Looking for real estate buying strategies during COVID-19? You've come to the right place. The desire to buy real estate during COVID-19 is heating up. However, buying real estate during COVID-19 has also never been trickier.
Take a look at how strong the Mortgage-Purchase Applications rebounded in May 2020. Demand for real estate is now at a 11-year high.
In 2021, single family homes are getting bid up aggressively thanks to more wealth, low mortgage rates, and tremendous vaccine rollouts.
This post was originally published on April 27, 2020, during the worst of the pandemic crisis. However, I continuously update the post because real estate buying strategies evolve.
Today, I think it's worth waiting until mid-2023 or early 2024 to buy a move-up home. The Fed is unrelenting in its rate hikes and a housing recession is happening over the next 12-24 months.
Taking Advantage Of Uncertainty
Buying the S&P 500 below 2,400 was a shrewd move. The S&P 500 got down to about 2,237 before aggressively rebounding higher. We're now at all time highs.
When the S&P 500 was at 2,400 and below, the Doomers came out of the woodwork to warn us all that the world would enter a zombie apocalypse. They, along with politicians and the media, said that millions of people would die from the coronavirus. As a result, many predicted the S&P 500 would fall to 1,000 and the Dow would fall to 10,000.
Thankfully, social distancing and lockdown measures have helped tremendously and the Federal Reserve and the government launched massive stimulus plans to save us all. Thankfully, the models were nowhere close to correct.
Government Support Is Robust
With tens of millions unemployed, the government announced an extra $600/week in unemployment benefits. Earning $4,000 – $5,000 a month per person should be enough for one person to survive, especially given all the backlash I got in my budget posts.
With stimulus checks and more PPP money being dispersed, the government is attempting to ensure a vast portion of the economy survives until the lockdowns end. So far, the government is doing an admirable job pumping out the cash.
As the stock market recovers, the time to find real estate deals is now. If you believe in a measurable recovery, then we only have a small window before the most frightened real estate sellers realize the world is not coming to an end.
Real Estate Buying Strategies During COVID-19
Your goal as a financial freedom seeker is to buy real estate from the equivalent of the stock seller who sold stock or shorted stock after the Dow dropped below 19,000 and after the S&P 500 dropped below 2,300. They are out there. You just have to aggressively look.
You want to find the real estate seller who thinks the following:
- The Federal Reserve and the Federal Government are ineffective.
- Stimulus checks, unemployment benefits, and PPP loans won't be paid and forgiven.
- The coronavirus numbers will be equal to or greater than all the government model predictions.
- There won't be any efficiency or productivity gains after going through months of working from home.
- Confuses a slowdown in the real estate brokerage business with real estate prices.
- Lockdowns will last well beyond 2H2021.
- There will be a fourth wave as new variants infiltrate us from Brazil and the UK.
- People are actually going to start saving aggressively instead of reverting to their old ways of spending more than they make.
- The stock market will re-test the lows and go lower.
We know in general how real estate performs with every tick lower in stock prices. The S&P 500 down between 15% – 25% is the sweet spot for real estate outperformance in my opinion.
At this level, money rotates out of stocks and into real estate and new money invests in real estate. Real estate is attractive due to its defensive characteristics. So long as the stock market doesn't stay down for too long, real estate will likely do fine.
Real Estate Is Holding Strong
I've also highlighted some real-time examples of how well real estate prices have held up during a global pandemic. You can knock the examples all you want, but these are real examples from real people I do not know.
Below is another real estate outperformance example that closed 40.5% above asking on April 21, 2020. This is well into the pandemic and lockdown. I've got plenty more examples through 1Q2021 as well.
Given the strength of real estate on the way down, real estate will likely continue to hold its value or go up further as the economy and the stock market rebound.
Just be careful with some commercial real estate investments in hotels, student housing, and office buildings. If there are no deal sweeteners, then it's tough. However, these are also sectors that may likely have the most upside as well. Here are the top 20 best places to invest in commercial real estate.
The idea is to buy real estate at an enormous discount. This is despite the stock market already recovering by a huge amount. Then, if you choose, sell the property once the market realizes its true market value.
Or, if you found that dream home, you can enjoy living in it happily ever after. Each day you wake up, you will be reminded by what a steal you got!
Use The Stock Market As Guidance
The beauty of investing in the stock market and real estate market is that you can use your knowledge in both markets to make a better investment.
We, unfortunately, can't rewind time and invest all we can in the S&P 500 at 2,237. However, what we can do is try and convince real estate sellers to still think that the world is still like it was when we were at S&P 500 2,237 to get a great deal.
Ideally, we want to find those sellers who were not only panicking when the S&P 500 was below 2,400, but also thinks the S&P 500 will re-test the lows and go down a lot further.
Here are some real estate buying strategies during COVID-19.
Convincing A Seller To Sell At A Huge Discount
In real estate, there’s a nice saying that goes, “money is made on the purchase, not on the sale.” That’s not entirely true since you can do a lot of things to make buyers pay top dollar as well. But with a well-timed purchase, you get to pay less in property taxes over the life of ownership and generate a much higher compounded return due to a lower cost base.
Most people are trying their best to sell you something. I like to take the opposite approach and figure out how to convince someone to sell me something they may not want to sell that I think is valuable.
If you've found an ideal property, here are some strategies for trying to convince the seller to sell, especially when there are shelter-in-place rules and a lot of fear of the unknown.
Real Estate Buying Strategies During COVID-19
1) Focus on making a connection.
Making a connection is one of the best real estate buying strategies. Making a connection is extremely important during any transaction. Sellers would prefer to sell a property to someone they like. The more you can convince the seller that you will own the property forever and take care of it, the better.
You write a real estate love letter wherein you tell the seller how much their home would mean to you. Talk about the children you plan to play with in the backyard. Talk about how you plan to replace the roof, regularly mow the lawn, and invite your parents over to stay. Paint a lovely picture in the seller’s mind of how you plan to take good care of the property once it’s sold to you.
