Making More From Your House Than From Your Salary Makes Life Easier

One of the great benefits of being an investor is that you can sometimes make more from your investments than from your day job. After several years of doing so, you might even start wondering what's the point of working so much!

According to Zillow, home value appreciation in 2021 was higher than median wages in 25 of 38 major metropolitan areas. In 11 areas, home price appreciation was greater than $100,000.

With millions of homeowners making more from their houses than from their salaries during the pandemic, maybe we'll avert a recession after all.

Metropolitan Areas With The Greatest Increases In Home Prices Over Wages

The greatest home price appreciation in absolute dollars came from the San Jose-Sunnyvale-Santa Clara area: $229,277. Not bad compared to the median pre-tax income of $93,000 based on data from the Current Population Survey Annual Social and Economic Supplement.

It is unclear whether the median pre-tax income is per individual or per household unit. Probably the latter. According to the US Census Bureau, as of 2020, the median household income in San Jose was $117,000. Meanwhile, 23-year-old college graduates are receiving $150,000 compensation packages working at big tech.

Even though many folks think San Francisco is dead or dying, the San Francisco-Oakland-Hayward area did just fine in 2021, showing a $204,914 home price appreciation. The median pre-tax income in 2021 was supposedly only $75,000, which also seems very light. If the data had only focused on properties in San Francisco, the absolute dollar amount appreciation would have been higher because the median price point is much greater than in Oakland and Hayward.

It is good for San Francisco to be in second place because nobody pays attention to second place, only first place. The city gets to be more stealth. If you're an existing homeowner, you don't want national publicity. Otherwise, politicians will be pressured to do more to improve affordability, e.g. raise property taxes, streamline permits, boost construction, etc.

As a homeowner, you want your politicians and the people who work in the building department to be inefficient. You might even want some corruption to occur to really slow down the permitting and building process.

The harder it is to pull a permit for your remodel or new construction, the less housing supply there will be. Politicians and city building officials have done a great job of suppressing supply.

Metro Area Home Value Growth Chart

Overall, the median home value in the United States grew by $52,667, or $2,667 more than the supposed median pre-tax income in 2021. Meanwhile, the median rent grew by ~16% or $3,072 in 2021. Therefore, if you are a rental property owner or investor, you were able to benefit both ways.

Below provides more details by metro area. Tampa-St. Petersburg-Clearwater showed the highest absolute dollar rent increase of $5,292. That's impressive since the median home price in Tampa, Florida is only about $375,000 in 2022.

Therefore, if you follow the BURL real estate investing rule, you should put the Tampa area on your places to invest list.

Metro AreaHome Value Growth December 2020 – December 2021Median Pretax Income, 2021Home Value Growth Minus Median Income2021 Rise in Full-Year Rent PaymentsU.S. Profession That Made an Income Closest to 2021 Home Value Growth
United States$52,667$50,000$2,667$3,072Directors, religious activities and education
New York– Newark— Jersey City$63,928$60,000$3,928$4,656Judicial law clerks
Los Angeles– Long Beach– Anaheim$131,979$50,000$81,979$3,924Judges, magistrates
Chicago– Naperville– Elgin$34,918$57,000-$22,082$2,028Other protective service workers
Dallas–Fort Worth– Arlington$69,488$50,000$19,488$3,156Human resource specialists
Houston– The Woodlands– Sugar Land$45,250$50,000-$4,750$2,004Dental laboratory technicians
Washington, D.C.– Arlington-Alexandria$56,163$75,000-$18,837$2,700Loading machine operators, underground mining
Miami– Fort Lauderdale– West Palm Beach$72,053$40,000$32,053$7,104Public relations specialists
Philadelphia– Camden– Wilmington$39,994$60,000-$20,006$2,160Supervisors of food preparation and serving workers
Atlanta– Sandy Springs– Roswell$73,036$50,000$23,036$4,008Soil and plant scientists
Phoenix– Mesa– Scottsdale$103,470$52,000$51,470$4,644Education administrators, K–2
Boston– Cambridge– Newton$76,616$66,852$9,764$3,948Arbitrators, mediators
San Francisco–-Oakland-Hayward, CA$204,914$75,000$129,914$3,540General internal medicine physicians
Riverside–-San Bernardino–-Ontario, CA$111,014$45,000$66,014$4,560Air transportation workers
Detroit-Warren-Dearborn, MI$29,675$57,000-$27,325$1,644Gambling cage workers
Seattle-Tacoma-Bellevue, WA$131,129$65,000$66,129$3,816Computer and information research scientists
Minneapolis–-St. Paul–-Bloomington, MN-WI$39,942$60,000-$20,058$1,020Gambling surveillance officers
San Diego–-Carlsbad, CA$160,493$54,703$105,790$4,932Computer and information systems managers
Tampa–-St. Petersburg–-Clearwater, FL$74,754$46,000$28,754$5,292Criminal justice teachers, postsecondary
Denver-Aurora-Lakewood, CO$108,922$65,000$43,922$2,928Electrical engineers
St. Louis, MO-IL$27,741$50,000-$22,259$1,428Cooks and food preparation workers
Baltimore-Columbia-Towson, MD$36,984$60,000-$23,016$2,316Medical assistants
Charlotte-Concord-Gastonia, NC-SC$71,804$57,000$14,804$3,384Commercial divers
Orlando-Kissimmee-Sanford, FL$64,638$44,384$20,254$4,380Set and exhibit designers
San Antonio–-New Braunfels, TX$54,769$46,966$7,803$2,292Counselors
Portland-Hillsboro-Vancouver-Hillsboro, OR-WA$83,283$60,000$23,283$2,520Speech-language pathologists
Las Vegas–-Henderson-Paradise, NV$83,894$46,000$37,894$4,380Nuclear technicians
Kansas City, MO-KS$40,846$50,000-$9,154$1,368Mixing and blending machine setters, operators
San Jose–-Sunnyvale–-Santa Clara, CA$229,277$93,000$136,277$3,108Oral and maxillofacial surgeons
Nashville-Davidson-–-Murfreesboro–Franklin, TN$84,395$50,000$34,395$3,372Emergency management directors
Providence-Warwick, RI-MA$66,657$55,000$11,657$2,364Court reporters and simultaneous captioners
Oklahoma City, OK$26,866$44,044-$17,178$1,584Food preparation workers
New Orleans–-Metairie, LA$31,945$47,000-$15,055$2,628Textile machine setters, operators, and tenders
Salt Lake City, UT$119,539$53,638$65,901$3,156Computer network architects
Birmingham-Hoover, AL$31,968$50,000-$18,032$1,476Helpers – production workers
Urban Honolulu, HI$138,254$51,000$87,254$2,820Operations specialties managers
Omaha–-Council Bluffs, NE-IA$31,114$50,000-$18,886$1,236Funeral attendants
Albuquerque, NM$47,215$45,000$2,215$2,736Educational instruction and Library workers, all others
Boise City, ID$124,979$50,000$74,979$3,240Health specialties teachers, postsecondary

