San Francisco Bay Area real estate is an attractive asset class because of the growth in technology companies like Google, Apple, and Facebook. These companies are earning huge corporate profits and paying its tens of thousands of employees handsomely. The question is: How does immigration affect San Francisco Bay Area Real Estate?
Interest in San Francisco Bay Area real estate is strong due to the following reasons:
- A rebound in the S&P 500 and tech companies in 2019 and 2020 (+43% in NASDAQ!).
- A sharp and sudden decline in mortgage rates
- Tech IPO boom flooding the streets with around 2,000 – 5,000 potential new buyers, and 10,000 new millionaires
- Rents declined during the pandemic, but are inching back up as people return
Everybody should at least check the latest mortgage rates online through Credible, a premier lending marketplace that allows you to compare real quotes from multiple lenders. I refinanced my primary residence to a 7/1 ARM at 2.625% with no fees and a $220 credit. I'm saving $1,000 a month in cash flow and could not be happier!
With so many new IPO millionaires coming into the market – an estimated 2,500 – 5,000 high intent real estate buyers – it seems highly likely San Francisco real estate will continue to go up.
There's one interesting positive factor that nobody talks about with regards to SF Bay Area real estate as well. That is the strong effect immigration has on prices. Let's discuss how immigration can help boost San Francisco real estate, especially now that Joe Biden is President.
How Immigration Affects SF Bay Area Property Prices
This information was written by Terry Lambert, a 20-year SF Bay Area veteran on Quora and myself, and owner of SF real estate since 2003.
Bay Area real estate market price pressure starts up in about November, and continues upward until about May, when the EB-5 visa season is over.
It currently costs at least $1.8M for a direct investment and $900,000 for an indirect investment to obtain EB-5 application approval. Then, depending on the investor's country of birth, because of a quota backlog, it will take many years for the actual EB-5 visa to be issued. Thus, an applicant born in China whose application was approved today, based on current law, may have to wait 5 to 8 years before the EB-5 immigration visa is issued.
Does Immigration Affect San Francisco Bay Area Real Estate Prices?
This is how the Kapok investment mechanism in St. Croix in the U.S. Virgin Islands worked, in order to get the 90% federal tax break that comes from operating and employing people in an Economic Development Zone.
Several companies took advantage of this in the wrong way; Kapok was not one of them.
As long as you lived in St. Croix or elsewhere in the U.S. Virgin Islands — big hardship, that, right? — for 186 days or more a year, you were golden.
If you had U.S. companies, you could then incorporate down there, and sell your management consulting services to the companies you owned in the U.S., and you would get a 90% break on federal income tax.
Foreign investors can play this same game to essentially buy U.S. citizenship in the form of a green card from an EB-5 investor visa.
But to do this, you have to push the price of your investment up to $1M, and practically guarantee the competition for the same property doesn’t beat you out for it.
So you bid $1M on an $800K house — 25% over actual market value as real estate… but not as an EB-5 mechanism.
Immigration Helps Boost San Francisco Real Estate Prices
Or, you can simply buy a house that costs $1 million or more. The San Francisco median home price is roughly $1.5 million. Therefore, it is actually quite easy to buy your visa way into the Bay Area through Bay Area real estate.
The best neighborhood to buy property in San Francisco is Golden Gate Heights, where you can get a single family home with panoramic views that trade at a discount, not at a huge premium unlike every other major international city with homes with ocean views.
Huge upward pressure on real estate prices is where you can put the EB-5 visa investor approach to use.
The Bay Area gets about 17% of a the 10,000 EB-5 visas granted each year — the current EB-5 cap.
This runs out in about the start of May, but there’s momentum that keeps it going on a ballistic trajectory through about the end of June.
Since the EB-5 program is about 300% oversubscribed, the effect is to permanently consume 10,000 * 17% = 1,700 housing units off the market, and to temporarily consume another 200% of that, or 3,400 housing units off the market.
Inventory Is Tight In San Francisco
That’s some pretty big market pressure since only 5,471 properties changed hands last year out of almost 400,000 housing units.
So there’s an epicycle in the real estate market in the Bay Area that most investors do not take into account.
As long as the rules stay favorable for the EB-5 visa program, real estate in the Bay Area will always have this tailwind.
I don't see how the rule will get more stringent since companies need lower cost workers to stay competitive. The lobbying efforts will continue to be strong in this one.
There is already not a lot of real estate inventory in the SF Bay Area. As new immigrants flood into the area post pandemic, there will be more demand for less inventory. I'm bullish on big city real estate as I firmly believe people will rush back to San Francisco for great job opportunities.
San Francisco Real Estate Is Good Value
Despite all the hoopla about San Francisco being the most expensive city in America to rent or buy, San Francisco is actually cheap compared to Manhattan, New York and most other international cities in the world.
Vancouver is more expensive than San Francisco, yet there are NO major international companies that pay handsome salaries. Can you name more than one? I bet most can't even name one.
San Francisco, on the other hand, has major companies and keeps on growing major companies with new tech IPOs every year. Not only do the tech IPOs create liquidity for thousands of new employees, tech IPOs raise billions of dollars of NEW capital to keep the hiring and innovation going.
Check out The Economist ranking chart of cities by price-to-income and price-to-rent. On the price-to-income chart, San Francisco is in the lower half. On a price-to-rent chart, San Francisco is third to the bottom.
San Francisco real estate should continue to increase in price and outperform the national real estate price growth over time. The reason why San Francisco is expensive is because incomes are high.
San Francisco Companies Pay Big Salaries
When you have 22 year old college graduates making $100,000 and 30 year olds making $250,000 each, there's no reason not to expect San Francisco Bay Area prices to be where they are.
Once you've purchased your primary residence and gotten at least neutral SF Bay Area real estate, I think it's wise to look for in the heartland of America where valuations are cheaper and cap rates are much higher.
Places like Austin, Memphis, Dallas, Houston, Salt Lake City, Birmingham, and other cities are growing rapidly. San Francisco does not have a monopoly on innovation or capital.
That said, thanks to the global pandemic, the migration towards lower-cost, 18-hour cities, has accelerated. Working from home is becoming more accepted. Therefore, it makes sense to try and save money in cheaper cities if you can.
Diversify Real Estate Investments Into The Heartland
The easiest way to invest in specific real estate projects in the heartland is through CrowdStreet. For more diversified real estate exposure through an eREIT, I like Fundrise. Both platforms are the best real estate marketplaces. They have the most robust platforms and the best vetting process to find the best deals.
I've personally got $810,000 invested in 18 commercial real estate properties across America to diversify my holdings. Both platforms are free to sign up and explore.
Real estate has proven to be a wonderful long term investment. Get neutral SF Bay Area real estate by buying your own home. Then diversify your investments around the country with real estate crowdfunding and speciality REITs.