Selling a home is extremely emotional, especially if you’ve lived in it for many years. All the memories can't help but flood back when you get into negotiations with a potential buyer.
2) Become the Doomer Bear.
It’s much more stressful being a seller than a buyer. Buyers can simply shop around with no commitments. However, the seller is putting himself out there by listing his property online, signing a contract with a real estate agent, and allowing strangers to go through his home.
The seller also knows that if they don’t sell within a certain period of time, the property goes “stale fish.” And when properties go stale, price cuts are an inevitability. It’s also embarrassing when you put yourself out there and get rejected.
As a result of so much worry and stress, using “the end of the world” strategy can motivate your seller. Luckily for you, it's currently much easier to imagine the end of the world given the 24/7 news cycle is all about coronavirus deaths and economic destruction.
You could start with a big picture scenario such as discussing what would happen to the property market if the stock market has a 50%+ correction like it did in 2008-2009.
Then, you could go on to discuss what would happen if COVID-19 mutated, thereby putting billions more people at risk.
After, you could discuss about how the second and third wave might be so much more deadly.
Then, you might highlight all the government models that predicted millions of people could die in America as proof you are not talking hyperbole.
After, you can discuss how you believe strict lockdowns will last for at least another year or two, since a vaccine won't be developed until then.
Then, you can bring up how states could go bankrupt and how the United States could turn into Venezuela with martial law. If they are a fan of TV shows like The Handmaid's Tale, you could joke about what life would be like in Gilead.
Finally, you could talk about natural disasters like earthquakes, flooding, and fire completely destroying their property for good.
Your goal is to paint a picture of the house being a tremendous burden and you being the savior of that burden. Obviously, you don't want to come across as crazy. Instead, you want to come across as a financially stable realist. Because after all, anyone of these things above does have a chance of happening.
Like inception, if you can implant just one of these items into their minds as they are thinking over your offer, there's a good chance you could turn them into the panic stock seller when the Dow was at 18,500.
3) Focus on the benefits of a simpler life.
Desire is the cause of suffering. Owning property can be a big pain in the rear. Your goal is to focus on how much better their life would be if they did not own the property: no more maintenance work, no more de-weeding, no more replacing old systems and appliances, and no more stinking property taxes!
A simpler life is why I sold my rental property in 2017 and reinvested the proceeds into real estate crowdfunding, dividend-paying stocks, and municipal bonds. Not having to deal with rowdy tenants was a life-saver as I focused on taking care of my baby boy.
The older and wealthier the property seller, the more appealing a simpler life free from property maintenance will be.
4) Make them fear losing you.
Once you present yourself to the seller as someone with impeccable character and tremendous financial strength, it's time to make them fear losing you with a real estate breakup letter. FOMO is one of the best real estate buying strategies.
Even if there are other interested parties, a real estate transaction is never done until the final escrow papers are signed and the money is finally deposited in the seller's bank account. So many issues cause a deal to fall apart.
You must make it clear to them that once they lose you, you are gone forever.
The Right Offer Price In A Pandemic
You should patch your real estate offer price with the worst decline in the S&P 500.
Here's an example for 2020:
Given the S&P 500 corrected by 32% from its high, you could offer 32% below comparable sales prices right before the coronavirus hit. Your real estate agent can easily pull up all the most recent comps. You can also do so yourself by searching online.
Unfortunately, offering 32% lower than the most recent comps will likely shut you out. Most rational sellers know the stock market has rebounded and many believe there will be an economic recovery in 2H2020 as shelter-in-place rules are lifted.
Therefore, it is my belief that a more reasonable starting offer price is ~20% below recent comps. You will likely still offend most sellers who won't bother to respond to your offer. However, -20% is not unreasonable given all that's going on.
If you can buy property 10% lower than February 2020 comps, you will have hit a home run. Just know, the ball game is never over. We can only operate in confines of what we know at the moment and speculate about the future. I don't think the housing market will crash for at least three years as the economy opens up.
Be Prepared For Real Estate Opportunity
If my thesis is correct that real estate prices will continue to hold up during a pandemic, then finding great real estate deals will get harder. Unlike during previous downturns, real estate inventory is down as most sellers simply wait things out. However, you should never let something difficult stop you from trying. You must implement my real estate buying strategies to get a deal.
There is always some real estate deal out there if you look hard enough. One should assume that anybody willing to list their property during a pandemic believes prices will be heading south. Otherwise, they would simply wait several months until people can actually physically visit their house. Therefore, it is up to you to prove them right by offering a much lower price!
There is also going to be that real estate agent who tries to convince the seller to sell at a bargain price to capture a commission. When business is way down, it is only natural to push harder for more business. Unless there is an extenuating circumstance, encouraging your seller to list during a pandemic is not the right move.
As a buyer, if you can't raise enough money to buy a property with cash, then at least get pre-approved so you are ready to make an incredibly enticing offer at ~20% off last year's price. You are more than welcome to offer an even lower price as every situation is different. The worst the seller can do is say no.
Never Be Afraid To Pass
As someone looking to build as much wealth as possible to take care of your family, a little “no” shouldn't stop you on your quest for great fortune. The market is open and fair game.
Finally, if for some unfortunate reason we do re-test the lows and go even lower in the stock market after you buy, at least you were able to buy the property at an appropriate discount.
Although I'm seeing examples of some really strong sales during the pandemic so far, real estate is local. I wouldn't pay record high prices no matter how defensive real estate is an asset class.
If you are going to buy property today, please bargain more aggressively than normal. Let's not ignore the fact that tens of millions are now unemployed. We are in difficult times.
Lockdowns and COVID-19 will help accelerate the migration out of densely populated cities such as New York City. Expect less densely populated cities such as Charleston, SC to gain. The work from home trend is real and will last for a long time to come.