Percentage Of Individuals And Households Earning More Than $100,000

Despite inflation, making six figures a year is still a good accomplishment. Back in 2014, a $100,000 income as an individual meant that you were earning more than 92% of the population.

According to IBISWorld, a data industry research group, roughly 34% of U.S. households will earn more than $100,000 in 2022. Either way, in America only a minority of individuals or households earn more than $100,000.

Therefore, to be able to earn $100,000 or more from your primary residence alone is quite an accomplishment! So let's rank the metro areas that saw house prices appreciate by more than $100,000.

Percentage of U.S. households making over $100,000

Metro Areas That Saw More Than $100,000 In Home Price Appreciation In 2021

Here are the 11 metro areas that saw home prices increase by over $100,000 in 2021.

1) San Jose-Sunnyvale-Santa Clara: $229,277

2) San Francisco-Oakland-Hayward: $204,914

3) San Diego–-Carlsbad, CA: $160,493

4 Los Angeles– Long Beach– Anaheim: $131,979

5) Seattle-Tacoma-Bellevue, WA: $131,129

6) Honolulu, HI: $138,254

7) Boise, ID: $124,979 (+24% YoY)

8) Salt Lake City, UT: $119,539 (+24% YoY)

9) Riverside–-San Bernardino–-Ontario, CA: $111,014

10) Denver-Aurora-Lakewood, CO: $108,922

11) Phoenix– Mesa– Scottsdale: $103,470 (+30% YoY)

Of these metro areas, the home price growth in Phoenix, Boise, Salt Lake City looks to be the most unsustainable. Annualized home price growth over the past 10 years has been closer to 5%. Further, there seems to be plenty of land for new supply growth.

The San Francisco-Oakland-Hayward metro may have seen a $204,914 increase in the median real estate price, but the median home price in San Francisco is between $1.55 – $1.9 million, depending on which source you use. In addition, income levels are also much higher. As a result, its real estate price increase is much more healthy.

The attraction of living in the Sunbelt may be going down with rent appreciation of 20% in Jacksonville, Florida and 40% in Austin, Texas. Meanwhile, the allure of living in a big coastal city may be going up again. Working in offices is returning.

Median Home Prices Are Going To Keep Going Up

If my 2022 housing price forecast proves correct, the median home price will grow by another $35,000 – $40,000. This price increase will be a deceleration from 2021.

To calculate how your metro area may perform in 2022, take your metro area's 2021's home price increase and multiply it by 70% – 80%.

Given roughly 68% of Americans own homes in 2022, the majority of Americans should feel richer a year from now. Therefore, maybe we can believe the Federal Reserve Board of Governors when they say we won't go into a recession after all. Even if we do, it probably won't be that long or painful.

Of the ~32% people in America who rent, some rent by choice. Other renters may have parents who own one or more properties they will pass on to their children. As a result, home price appreciation will continue to be a top contributor to American wealth creation for generations to come.

Saving And Investing The Difference Is A Must

If you cannot buy or don't want to buy, then you must continue to save and invest the difference in stocks and other assets. It may be a challenge to keep up, given the median home price is much higher than the median salary. However, you must try. Otherwise, you may eventually get priced out.

