourced real estate. I’m also looking at GroundFloor, which is available to me as a resident of Georgia.
My apologies Sam with regards to my last comment. For reason I thought you were using Fundrise eREIT Heartland fund and my question was directed towards that.
Actually looks like my original comment didn’t post so I will rephrase my question. I was wondering about your thoughts on the tax implications of Realty Shares. Specifically how you feel about not being able to depreciate your real estate for tax purposes. Are you essentially willing to pay more taxes on these investments for the ease of investing in multiple properties in the American heartland?
I’m still on the fence about crowdsourcing real estate. I’m also looking at GroundFloor, which is not open in all states but is to me here in Georgia.
I like your thesis and I’m intrigued with the Fundrise model, but Fundrise is comparing their “low fees” against public REITs they quote at 6-7% up front, and 1% ongoing. Let’s instead look at Fundrise’s public filings: Fund managers carve out a loan origination fee of up to 3%, an ongoing annual management fee equal to 1% of NAV, a property management fee of up to .5%, and a property sales fee equal to .5% of gross proceeds. How do we justify paying these fees against Vanguard’s REIT, which has no upfront fees and an ongoing expense ratio of .12%?
Fundrise was offering some very lucrative terms for early investors, including $0 in management fees until 12/31/17 unless you earned a 15% annualized return. However I’m concerned that those of us who missed out on their initial offerings will be footing the bill for their current investments.
As a resident of Kansas City for a time, I am with you on heartland real estate. There are plenty of great paying jobs in these slightly smaller metropolitans. I’m sure California and the like will continue to command high salaries and real estate. Meanwhile the rest of the country will have “slow” and steady growth.
In the meantime, I’m afraid I’m too small to invest in Realty Shares and am skeptical of Fundrise’s fees. Looking forward to more parity in options in the future.
All the best from the midwest and south.
A very informative article – thank you. Living in Australia the investment potential of ‘heartland’ real estate is somewhat beyond my capacity but I certainly applaud your thoughts about investment trends. I have long advocated investment cycles (trends) as the best way to map investment entry and exit points. The ability to do so is certainly not going to rival rocket science in complexity which suggests that with a little bit of study and knowledge anyone can achieve it.
From my experiences over the last 25 years as an adviser, most investors seem to be able to identify just the final phase of a boom, which occurs immediately before the inevitable crash and have their fingers ‘burnt’ with over priced buying of assets.
There is a lot of scholarship regarding investment cycles and it is well worth getting to know as much as you can as I believe it is probably the key to successful investment.
But like all investment ideas, you are only increasing your probability of success by getting to know investment cycles, rather than discovering a sure way to invest. If anyone has a sure fire success method I would love to hear from you by the way.
Thanks again, your article was excellent.
You’re voting demographic maps were interesting, and have some value. We need to remember that votes are counted per person, not by square mile. Much of this country has a very low population density, so while the red area looks impressive, it’s how many people that live there that matters.
I live & invest in Cleveland OH, you cant much more heartland than that! I see the results of coastal investors buying up property. I know the recovering real estate market has also influenced pricing, but a huge part is due to investors from the coasts and foreign countries. Lots of Israeli investors hitting Cleveland now. I used to be able to buy good deals for about $10,000, but 3 years later, the same deal is going for $25,000. I am not complaining, since all my previous purchases are doing a lot better, I am just noticing what is going on.
At least once/month I consult with an investor from the coast about how they paid way too much for their investment. People dont understand our economy, they buy a double for $40,000, thinking it is a good deal. They compare it to coastal pricing. They dont realize that they will never get their money out of that investment, they shouldnt have bought it for $1, let alone $40,000.
Fascinating that Israeli money is hitting Cleveland now. I know Israel has seen some HUGE startup growth over the past 10 years… like a new Silicon Valley.