Stay disciplined. Real estate buying during COVID-19 is tricky. But for the right price, you'll likely do fine. Good luck everyone!
Alternative Real Estate Investment
Because it takes a lot of time to find a new property, get pre-approved for a mortgage, and negotiate, another strategy is to invest in real estate syndication deals. You don't need to come up with a large downpayment and then take out a mortgage with real estate syndicate. Instead, these deals have already been pre-vetted and sourced.
Two Best Real Estate Platforms
Take a look at CrowdStreet, one of the best real estate syndication platforms today. CrowdStreet focuses on faster-growing 18-hour cities that have much lower valuations. Instead of leveraging up to buy one property, you can buying multiple properties without debt. It's free to sign up and explore.
Also take a look at Fundrise, one of the premier platforms that offer diversified eREITs. eREITs are private real estate funds that give investors broader exposure to commercial real estate deals across the country. Fundrise is also free to sign up and explore.
Buying real estate during the height of the 2020 pandemic turned out to be a really great move. I still think buying real estate in 2022+ is a good idea because mortgage rates will stay low and the Fed and the government will stay accommodative. The millennial generation is in its prime home buying years.
Personally, I've invested $810,000 in real estate crowdfunding to take advantage of lower valuations i the heartland of America. Further, I want to earn income 100% passively.
Real Estate Trends Going Forward
One big trend to be aware of is the rebound in big city real estate. I firmly believe savvy investors should be buying real estate in places like San Francisco and New York City before there is herd immunity. These great cities always rebound. They have the most job growth and highest wages.
Further, foreign real estate investors will be coming back strong in 2022+ due to tremendous pent-up demand. I would seriously get long U.S. real estate before others do. U.S. property is cheap, and foreigners know this. I just hope more Americans know this as well!
Readers, any of you going bargain hunting for real estate? Do you think you will be able to convince a seller to sell at a huge discount? Why would a seller want to list right now? What kind of deals are you seeing out there?
I want to spread awareness amongst people purchasing/selling houses regarding huge increase in wire frauds in general, but especially during these times of pandemic where most transactions are happening virtually. Recent experience where my relative was in the process of purchasing his first house, one day before settlement (Friday) he received wire instructions from the title company to transfer the down payment and closing costs. On settlement day, following Monday, they are at the table signing documents, when the title company asks for the cashiers check. When told the money had been already wired, they find out that the title company had never sent any wiring instructions. Turned out that scammers had intercepted their email communication, quietly monitoring everything, and waited for the perfect time to spoof title company’s email and get the money. By the time the buyer realized all this it was too late and all his savings were permanently gone. Can you imagine hearing that? Turns out that this happens to thousands of people every year in the US and there have been no regulations placed to protect consumers.
This has happened to buyers, sellers, refinancing with cash out, and all sorts of transactions, so folks please be aware and careful.
Oh my, that is TERRIBLE! Damnit! I hate scammers and have been receiving scammer calls for unemployment benefits recently as well. These guys were doing ID theft and taking another’s UB. Grr.
I really hope your relative gets that money back. Everybody, pls call your title company and verbally confirm wire details!
Hi, i just got my credit preapproved just in case i can catch a goog offer. Would you say this is a good time to buy?
Amazingly enough to me, months into the crisis real estate values seem to be holding steady or continuing to rise. I suspect the ultra low interest rates are a major driver here. It is also possible that it will just take more time for the fallout of CV19 to cause enough foreclosures to really hurt the market.
I am pretty much a full-time real estate investor, mostly in multi-family. Since the quarantine started, all I do is listen to 2 to 4 webinars each week with economists, real estate investors, real estate fund managers, lenders, etc.
What I have heard consistently is that demand for entry level housing is going through the roof. They can’t build them fast enough. It’s a similar story for “build to rent” which are entry level houses built to be rented.
Covid-19 has impacted the American population very unevenly and most negatively affecting lower wage, blue collar workers who rent. These are people who probably can never afford a house–even pre-Covid. White collar workers have mostly remained employed.
Given that most Americans are under quarantine and sheltering in place with few diversions to spend our money, there is no greater luxury than a home. Private space–indoor and outdoor–is more valuable than ever. People who were sitting on the sidelines are now clamoring to be in a house. People with sufficient funds who had not planned on owning are looking for houses instead of apartments to rent. Even existing home owners are finding their homes a bit cramped with all their young and sometimes adult kids living under one roof 24/7. People are looking for to upgrade. I personally have two adults and two kids in the house zooming at the same time which necessitates at least 4 confined work spaces.
Low interest rates coupled with the pre-Covid housing shortage is going to give this housing market a long-term boost, Sheltering in place isn’t going away anytime soon, and this won’t be the last pandemic in our lifetimes. Unless the more general US economy takes a hit, housing isn’t going to crater.
“You want to find the real estate seller who thinks the following”
Appreciate your experience, education and willingness to share. After Riots, Covid explosions and increased political uncertainty. I would expect the above statement increasing easy. I’m moving into the Bear Camp and will hold onto cash. I was able to retire early after a decade of flipping, then selling low income real estate on (higher interest contracts) and recently holding onto some Middle Income type rental homes in larger cities. But this market has that “somethings about to blow” feel like in 2007. Hope to hear an update from the Sam uri Soon :)
Definitely not a bad call to hoard cash. If you’re happy with your home, enjoy it!
Well Explained Article with the examples. It’s a weird real estate market where there seems to be pockets of strength, and pockets of weakness. If you have the cash and / or can get preapproved for a mortgage, there are deals to be had. Very thankful to you
I am curious about why people want to buy houses at this time. Because of the volatile stock market, lay-off and remote work, it seems a Great Depression will come soon. Should we wait and buy the house then?