If you are a parent to young children, you may want to build a rental property portfolio today. 20+ years from now, when your children are in their family formation years, they will likely appreciate the foresight you had today.

Also consider investing in real estate through private real estate funds like the ones offered by Fundrise. Fundrise invests in single-family and multi-family rental properties, mostly in the Sunbelt, where valuations are lower and rental yields are higher. If you don't have enough money to buy a single-family home yet, investing in Fundrise is a good solution.

Readers, for 2021, how did your metro area do in terms of home price appreciation? Do you think it's unfair to compare median home price appreciation to median pre-tax income given the median income-earner is usually not the one buying the median-priced home anymore? What are some negatives of such home price appreciation?

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About The Author

68 thoughts on “Making More From Your House Than From Your Salary Makes Life Easier”

  1. I’m in an unusual situation and would like some of your thoughts. I’m 63, single, recently retired, multi-millionaire plus a pension, but own no real estate. I had owned my primary residence up until 2006 and sold, thinking I would buy another place, but then the real estate bubble burst so I waited. Then I got very busy with work and looking after aging parents. So I never bought another place. I’ve rented a small apartment since 2006. But I would like more space now that my life has calmed down.

    I invested the equity from my former residence, which has earned an average annual return of 7%. Every calculator I have used, taking into account all costs of renting and hypothetical owning costs shows that I have actually come out ahead financially by about 75K by renting the past 17 years. But I chose to downsize to a much smaller place as a renter, so it’s not an apples to apples comparison. And even after the insane increases in single family homes the past 2 years, my former residence has still only appreciated an average of 4.5 percent per year since 2006, because that period includes the 2007-08 real estate bubble bursting followed by several years of flat prices.

    Question is : should I buy a place now, or wait until things cool down ? As has been stated we are not likely to see another housing collapse because homebuyers are in better financial shape now, and lenders are more judicious. But obviously, the current madness cannot continue. In fact it looks like there are already signs the real estate market is cooling. I think we are at or near a top. So, what to do ? Thanks for the suggestions !

  2. How do I value my mortgage that I got in early 2021 at 2.75% on a 30yr fixed? I was paying extra principle each month to pay it down sooner, but given rates are now closer to 4.5% or higher, is it worth putting money elsewhere even though the value of the home keeps rising quicker than any other asset?

  3. I’m also in the San Francisco-Oakland-Hayward metro area located east in the inland valleys. I was lucky enough to realize a substantial gain on the house I sold in the Midwest this summer and turned those gains into a down payment on a new townhouse out here. Since my offer was accepted in November of last year, the same floor plan today is going for $210k more than what we paid. My partner and I feel richer because of our home’s appreciation. We expect that in 6-10 years time we’ll be able to apply our gains towards a SFH. At the same time we realize that the gains are due to our luck of being in the housing market at the right time. If we were about 6 years younger then we’d likely be much farther away from homeownership. Many people do not have family that will pass on homes or help with down payments. For those who find themselves in that situation, it will be more difficult on the margin to get into homeownership. The trend towards higher home prices relative to incomes will likely exacerbate already high levels of inequality here in the US. The effect on inequality is the biggest downside I see to the home price appreciation we’ve seen.

  4. Home prices in Vancouver Canada increased 17% last year, haha. My wife and I have 3 properties now and very grateful for our good fortune. Things are slowing down in 2022, but we’ll probably still end the year more expensive like in the U.S. probably. When home values increase faster than wages people should still be able to afford housing. It’s just that they have to be willing to spend more of their income on housing, and cut back on other expenses and savings. It’s a trade off. And yes, if people don’t buy a home, they have to save and invest in other productive assets. Personally I think it’s best to invest in both real estate and stocks. :)

  5. I agree with Jeff, there are many ways to invest in RE without actually owning actual property, REITS, RE ETFs, stocks that cover industrial buildings, apartment complexes, hotels or even single family homes like Invitation.

    Zillow surely wants to keep believing home prices will keep going up. How much longer can the growth in prices surpass growth in income. Also, 30+% in a year? Where were all these people living 2-5 years ago when bidding wars were almost non-existent.

    It’s too bad we have companies buying up single family homes, it takes away the sense of community and pride of ownership for many folks.

    I’m all for more supply if that’s really warranted, but like I said there wasn’t a feverish thirst for RE a few years ago (at least in my part of CA). Also, empty homes in urban areas should be banned, people need a place to live!

    That’s my rant ha. I’m going to cover this and ways to reduce housing costs in my next blog post.

  6. Owning Real Estate is great, but there are so many other ways to own Real Estate without the hassle of being a landlord.

    The returns are as good and usually better without the headaches. I was a landlord for many years.
    My Private Equity Real Estate Investment generated 28% total return last year. 7.2% Distribution and 20.8 NAV. Only 5% of the 7.2% distributions are taxable. Granted, last year was an incredible year for Real Estate.

    Another Real Estate investment that should get some attention are Opportunity Zones. I sold my rentals, and put money into land and took the Cap Gains and rolled them into an Opportunity Zone which defers the cap gains taxes much like a 1031 exchange.