The thing is, everything is relative. Your example of a coastal investor overpaying is EXACTLY the trend I’m looking to take advantage of. Yes, it’s overpaying to the in-the-know local, but to a coastal investor who is used to pay 3-10X more for a similar property, it’s a bargain. Don’t fight the wall of money.
“Don’t fight the wall of money.”
I think this is an excellent investment philosophy.
Hi Sam,
Compared to the east coast or west coast, prices of homes in Texas may look cheap. In the past 5-7 years, cost of homes in Texas have gone up like crazy, especially in Dallas. Houston took a little hit when oil collapsed. However, it is coming back up.
What do you think about Midwest – Ohio, Indiana, Missouri, etc?
–Michael
Seems to me that the more democrats in a city it means more taxes to fund their savior of humanity. So liberals flee their own policies to the red areas of the map only to start a new mess for the conservatives. Just stay in your self created dream world.
If you consider Nashville “the heartland,” I can tell you the real estate market here is already zany. I think it’s probably over priced. The biggest draw here is not the nice weather, although it’s way better than the midwest. The biggest draw is the very low taxes, and no state income tax. The real estate, however, is frothy.
I would look elsewhere if I were investing. I bought my house in 2008, but we live in it and I wouldn’t want to be looking for one today.
Incredibly well thought out post. I’m also a bay area resident and I’ve been thinking a lot about these ideas lately. I love living here, but man… holding a million dollar mortgage for a very average home isn’t fun.
I just came across your blog. I admire that you’ve managed to retire in this area, so I plan to dig into your posts and see how you got to that point.
Nice to meet you Caren!
It wasn’t easy retiring early in San Francisco, but prices were cheaper back in 2001 when I get first got here.
But the ideal goal is to move back to Honolulu in three years, where is actually much cheaper, housing wise.
See: https://www.financialsamurai.com/its-always-good-to-dream-about-living-the-dream/
Hi Sam, long time reader here. I remember when you wrote about Prosper several years ago, and you mentioned they had an external partner that can take over in case of their own bankruptcy. Do you know if Fundrise and/or Realtyshare have a similar back up plan?
If you want to invest in real estate my mother is a real estate agent near Dallas. The local newspaper was one of only 3 in the nation that endorsed trump. The market is exploding but bubbles always pop, it seems like you had to learned that a few times.
Hello Sam, I’ve recently been introduced to your website and want to first thank you for the great insights. Recently I’ve seen you discuss some of the crowd-sourcing real estate REITs like Fundrise specifically. I’ve done some research on them and even jumped in on a local sourced project in Oregon from another company in trying to diversify out of stocks. My question with respect to these REITs in general is given a growing bubble, how would they perform when the bubble eventually bursts? Not asking you to be Nostradamus or anything like that :-) just thought you might have been involved in one back then or have more insight to what happened to these types of REITs during the 2008 bust. What might be their plan in that event? Assuming real estate prices dropped considerably I assume the bet is that they do not go bankrupt and eventually could buy up some property at some low prices and catch the next bubble. Your thoughts?
Hi Sam,
I’m already invested in Fundrise, and keep looking at Realtyshares, primarily as a way to get higher returns. Fundrise looks great, they have a shiny website, etc. But I don’t like how the money flow is one-way (in their direction). I also am not crazy about the fees.
Anyhow, with the Fundrise it seems that the deals have been pretty thin lately. 8% interest on something where I’m 5th creditor in line doesn’t sit well with me. But it is what it is. My larger question with Realty shares is comparing it to traditional RE/Rental holdings’ tax benefits.
Can you say how Realtyshares handles things like Depreciation? From what I’ve seen it looks like they take advantage of it from their side–but that doesn’t really help me at all. Is there something I’m missing?
Thanks!
Saw this CNBC article on Stanford and the midwest, seems like you’re not the only one focused on the heartland of America!
https://www.cnbc.com/2017/08/02/stanford-is-paying-up-to-160000-for-students-to-get-their-mba.html