It’s a good question b/c the economy certainly doesn’t seem fine now. But mortgage rates have collapse, the May jobs number was a nice 2.5 million+ upside surprise, and the stock market is back to all-time highs. People wanted to buy real estate when stocks were falling apart in March 2020 due to the desire for a stable asset. Now, people are looking to buy real estate for investment gains now that there are signs the economy is returning.
Hi, listened the podcast of this topic and tried negotiate yesterday when buying flat. It costs 53900 but I asked can we do for 48000 :) Broker said – are you kidding. There is no such prices. People are buying flats.
And actually believe him. Maybe he is even insulted :) Max he can make is about 1k discount.
And I really when looking to other advertisements I cannot see much better flats. So are really old looking and cost even more.
I believe why people can buy buying a lot – because of the money printing even if it is covid – 19. The price I asked 48000 one year ago I saw worse flat for that price. So after one year of inflation I understand that better looking flat cannot be like this price.
Hey Sam, Thanks for the article. My (pregnant) wife and I are looking to leave our fairly expensive ($5k) 2 be apt in SF and move to the East bay (Orinda/Lafayette). I have been actively looking in the $1.5-$1.7mm range but things seem to be going quickly and/or just limited supply. Given that we are looking for something to live in for at least 10 years and need to leave the city, would you say we should just buy something that meets our needs and is at a “fair” price? Or, would you move into a short term rental and wait out the next few months (considering the added stress and costs of moving and being unsettled)? Thanks!
The newsletter today has some great points on what is happening in the real estate market – and it’s not very good news for buyers. the TLDR is that there is very low supply and prices are rising.
Sam – what’s your take on all of this, beyond what is in your newsletter? Given prices are rising, why aren’t we seeing much more on the market (SF/East Bay specific). A lot of people here plan in advance to list homes and April is a big month. Moreover, they may invest money to fix the property up with the expectation of recouping that money when they sell. So there must be many people who planned to sell that now are on hold. Why wouldn’t they now sell?
But, at the same time, our local economy has been hit hard by layoffs and a lot of firms have said their employees can work remotely for the year, or even indefinitely. Between this newfound flexibility and opportunity to leave the Bay and some potential buyers now out of the market (no job), I can’t really figure out what’s driving this appreciation… sure there always are going to be people who have to or want to buy, but there also should be people who have to or want to sell, too.
People have so much equity in their homes, they are not in a rush to sell at a discount. They can just hold on for longer and the stock market volatility has made real estate owners appreciate their assets even more. And if you have a yard with kids, the appreciation is even greater.
Waiting a year to list or after the vaccine makes sense if you don’t have to list now.
Thanks – we’re buyers – but for the past few weeks we expected it to be a great time to buy. Now it seems like it is a worse time. The fact that people have equity, and have seen great appreciation, should make them less worried about getting top dollar (especially given that real estate everywhere else is cheaper). A “discount” is relative, but if you bought in 2010 for 500K, could sell for maybe 1.2M now, is the downside potential of selling at 1.1M really a discount? I’ve bought real estate but not sold, so maybe I don’t have that perspective.
But there are other circumstances that should be at play, I would think: Even for people who own a home and can pay the mortgage, I’d expect that more of them would have looked to cash out before the pandemic, and maybe even more of them now (see what is happening in NYC – there has been a pretty significant flood away from Manhattan…). Add in fewer buyers that can get pre-qualified and less need to be here due to remote work. I guess I just don’t understand what is going on!!
The CA real estate market has its own nuances that explain the low number of sellers.
1. Proposition 13 and property tax. Most sellers of primary home real estate will stay within California. If they originally bought at $500K, their property tax is based on the $500K valuation (plus some modest annual adjustment). If they now trade their home for another equivalent one at a current value of $1.2M, they have now more than doubled their property tax. Trading up would exacerbate this problem. There is some property tax protection for seniors who trade but not for most citizens.
2. SALT deductions are limited to $10,000 as of 2. 2018. Any increase in property tax is effectively not tax deductible.
3. New mortgage interest limits ($750K on new loans vs $1M on older loans). Many CA new home mortgages would exceed the $750K limit.
4. High valuations everywhere making it expensive to trade up.
I don’t love my home of 17 years, but I’m kind of stuck. I have the money to trade up, but I’m grandfathered into my lower property tax and higher mortgage interest deduction limit. If I trade my house for the exact same house across the street, I would be hit with the additional cost of #1, 2 and 3.
#1 and #4 impact investment real estate as well, but #2 and #4 do not apply. Property tax and mortgage interest are fully deductible for investment properties.
GREAT perspective. I was thinking of someone who moved to Arizona, Nevada, Texas, etc – homes are so much cheaper that the taxes would be a minor issue, right? Lots of news about people moving there but we don’t really see it in the real estate market.
I would look for deals right now. If you can’t find any, how about see if you can negotiate down your rent?
Thanks. We actually own our condo now so there’s no option to renegotiate, but we bought 6 years ago and the monthly payments are very doable.
Deals appear to be hard to come by. Especially now that you can’t list homes off market as easily as before. The surprising thing over here in Oakland is that we still have very low supply. It seems like a lot of sellers are still delaying the sale, and I don’t know why. I would assume that if you just spent money to fix your place up, it may be harder to just not sell (as you spent the money only because you were going to get it back when sold). And waiting a year means the newness of the improvements has worn off. Also, it’s a bigger city – some people have to move and have to sell – good or bad real estate market.
Keep in mind that not all markets are the same. Seattle real estate is still a hot seller’s market. Low inventory, low days on market, multiple offers and historically low-interest rates are all keeping it this way. We surely don’t know what the future brings but buyers need to watch those rates and not let waiting in hopes of a deal lose their ability to take advantage of these rates. We know that through recessions real estate has been the best performing asset in all but one recession since WW2. How COVID plus recession effects that only time will tell. Just know that it will differ market to market.