    However the Opp Zone tax treatment after 5 years gives you a 10% step up on the cap gains invested and if you hold 7 years it gives you a 15% step up. Meaning, that 15% of your cap gain invested is now tax free.

    Hold it 10 years and you pay 0% on any and all the new gains from the investment.

      1. I have found one of the best indicators for future growth is the RE affordability index. The combination today of higher interest rates and inflation on food, fuel, etc. means the affordability of just about every thing has got to be near or at record lows! My sense is that while we may not experience a significant recession, we are likely to experience a stagnant economy for many years. What say you?
        Mark P

        1. I say affordability is way higher today than it was in 2006 for new buyers. And for existing buyers, affordability is even higher.

          Are you not way wealthier today than you were in 2006?

  7. I am not sure how much it matters that your home price went up unless you sell it. Interest rates are on their way up and income for the vast majority will be flat. I am a firm believer that higher rates will lead to a decrease in home values as cost to borrow increases.

    1. I hope so, as I’m looking to continue building my real estate portfolio with ocean view homes.

      But don’t underestimate the wealth effect and psychological effect of having a large part of the average American’s net worth grow.

      Do you not feel wealthier with your real estate appreciation?

      1. I have several rentals and a primary residence and honestly only cash flow received monthly that I can spend or reinvest makes me feel wealthier. Even when my stock portfolio went up over the last few years honestly didn’t feel one bit different as I can’t spend gains with out selling assets. To me cash flow above operating cost is king

        1. Cool. Maybe I’m just more easily satisfied, I’m not so sure.

          I left work In 2012, I thought I had enough. Although I ended up needing more for my family, any wealth gained after 2017 feels like absolute gravy.

          Have you left work as well? If not, that might be the biggest difference? If life is the same, even if you have no money, more money doesn’t really matter as much.

          1. Of course I left work the exact same year and earlier posted about my energy investment income and history of past partnerships with companies founded by Apollo global management. Posted under Brett from Oklahoma.

          2. If you recall that is net income in excess of 150,000/month derived 100% from non op working interest and royalty interest with an additional 4,000 in rental income. I have Americana partner’s manage my equity portfolio as well. They are a top notch private wealth management firm

            1. My primary residence did increase by 23% last year my my rental units by close to 20%, but to me that feels just like my equity portfolio. Looks good on paper but either need to sell or take lines of credit to tap that value. I always aim to invest 75% of my free cash flow in my core business of energy production and 25% between direct investments in real estate, restaurants, breweries, a yoga studio, a biotech company and any additional opportunities that are directly sourced where I am a partner in the llc or sub chapter s so I can receive the pass throughs which most the time are losses which I use to offset the energy income. The losses are for various reasons but mostly due to start up cost and depreciation on equipment. Outside that Max my retirement and push the left over cash that doesn’t get placed in the core or additional businesses to the guys at Americana. Maybe I don’t think about this correctly but paper apperception doesn’t excit me. My family and I enjoy multiple overseas trips a year for extended periods of time exploring and learning and we need high monthly cash flow to support the ongoing investment program and to live. Only time I even look at the appreciation is when doing a personal financial statement since non of the assets are tied to loans. Everyone has a different way they enjoying doing things and this model has worked for me, but by no means is it tur only model

              1. Hi Brett,
                I have not read how you grew your investments and would like to learn how you developed such cash flow. Bullseye regarding cash flow – assets that generate cash flow are pure gold.
                I was in the energy sector would like to learn how you were able to invest in that sector along with your investment strategy.
                Thanks for posting and I look forward to hearing from you.
                Semper FI,

  8. I think growth in the SLC area is fairly sustainable — Silicon Slopes. I live in the area and have seen a lot of job and salary growth over the last 5 years. More recently, we got a lot of CA and other transplants during COVID, especially in Park City where we’ve had greater than 25% appreciation. We have great skiing, mountain biking, and close proximity to national parks. I’m not a real estate speculator and could be wrong, which is fine, because we bought before al the madness.

  9. I do regret not getting into real estate in my early 20s. I could have easily bought a rental property in my college market to rent to college kids and while it sure would have had a lot of headaches, it could have helped to build wealth at an early age. Then later on, when my wife and I sold our first home, we should have rented it instead. We had enough money to cover the new house downpayment, but had a tough time mentally getting over the hump. So if anyone can learn from me, trust your gut, be more aggressive early in your career with housing before you are “old” and tired like me. :-)

    1. Oh well. Good notes for now or the next life!

      I do like the plan of buying, living, renting, buying, living, renting. In one lifetime, a household could own 3-5 properties no problem.

  10. Simple Money Man

    For folks whom can’t afford a down payment on another property, could they capitalize in the real-estate market by continuing to make payments on their primary mortgage, while enjoying the unrealized gain in price appreciation?

    And invest (DCA) any additional funds in REITs and crowdfunding?

  11. Manuel Campbell

    In addition to all of that, gains on houses are non-taxable, whereas employment income is fully taxable. That means the average household in San Francisco must put an additional 205 000$ to buy a house, but they have to do it with after tax income. That means, assuming a 30% average tax rate, they have to earn an additional 293 000$ to buy the same house. Ouch !