As someone who has invested in both multi-family and single family homes (from $50K to $1M homes), I unequivocally have achieved a better return in multi-family over the last 10 years. That being said, I’m seeing a lot more buzz in the “build to rent” single family market.
forbes.com/sites/forbesrealestatecouncil/2020/02/12/why-build-to-rent-is-garnering-multifamily-investors-attention/#431656de1b39
Does anyone know how to invest in this type of real estate?
Hi Sam,
My only question regarding the online real estate market place is that what if LLC shuts down tomorrow while you are sleeping, then what will happen to all your hard earned money?
Is that impossible scenario and if no then how to protect against it?
From my personal experience this has happened in different field where the company vanished overnight after operating for 10 years.
We’re majority real estate in our portfolio so we clearly believe in it as an asset and intend to hold it long-term. That said, we’re not buying now b/c we rent out our real estate investments, and I’m just not sure how consistent rentals will be in the short-term with unemployment ticking up. We are conserving our cash for a bumpy ride, and we are keeping the rest in paper assets which are more liquid. Of course, we’re still looking in case there is a screaming bargain, but I think it’s early to find those (at least where we are in FL) and there’s no reason to rush into anything just this minute.
While I agree generally that real estate is a good buy over the long run, I could say the same about the stock market. It all depends on the specific investment. I would just caution the reader to understand their specific market and asset class. Single family homes, apartments, vacation rentals, office, retail, industrial, etc., and of course REITs all react very differently to market conditions.
I’ve invested in single family homes and apartments, in the Midwest and the West Coast. I’ve bought $1M+ homes and $50K homes. I’ve lost money when I timed the market perfectly, and I’ve made an incredible amount of money when I was just hoping to bat a single. Here are some lessons learned:
1. If you don’t like the idea of leverage, stick with stocks. You need leverage to make money in real estate, but you control the amount of leverage/risk you take on. Nobody ever built a real estate empire by paying cash for everything.
2. Midwest properties are cheaper and cash flow better (on paper at least), but rents and prices tend to stay fairly stagnant due to plentiful supply of housing.
3. Coastal in-fill cities are expensive (perhaps too expensive) but offer more opportunity for appreciation. A good deal on the coast means I have enough cash flow to cover principal, interest, tax, insurance, repairs and a few upgrades. I do not expect to use the cash flow to supplement my income.
4. More doors = better cash flow. A $1M six unit apartment will cash flow much better than $1M single family home. Within the same market, potential for appreciation is similar so I have stopped investing in single family homes.
5. Poorer neighborhoods cash flow better than nicer neighborhoods. The investor should be compensated more for taking on additional risks and headaches. Your goal should be to improve the building, the tenant base and ultimately the neighborhood.
6. Financing for single family homes vs. apartments (defined as 5+ units) have totally different types of mortgages; mortgage brokers/lenders typically specialize in one or the other.
7. I highly recommend using a management company, but you need to manage the management company.
I highly agree w/your comment that the owner has to manage the management company! But when you find a good one it is so much better. I went through two of them. The present one I have now is outstanding though!
When you say manage the management company, do you mean own them or do you mean check in on them to make sure they are doing their job?
I meant keep an eye on the management company for incompetence, inefficiencies and fraud. If you are a perfectionist or control freak, management companies usually don’t work out too tell. You may need to tolerate some negatives (principally extra expenses) for the peace of mind that you won’t get that 2 am call from the tenant or sued (because you didn’t follow the law). Understand that the to 5% to 10% management fee is NOT where they make their money–it’s the maintenance and rehab work.
It is notable that every management company I know of was started by a real estate investor with enough scale that he/she decided it was more cost effective to start their own and charge other people to manage their buildings.
in February, we were seriously considering buying a vacation property in an extremely popular ski & mtn. bike destination a few hours from us. After running all the numbers, including talking with a property manager and modeling some different occupancy percentage scenarios (zoned for nightly rentals), it seemed like a relatively low risk purchase.
Wow, am I glad we didn’t pay full price only to see all the potential remaining winter rental income vanish overnight! That said, my agent has shared a couple of examples where sellers have accepted almost 20% off their asking price in the last couple weeks.
It’s a risk for sure, as we don’t know what the future will bring, but saving multiple hundreds of thousands on an extremely desirable piece of property in a place we love and would consider retiring in sure is tempting.
Sam, I’m interested in your take on this sector of the market. I know you had a less than desirable experience with the place in Tahoe in the last big crash. Do you see any of the same warning signs today that might have existed back when you bought?
We just bought a place in Tahoe area – indeed got about a 20% discount from Feb prices. We went in knowing winter/spring income is all gone. But we needed the time to update the place a little anyways. So we’re just using it for ourselves for now.
I’ve done very well investing in apartments and single family homes and to a lesser degree in stocks. Vacation homes are an extremely volatile invetment as it straddles normal residential and lodging (i.e., hotels) which are being hammered.
My opinion is as a vacation rental owner, you are giving up some investment return for the luxury of having a vacation property at your disposal. I’d much rather invest my money in something more profitable and use the proceeds to rent a vacation home when I need one.
As for Lake Tahoe specifically do you have long-term concerns regarding increasingly shorter ski seasons due to global warming?
I highly doubt you got a 20% discount to Feb prices. But if true, feel free to share an example.
I am under contract on a house right now and I am absolutely stoked about the low interest rates. I bought a house last year for the same price and a 4.25% interest rate. Now I am looking at 3.25% and a savings of about $200-$250 per month. The rates made it go from a good deal to a great deal, so I am pleased.
I recently heard that Fannie Mae is predicting that 30-yr fixed mortgage rates will drop and remain around 3.0% or even 2.9% through 2021. Do you agree with this, Sam? I know that is one lever the Fed pulls to stimulate the economy, but do you think the banks and credit unions will follow suit?
I believe interest rates will stay low for years to come, helping the housing market outperform.
I live in Atlanta (Buckhead). Houses that are $1.5M+ are going pretty fast. Houses below $1M same. Houses between $1M to $1.5M seem to be the slowest (which our house is). I think this is where you get the younger professionals buying in their 30s/40s and they may be feeling uncertain with less of a cash cushion if things go wrong, plus school doesn’t start until mid-August so people have a little more time before they really have to move.
What are your thoughts on the erosion of landlord / property owner rights during the pandemic? Here in NJ landlords cannot evict tenants and now we have to use their security deposit as rent if requested. This seems to be a new precedent where governors can override your private party contracts which is quite scary. Cancel rent is probably next. Do you think the balance will ever go back to normal? I’ve been landlording over 10 years and although the measures thus far will likely have little impact (6 high end $1m+ units with highly qualified tenants), I fear landlords have become an easy target for politicians and am seriously considering selling and getting out of it when this is all over. Interested to hear your thoughts.
I think such measures are temporary (<6 months) and there will eventually be mortgage debt forgiveness as well if things get worse.
I’ve seen these type of “temporary” measures pop up in response to Covid-19 in several “blue” states. The most anti-landlord proclamations coincide with the most liberal cities that previously had rent control and tenant-friendly eviction ordinances. To me, that is a cost of doing business in these jurisdictions. You need to factor that in when you invest and assume those jurisdictions will become more tenant-friendly over time.
Such policies won’t dissuade me as an investor, but it is one of many factors I consider.
Hi Sam,
I found this site via a google search for advanced personal finance advice. That was about 2 years ago and have been an avid reader and listener since. Love all the content, but your recent breakdown on S&P valuation and deriving what you thought a likely low was is top tier content. I’m grateful to have found the site and keep up the good work!
If there is anything I can do to further support the site please let me know.
My wife and I
I’m glad to have helped! It’s been a joy writing about personal finance since 2009 and now it is a good challenge given all th uncertainty. I like having nothing to sell, except for my severance negotiation book, because it frees me to write about whatever I want. If folks want to read and follow along, then great! If not, no worries! There is no charge.
It appears to me the biggest influence on home prices are interest rates. When interests rates for mortgages hit over 5% in late 2018 home price appreciation pulled back and prices went slightly down.
The trend for mortgage interest rates currently is a downward trend. If interests rates stay this low while we recover our economy I can see the further price growth that we were beginning to see at the start of the year.
My local realtor agency sent out a newspaper stating “this will resemble 2009 when the market crashed 30% and took a decade to recover”. Talk about fear mongering, good grief. This “WILL”. Not may. Ha! Vultures…
Hi, been following your blog for some time, really like your fuss free articles on investing. In Malaysia where I’m from, there are real estate deals galore from developers! up to 30-40% discount or rebates on new units. Time to go shopping :) Have started a personal finance blog not long ago too as a creative and sharing outlet. Thanks for inspiring me!
Wow that example from Bella Vista Way is crazy! I’m in shock. I’m thankful I’m not in a situation where I need to sell property right now yet it seems like some sellers are doing super well based on the example you highlighted.
Is the basic assumption you’re making here is that the world pre-Covid was normal and sustainable and it’s just a matter of timing and negotiation? I’m not a doomer, but certainly my belief is that this recession will be more like 1929 than 1999, exposing fundamental flaws in the status quo which will be resolved but not without pain. Less globalism, debt defaults, stricter lending standards, government overreach, pension problems, grayer demographics… there’s a lot of headwinds that tell me this will be a restructuring decade.
In that environment, beyond looking at the cash flow calculation based on past trends, my thesis is to buy a single family home in a “resilient” city. What does that mean? It means a diverse economy that includes “essential workers” (manufacturing, preferably) as well as more high touch professions. A walkable community with a sense of place that people care about, not just a smear of homes along the freeway. A city that can balance a budget and make tough decisions. And so on.
Bottom line, normal people don’t make decisions about where to live based on spreadsheets (if they did, we’d all be rushing to the Midwest), but rather job prospects, perceptions about their future (aspiration, identity), lifestyle factors (weather, environment, politics) and most of all, family and friend connections.
Brian, I’m in your camp. Even in San Francisco, landlords are lowering rents. If the cap rate suffers, real estate prices suffer. 90% of Americans have negative savings, and, for many of them, this covid crash has become their Minsky moment. I predict that with this world wide economic crash, there will be a far better buyers’ market in three years than there is now.
Solid article with some great points to consider. I really like your line about hearing the word “no.” Who cares?!? In
My experience, 20+ years property casualty insurance, asset classes like homes, tend to the lag the market moves. I don’t know if it’s the size of asset, the length of time it takes banks to get in order, or some other variable, but it seems to me that the ripple back to a principal residence is atleast 6-12 months AFTER the crisis subsides. I’m gearing up for some potential deals in late fall (after the shock subsides) or maybe next spring, if things haven’t bounced back quickly enough.
I agree with you on real estate generally lagging about six months after. However, in this case, we saw the fastest decline to Bear market in the stock market in history. Therefore, we should expect one of the fastest rebounds in history as well. The timeline is truncated so people hunting for real estate should hunt aggressively over the next two months in my opinion. But we shall see as always!
Great points. The drop was so sudden. Will that equate to all “ripple effects” moving at the same speed? Going to be interesting and definitely a possibility. I’m ready, whether that be a trade up to the forever home or adding a rental or two to the stable. Thanks again for your insight. Really, really enjoy your thought process!
I’ve been saying those exact words in some Facebook trading groups I’m a part of. Not many believe it, but I think we’re in for a V recovery that shocks all the pessimists out there.
All the predictions about U-shape or V-shaped recovery does not matter at the end of the day. Achieve your goals and/or wake up to the American dream.