    That’s a good reminder for those who think about delaying the purchase of a home in hope to get a better price to not play that game. Just buy a house when you are ready and when you can afford the payments.

    I mostly see my house as an economic “liability”, like Robert Kiyosaki, an not like an investment. The real question for would-be buyers should be : do you want a big liability now or a bigger liability later ?

    Once you already have a house, then getting rid of the biggest part of this liability – aka, the mortgage – should be a top priority. Maintenance and property taxes will always be there. But they are much more manageable when you have no mortgage to pay. Something to think about for anyone renting.

    If you only have a home (like me), without rental real estate, then you don’t really “win” anything with rising home prices. You are just not “losing” like renters, with an even larger liability.

    The real winners are investors. Whether it’s in real estate, stocks or other investments, the effects are the same. An increase of the value of your investment greatly improve your financial situation.

    An that’s the reason why – I think – it’s impossible in the long run for workers to keep up with investors.

    Interesting data sets in your post.
    Here are the numbers for Montreal, Canada :
    House price appreciation (Feb 2022) : +90 000$; Condos : +55 000$
    Median pre-tax income (2020) : 38 700$

    1. Hi Manuel, You mentioned, “Once you already have a house, then getting rid of the biggest part of this liability – aka, the mortgage – should be a top priority.”

      I understand this line of thinking if it’s late 1970’s or early 1980’s when rates were in the high teens, but why now?

      For example, if you mortgage debt is at 3 or 4% and inflation is twice that (7 or 8%), why not borrow as much as you can within reason? Why pay down debt at 3 or 4% unless you know of no investment that can get a higher ROI than 3 or 4%. For me, I know of plenty of investments that have better than double digit ROI so why not borrow as much as you can. I have a $1.725M house that had a $680K loan at 3.75%. I refinanced (cash out) in December of 2021 and doubled my loan amount and also lowered my rate to 2.625% at the same time. Effectively, I’m borrowing money at lower than inflation (2.625%) and can put that money to work earning 10% or more.

      1. Manuel Campbell

        Yeah ! You are right.

        To be more specific, I should have said “net personal debt”, which is essentially the home mortgage minus any investments. “Net personal debt” should be reduced to zero as fast as possible.

        When I’ll reach the next level of wealth, something like 3M$ or more, I would seek to structure my debt differently, ie. have no personal debt at all and finance all my investments by themselves, preferably inside a corporation.

        That would be the ultimate peace of mind where you know your creditors can’t get a hand on your personal home no matter how bad things turn for your investments.

    2. “In addition to all of that, gains on houses are non-taxable, whereas employment income is fully taxable.”

      A nitpick, but property taxes increase based upon the gains of the house. Unlike stocks, property taxes are taxes on unrealized gains.

      1. Manuel Campbell

        “property taxes increase based upon the gains of the house”

        Not really. At least, not here in Quebec. Property taxes increase depending on city expenses, not based on property valuations.

        If properties go up more than city expenses, then the tax rate will go down.

        However, it’s also possible that city expenses to go up while property valuations stay stable or go down. The tax rate would then go higher.

        You can make a case that, over long periods of time, city expenses and property valuations should be highly correlated, and I would mostly agree with you !

        1. Not that guy again

          In the USA capital appreciation on the sale of a home is taxed. I’m surprised to hear it isn’t in Canada? Here there just happens to be an exclusion for $250k/$500k depending on your status.

          IMO that is simply just a way to make you whole from:
          1) Homeowners not tracking all their improvements and repairs and adding it to the cost basis like you would for a business asset or investment property
          2) The inability to depreciate your primary house
          3) The inability (in some cases) to write off other expenses/taxes like you would on an investment.

          1. Manuel Campbell

            We have the same exemption in Canada, except there is no limit. That is only for the primary home (of your choice in case someone has multiple houses).

            The other difference is that interest on personal mortgages are non deductible in Canada.

            The basis for the exemption was to not tax citizens solely on the inflation on their primary home when people have to move.

            I don’t know why the limit is so low in the US. I could understand the IRS would like to tax the gains on the houses of the very rich, let say 5M$ and more. But 250K$/500K$ seems like middle class could generate those type of gains in this type of market. Maybe policymakers will have to raise that ceiling … ?

  12. Sam, how can you say that just because equity is high and increasing that we will likely avoid a recession? That is exactly what was happening in 2004-2007 with increasing equity and unsustainable home values. Did we avoid a recession then?

    I know lending is more conservative now than that time frame, but now we have inflation leading to costs outpacing wages. That’s not sustainable.

    1. It’s not the only reason. But if there is a recession, i don’t think it will be as long and as painful as average.

      What do you think and why? How much wealth did you gain in your house and stocks in 2021? And do you not feel more ready to withstand a downturn? What are you doing with your money based on your views?

      Related: Recession Indicators

      1. Those are great questions. There has been a lot of money (6T rings bell) injected into the economy by the Fed since March 2020. That is in addition to numerous trillions of federal debt incurred to finance COVID related programs (PPP, ERC, and others). It is unprecedented.

        As we know, a lot of this money has chased risk assets (stocks, real estate, crypto, and other alternative assets). People have said ‘cash is trash’, we need to hedge against inflation.

        On one hand, I have done that. Most of my stock market money went in from June 2020-August 2021. Then lots of money went into commercial real estate.

        The contrarian would say that when everyone says cash is trash, record high real estate prices (record low cap rates), stock market near all time highs when looking at the CAPE and other measures, we should do the opposite and hoard cash because a downturn is likely. Yet, with how much money has been printed and decent consumer balance sheets, is a severe recession really likely?

        It is hard to tell find a historical time period to compare to current date given some of these unique factors. I read that the 1940’s is a decent comparison in some respects.

        Yes, Primary residence and stocks are up like you suggested. I think we are in late mid-cycle and there are now signs of being in late cycle. Despite inflation, I think now is a good time to build cash balances in order to take advantage of a down-turn. Demand for goods and services was moved up during the pandemic and need there will be demand payback. The Ukraine conflict and fed tightening all pose uncertainty. Given this, I think the general direction of the economy will be more clear in summer to fall. Build cash between now and then to provide some defensiveness and have flexibility to take advantage of opportunities if some of these risks lead to a recession.

        Finally, the rebound from the March 2020 stock market lows and Covid recession was the quickest in history. This likely will make this cycle much shorter than average/most cycles which can lead to a recession or at a minimum economic stagnation quicker than most think.

        Would love to hear your thoughts on this.

        1. Indeed, so you are feeling richer no? Take your situation and multiply it by over 150 million people who own stocks, real estate, or both.

          Many folks are feeling richer in America and have huge buffers to chip away at before things get disastrous.

          1. Maybe I’m missing something here, but the value of someone’s primary residence increasing is not really a “buffer” unless you sell it. And then you need to either buy another home to live in, in which case you’re just re-investing, or rent, in which case that’s money out the door. If there’s an economic downturn, the value of the house is likely to fall as well.

            Same thing with equity investments. Most people that invest in stocks are doing it for the long haul and don’t intend to sell those assets. Sure, they can if need be, but if there’s an economic downturn the value of those equities is going to fall, so selling is sub-optimal.

            The only way that I truly feel “richer” is if my net cash flow, after taking into account inflation and other factors, rises.

  13. Not sure how you can make money on your house unless you want to sell it; and good luck finding another one. There’s no dividends in holding a house, just additional expenses in property taxes, home owner’s insurance, and maintenance. I think my used Honda accord 2002 had a higher appreciation than your house (32% YoY) but you don’t see me advertising that a used car is a great “investment”.

    1. It’s why to be truly long real estate, you need to own more than one property. An important thesis in my upcoming book.

      Congrats on your Honda Accord appreciation! That’s a baller percentage increase! And it might make you feel better about paying higher gas prices. At least, that’s my thesis for anybody who owns used cars. The impact on rising gas prices back to 2008 levels, we’re almost everybody as much wealthier, there’s not gonna be as great as expected.

      1. Nice! I hope the book addresses ways to get long on physical property (not crowdfunding) without selling a primary residence to do so. Would love some tricks of the trade for that. The idea of buying a home and enjoying it for five years and then buying another (nicer one) is great in theory. However, how does one accomplish this in areas where nice homes are 1M+? Consider this a challenge for the new book. ; )

        1. Hi David, I’m in Orange County and a full time real estate professional, but I think of myself as a real estate investor that helps others invest in real estate rather than a realtor. Most realtors recommend to their clients to sell their homes (because it’s good commission that way). However, I recommend they lease the home behind them. The 50 year annual average for CA real estate is 7.3% appreciation. Rents have averaged going up at 4.7%. In a time right now where inflation is higher than interest rates, you can win 3 ways on inflation by owning investment real estate. 1) values go up with inflation 2) rents go up with inflation 3) debt debasement (the value of your debt is not worth as much in future years as it is today). I still am in shock that you can finance an asset (house) indexed for inflation and finance it at half the rate of inflation. I never thought interest rates would ever go lower than the rate of inflation, but that day exists now.

          Anyways, if you are able, it’s always best to rent the home you are currently living in behind you. Why? Because owner occupied interest rates are much better than investment interest rates. Keep the loan you have on your primary and rent it and go buy another primary (not as much down payment required and better rate). Fannie/Freddie should allow you to qualify based on 75% of the projected rental income on your current primary. I own quite a few rental properties myself and continue to use this strategy myself. I also have used 3 1031 exchanges in the last 5 years because I like buying ugly homes, fixing them up, and then renting them long enough to qualify for a 1031 exchange…and then do it over and over again. I used to flip but you get railed with short term capital gains so renting the home for a bit is best because the 1031 exchange is so amazing for real estate investors (avoid tax until you die and your heirs get the step up basis).

          1. So, current home is worth 1M+. To buy another home without making a lateral move (not interested in doing that), I’m looking at probably 1.5M+. You are saying I can purchase it with a lower down payment (<20%) based on rental income? If so, what about PMI and a 1M+ mortgage with SALT limitations, etc.? Thanks for your insight on this.