Sam – great blog! But the rebound is not necessarily going to be quick – yes for some service industry workers but what about the cascading job losses? We’re both in the Bay Area: I am not sure those thousands of AirBNB and Uber jobs are coming back anytime soon. Plus all the startups that are likely not going to try to raise in 2020 at all. So, those individuals are the home buyers in the Bay Area, plus with the massive appreciation we have seen, a lot of buyers will wait and see if they see prices slow or decline (the urgency will be to let prices fall more, not to buy before there is more appreciation). I also think – at least in Oakland – we will see a lot of homes come on the market at the same time since we have lost 2+ months of prime selling time. I’m also seeing a lot homes priced transparently which just scares off a lot of buyers. So fewer offers and less urgency to spend a lot (should you decide to buy now). We’ll have to see what happens when there is more supply – right now is not a good measure.
Sure, all reasonable assumptions.
Are you a renter or homeowner? What are your plans?
Homeowner but in a condo and it’s getting too small for our kids. So wait and see seems to be fine, as an accelerating market would allow us to cash more out on the sale, which could fund the new purchase. But I think there is a small chance we see appreciation, an ok chance prices stabilize, and a really good chance that prices go down.
So far, I’m not seeing any deals in my city of San Francisco. https://www.financialsamurai.com/real-estate-outperformance-examples-during-a-coronavirus-pandemic/
But I am see deals in the luxury end of HONOLULU which is very exciting! Been waiting 5 years for prices to really fall.
yep – same over here in Oakland, but I think that’s because there’s been very little on the market so there’s actually no evidence that buyers are not buying. also, no open houses so the metrics to judge interest are different. plus you always have some people who are frustrated by looking or assume that they’ll stay 20 years so the price is basically irrelevant. for us it’s another reason to wait.
Just like in any trade, its all about supply and demand. True, homes are in the market for longer time now but there are still not enough homes as compared to the number of buyers. If a property is listed for sale, there are like 10 buyers asking for it. The seller will just look at how much he is getting. How will the love letter help?
A love letter will definitely not help if you don’t try to write one.
Also, if you lack social and communication skills, a love letter probably won’t help either.
It’s the same thing with people who don’t bother to develop relationships at work, negotiate salaries, build client relationships, etc.
What is your current real estate situation?
We bought our house in 2012 because of a love letter. The house was on the market for 24 hours and got 10 offers. We made a strong offer, but there was one offer that was still a few thousand above ours. The seller chose us over the slightly higher offer because of our letter.
Hi Sam –
Excellent article (not sure if my first attempt worked). I consider real estate a great class for increasing wealth and providing cash flows.
What are your thoughts on International Real Estate/REIT funds? Historical performance shows US REITs as a much better asset class than international.
Sam – I owe you a big Thank you!! We used your love letter and break up letter strategy to buy our second house here in the bay area. It was an off market transaction where we used a similar love letter like yours to connect with the seller and show her we could close without contingencies. She initially dismissed our offer stating it was too low but then, she did come back with counter offer a week later. We submitted another counter offer which was relatively close to our original purchase price. On top of that, we used the break up letter to show her that we were willing to walk away from the deal and that we were putting offer on another property.
After all this back and forth, she agreed to sell the house to us if we increased our counter offer by a few thousands which we accepted. This new purchase price was still 12%-13% lower than other comps sold in the neighborhood.
This seller had bought the house right before the real estate crash in 2008 and had seen the decline in property prices. Our letters painted a similar picture about an upcoming recession and decline in prices which did the trick.
The whole transaction played out very similar to yours except that this house never got listed on MLS. Property prices in that neighborhood in past month and a half have actually gone up between 3% – 4%. We are almost 20% up just in the past month and half.
On top of getting a good deal, we were also able to lock in a low interest rate during that time.
I’ve been reading your blog for a few years now and it has really helped me put my finances back in order. I hope other readers read this comment and know that this can be done. Bay area is a very competitive market and thanks to you, we were able to get a fantastic deal. As you say, “Never fail because of lack of effort because effort requires no skill”. :)
Thanks once again and I’m looking forward to your posts on home renovation.
Great! Congrats on getting a deal!
Always good to hear about readers taking action and winning.
PM, did you send out flyers in a certain area to get this seller communicating with you? Hoping to do something similar soon.
Sam, NoVa here. The past 2-3 weeks, everything priced appropriately, i.e. seller not being completely delusional, is gone within days-2 weeks. Supply is limited, but demand is strong. SFH and townhomes below 1.2Mn especially. 1.2Mn seems to be a magic number.
The bidding war we saw in Jan-Feb cooled down a bit from mid-March – mid-April, and now gone back to crazy level again. What is going on?
NoVa real estate market back en fuego? If so, you have to get into the skin of the Doomer Bear and try and sell the end of the world scenario to get a better deal.
To buy low, you need to convince. Buying at market prices takes zero skill.
Seems starter home market is higher than ever. Above 1.2mn is sitting a bit. Anxiously waiting for my refinance to close in two weeks, then will practice your wisdom!
Thank you!
Maria, I’m in NoVa also (Arlington). Housing still seems very strong. I’m planning to sell within a year (retiring from the military and moving back to my home state). I’m hoping we’re somewhat protected here due to the job market being so strong, but I cannot see how this does not impact housing in most of the country.
Hi, Maria, I am in the same area trying to buy in Chesterbrook ES (Mclean High) zone within a year at under 900K. Seems an impossible task especially during COVID – low supply, high demand, even delusional sellers seems to get what they want. A basic 4 bedroom with no curb appeal was just offered at 1.3 and is already under contract! Amazing and discouraging to me… I am not really looking at past 1.5M market but you are right – these houses sit and sit.
Cool, my hometown! I went to McLean High School and lived near the McLean Racket & Tennis Club. Good memories for the most part. Related due to the pic of my old house: Spoiled Or Clueless? Work A Minimum Wage Job As An Adult
Sam, I love the club and used to go there the whole family almost every other day! Your high school house has the ideal location for everything! I’ve always been curious about your bad (tho small portion) experience of McLean. Would you share?