            1. Hi David, The sweet spot for buying an investment property right now is 25% down. The interest rate tends to be about a half a point higher for investment….so it’s more down and worse interest rate. On owner occupied (primary residence), you can put down 5% or 10% and get decently favorable rates pending your credit score is higher than 740. You ask about PMI and you’re right…PMI is a number that should be put in the calculation if you are doing a 90%-95% loan to value ratio. There is also an option to get an 80% first and a 10% second which avoids PMI. The bigger point is borrowing money at an interest rate that is half the rate of inflation for an asset that is indexed for inflation. Even with PMI considered or a 2nd loan at a slightly higher interest rate, the math makes sense based on inflation rates and interest rates. Rents are way up so you can rent your home behind you and probably get a decent tenant that will pay a good price. Supply is low and my last couple of rentals had multiple applications the first weekend and some offering more than list price (or latest comps).

              SALT Limitations are still there, but there is a number of states that are working around that or allowing corporations to deduct the SALT taxes…but something to definitely factor and look at your individual state.

              RE: rental income: The lender qualifies you for a payment on a house. If you rent your home behind you, the lender will decide what you qualify for based on your monthly debt to income ratio. They will use the projected rental income (75% of fair market value) in your debt to income ratio to qualify you for the next house…so it’s really only for qualification purposes.

          2. I’ve been looking at many homes in the SoCal area and I’m finding that the cost of a mortgage and property tax is significantly more than the market rent. The cap rates in good LA neighborhoods are below 2%, how can you “lease your home behind you” when you are losing a couple thousand dollars a month on the cost-rent difference?

            1. I bought a home in Mission Viejo (Orange County) in 2021. I put 25% down on a $919K purchase price so loan amount started at $689,250. My mortgage payment is $2,814 and my property taxes are another $804 per month. I rent it for $5,000 per month and the rent comps were closer to $4,500, but we had 6 applications the first weekend and tenants were offering more than the list in order to compete. They even paid 12 months up front. This is the market still today.

              In general, you are correct that the “cash flow” is not as good in CA in year 1 as compared to Ohio for example. Ohio is going to win if you are just looking at cash flow. However, two other points to consider:

              1) The last 70 years, the US has averaged 3% on inflation. In Ohio, their 50 year annual appreciation average is 1.8% meaning the value of the real estate has not been appreciating as much as inflation. In CA, the 50 year average appreciation is 7.3%. So, in CA, it tends to be that you get greater equity growth, but not as much cash flow. Part of this has to do with the land value in CA. In CA, about 75% of the value is land and 25% is the structure. In most parts of the country, the structure is 75% of the value and the land is 25%.

              2) It’s only in year 1 that the cash flow in CA is weak. Over time, rents go up and the properties do cash flow just fine…it’s just not in year 1 as much. Some of my rental properties in CA that I purchased 7 years ago are great cash flow plays at this point. However, they didn’t start that way…closer to break even. There are 5 ways to benefit economically with rental real estate and cash flow is just one.

              1) Leverage: Using other people’s money especially when it’s less than inflation like now.
              2) Principle pay down: The tenant is paying down your principle so this helps your equity go up.
              3) Cash Flow: I tend to graph the cash flow for 5 years, 10 years, and 20 years using long term averages on rent appreciation.
              4) Appreciation: For the U.S., this tends to be about 5% (long-term), but CA has averaged 7.3%. Not as great on cash flow, but good on equity growth.
              5) Tax Benefits: Even just a $550K house (structure only) is a $20K write off ($550,000 divided by 27.5 years for straight line depreciation). Not bad for something where you didn’t even have to pull cash out of pocket. *Depreciation is only on rental properties

        2. I think the best way to go long on Real estate is to look beyond your back yard. Sam is right to invest in 18 hour cities or fly over states. People are scared or have been schooled to live near your investment property…not so today. I have properties I almost have never seen let alone worry about. Hire good a good manager or better yet buy NNN warehouses…
          I think the simplest way to start is Study were Amazon is building distribution centers in the fly over states and start buying rental homes. Use local small banks and come in with20% down.
          I have done it with small warehouses following Under Armor Distribution centers and now own over 400 k in warehouse space.
          Cant buy on the coasts..cant grow were they already have everything and cap rates are so tight.

    2. Congrats on making so much on your Honda Accord!

      But I think I’d rather make more money in real estate and not rent in this environment.

      1. In the end you are leasing from a landlord, or making payments to the bank for a mortgage, or paying the government to keep your property with additional taxes. There’s no free lunch here.

  14. As inflation continues to run hot and real estate acting as a great inflation hedge, I want to ask Sam and other readers how are they handling “rent” price increase in the rental properties you own. We have two rentals and I manage another rental for my dad. Rent in San Diego (I’m sure for majority part of CA) has gone up A LOT in the past two years. I thought rent would stabilize this year and I’m still seeing huge rent price increase on Zillow. I truly feel very bad for my tenants who waited during the pandemic to purchase their first home. They’re put in this situation where purchasing a real estate is super expensive and rent has now caught up as well. For your existing tenants that have stayed with you in the past few years, do you raise rent every year to keep up with market price? I saw price increase from $4500 to $5500 and now $6500 in the premier SFH neighborhood in San Diego. I want to know how do most people handle the rent increase with their “very-good” tenants.

    1. I think if you really do feel bad for your tenants and they are good tenants, you keep the rent the same or increase it by a marginal amount. Or, by the amount your taxes and costs go up.

      When we find new tenants, you can go to market rate.

      1. I have a single family home rental in california. During the pandemic my tenant continued regular payments and called me very infrequently. I kept the rent the same last year. This year I increased it by 3%, which is a really small increase considering. He is just such a good tenant and causes no problems. Just think if you lose a tenant for 1 month, you’d have to raise the rent by around 9% just to make up that single lost month, not including listing time, fees, and cleaning. My tenant is probably getting a steal of a deal, but less hassle for me is worth a lot of money, literally.

    2. Lost in the woods

      I agree with the previous comments and operate similarly with my good tenant. Rent increases each year, but more slowly than the market, just trying to keep up with cost increases or a little more. After 5 years or so of slower rent increases, I am probably charging 85% of market rent, which is fine with me. If the tenant was a problem I would increase rent more aggressively. And if the tenant moves out, I will increase to market for the next tenant.

  15. Built house in Indianapolis for 87k ,in 1987, been offered
    266k last week, no complaints ….

  16. Interesting post!

    As a homeowner only and not real estate investor I mainly think of my net worth in terms of liquid investments. But of course the home equity is there if needed and glad to see it increase, even though I don’t track it closely.

    I am trying to build enough savings so that eventually I’m Financially independent without the home equity. At the same time I see the equity as a great insurance policy- if we ever need money we could sell, take the equity and move to a cheaper place.

    I am in an NYC suburb with high housing prices and high property taxes.

    We like it here and no reason to leave but could be an option down the line, especially when our kids are older and not living with us. The increased home value is a nice security blanket.

    1. It is a nice security blanket for millions of homeowners, which is why a long and difficult recession doesn’t seem likely given there is so much of a buffer.

      Your common brings about a crucial point about investing in real estate. You aren’t really long real estate until they on more than one property given we have to live somewhere.

      However, I want to get your primary residence is better than not owning anything in this market. So it’s all relative.

      1. I’ve seen this posted elsewhere, but what is the buffer? If there’s a downturn and housing prices fall, what buffer do you really have? If you lose your job and still have a mortgage, the fact that your house went up in value isn’t going to help you pay your mortgage. And being forced to sell your house is not really the “buffer” you want in a situation like that.

        1. The financial buffer is stability. If you made $200K from your home in 2021, you have a $200K buffer before you go back to even. The greater your buffer, the less likely you have to sell at an inopportune time or sell other assets.

          How about you? Do you own or rent? What is your financial buffer?

  17. Great insights Sam. For somebody who already owns primary home in Bay Area and wants to build rental property portfolio, what would you advice? To buy a rental property in Bay Area right now or wait for some softness?

  18. “Working in offices is returning.”

    Sort of yes and sort of no. I used to work in Manhattan (in the early 2000’s). I now live in the extended NYC in NJ. I have refused to work in the city for years (even before the pandemic) because I couldn’t stand the commute. Instead, I would fly all around the country (usually the West Coast) regularly as I considered a 1-2 times a month flying commute much better than a daily city commute.

    Upon visiting Manhattan this weekend with my family I did take note that “the NYC lifestyle is still rocking it”. Then, this morning I read an interesting quote in theWSJ that, I think, perfectly capture what’s happening in Manhattan right now, “People want to live in Manhattan as much as they ever have. The problem is that not enough people want to work there.”

    It’s so true, Manhattan living is glorious. Manhattan commuting is tedious and frankly was NEVER worth it, and now has been exposed for the sham that it always was. Many of the banks still haven’t figured that out and are trying to bully the employees back. Good luck with that. In my field (and I suspect, future graduates making industry selections), I have choices.

      1. Used to be strategy consulting back when I lived in Manhattan 20 years ago, but Big Tech ever since then.

  19. Oh wow, such fascinating insights! I have a couple friends in San Francisco who are looking to upgrade their homes and they haven’t been able to get anything. Inventory is thin and competition is fierce. They could sell their existing homes and make a profit, but one of my friends would still likely be priced out for what she really wants. They’re considering relocating to a different part of the Bay Area now, but it’s competitive practically everywhere.

  20. My real estate portfolio comprised of two Orange County properties and four AZ houses have made me more in appreciation in 2021 than I could ever make at work. Probably 4 years of working to be fair. My question to you sir, is when do we sell and take some of the profits off the table? I have a wife and a son and work in banking (fear layoffs) and only have a $50k cash cushion ($1.5MM net worth). Basically all real estate ($50k 401k, $50k in cars) Do I sell a property and raise $200k in cash to have as a liquidity cushion, I don’t own any equities so I thought maybe sticking all the cash in securities?

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