What? I’m looking into the same area! Currently living near McLean town center. My budget is 1.2-1.3mn, absolutely NO deal at all…sounds like you can only find a deal if your budget is above 1.4-1.5. which house is under contract for 1.3mn? That’s absolutely crazy!
there was a nice 4/3 on North River at 1.15M. They dropped to 1.1 and it went under contract quickly. the 1.3M I mentioned is on Woodacre dr – both in Chesterbrook ES zone. With your budget you will be fine depending on what your criteria are. Mine are only lowest cost and a school – not willing to change a school zone but have an upcoming divorce situation. I lived on Kirby for years and moved to 41st a couple of months ago. happy to connect by the way since we are on hunt but for different things :)
Sure! Horsecsc@gmail.com
Great article Sam.
I like real estate as an asset class.
Sam what are your thoughts on international real estate/reit funds? Appears over the long term (past performance) US REIT funds are much better.
Check this article out:
https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
REITs are MORE volatile when the stock market is volatile.
How can so many people afford a 2 million dollars plus home in America where 150000 dollars pre-tax is a decent salary. It will take like 20 years/ lifetime for someone to accumulate that kind of fund.Some might not be able to amass such fund at all.Any secret?
Sure. Two people making $150,000 join forces. They also have stock options, RSUs and the Bank of Mom & Dad.
In the San Francisco Bay area, 23-year-old college graduates of compensation packages of around $125,000 – $150,000 now.
Real estate prices are driven by job growth, salary growth, and an international and domestic demand curve.
Sam, love the material you create. Recently lost out on (2) homes in the last 2 weeks. Both well over asking in the city of Newark, Ca. My agent brought up today writing a letter and mailing it out to people who haven’t listed their home. Have you done this before? Think in this market helps if the seller doesn’t see other offers coming their way.
It’s worth a shot. Agents do that to prospect for listings all the time. You never know what a homeowner might be thinking.
Feels too soon for a major V recovery.
Stock market is on it’s way back to all time highs at a record pace. Whose previous highs was heavily fueled by buy backs, in an over heated economy being pushed. Over the span of… a few weeks. Really?
Meanwhile, depression level unemployment around the corner. Nearly every company out there looking to reduce costs, furlough workers, etc. People aren’t paying rent. Companies aren’t paying rent. Even if a cure was found tomorrow and everything opened up I think we’d be still looking at a long recovery just to unwind the shock.
I too bought at the major dip, but have sat back and watched in complete disbelief at the last few weeks. I’m likely to liquidate a fair amount and sit at the sideline for a few months.
I see housing as a wildcard. Supply is limited. However there’s a lot of people who bought houses the last few years who really, really need both people working to afford them. A lot of those people aren’t working now, and may not at the same income for several years.
Another wildcard, they probably aren’t paying their mortgage and aren’t under pressure to do so or get out. Why would you sell to go start paying rent… if you don’t have to pay your mortgage for a few months?
It’s going to be real interesting to see how this all plays out over the next few years.
This is where my thinking is – what is this going to look like in 6 months when (hopefully) we’ve gotten more back to normal? People will have lost jobs, the travel industry (hotels, rental car companies, air, etc) will have laid off a ton of workers – there’s going to be a trickle effect and it’s going to take time (6 months? a year?) and that is going to impact housing. I’m in NoVa (Arlington) and it’s out of control (the bidding wars and how much over asking homes are going for). I think we’re protected, but the rest of the country where jobs aren’t as strong, how will they do. We plan to move within 12 months to the Tampa area – and that housing market is very strong.
I am curious if anyone has any insight regarding the New York suburbs area. I am particularly interested in Westchester County and Greenwich Connecticut. I imagine there will be a mass exodus out of NYc as people realize they can work from home and don’t want to be living in such a densely populated city etc relying on pub transportation. I really don’t see any enormous softening due to the virus and perhaps see a rebound in the area, especially bc it has been beaten up because of the salt cap And demographic exodus. This pop may be temporary and people may want to go back to the city after all of this is done though.
We’re supposed to be moving to Fairfield County from Atlanta this summer (trying to sell now in Atlanta and it is SLOW – only really good deals seem to be selling). Every house we’ve been keeping an eye on in Wilton or New Canaan seems to go under contract pretty quickly so this seems to have boosted that market.
Closings came to a near standstill last week – like really eerie on how few closed last week in big metros in CA, especially in the $2mn+ range
Will be fun to see how my condo performs when I list it after Memorial Day.
Why sell? Why not try and take advantage and buy and rent out your place?
Selling a condo will likely be tougher than selling a single family home.
I’ve rented it out for the last 4 years at an amazing rate but the equity in the unit will be what puts us comfortably in range of a down payment in the Bay Area. I tried to sell last year at a great price but the buyer backed out 12 hours before closing :/
Instead, I rented for an additional year and put more money toward the principal. Had we stayed in New Orleans, we’d hold on to that condo for life because it rents so well.
Ah, that one, from where you used to live. Got it. I still think you should continue to rent it out, if you have indeed an amazing rate.
If you can’t lock in a good deal this summer in the Bay Area, I’d wait until the second wave hits.
No rush to buy property now if you can’t. Property prices are relatively slow moving. Worth biding your time.
I know this anecdotal, but last week two for sale signs were put up on restaurants that are on my drive to work. I’m thinking commercial is where the deals will be. My residential real estate agent friends say there simply isn’t enough supply of residential homes on the market right now to meet the demand. People don’t want strangers with potential Covid walking around their house so there delaying listing.
Agree! Some types of commercial real estate will be hit the most and they will present the most opportunity. I will have a post on this subject soon.
The lack of supply for single family property is frustrating. But they are out there! Just gotta keep looking.