If you are planning on settling down in San Francisco or the Bay Area, you probably should buy property before the next tech IPO boom and their respective lockup periods expire. There should be a wave of new tech IPOs post pandemic since there's been a backlog.
The median property price in San Francisco declined roughly 11% from its March 2018 peak. The stock market has rebounded in 2019 and 2020 and interest rates have come down. And thanks to the chaos in 2020 due to COVID-19, mortgage interest rates are at all-time lows.
Be selective and focus on prime neighborhoods with a concentration of single family homes with ocean views like Golden Gate Heights. The west side of San Francisco is going to significantly outperform more dense areas of the city given it is cheaper, has more space, and work from home is very popular now.
A single family home with panoramic ocean views, a massive deck or backyard, and a lot of privacy is huge. There is going to first be a strong migration shift to the outer edges of your city, then to lower cost cities.
By 2021, companies such as Uber, Lyft, Airbnb, Slack, Pinterest, Palantir, and more will have gone public. Once they do, they will make millionaires, multi-millionaires, and a few billionaires out of thousands of people.
The default assumption is that these tech IPOs will bring in huge demand and drive SF Bay Area real estate prices up. First time home buyers and investors are feeling the fear of missing out and itching to buy now before the flood of tech IPOs.
But is buying San Francisco real estate in anticipation of all these millionaires getting liquid really a slam dunk? Not necessarily, although every tech employee who got liquidity is looking to buy property now.
San Francisco property prices are down about 11.5% since its most recent peak in early 2018. The opportunity to buy SF property in the new tech looks good. The tech IPO boom is really making a difference in big city real estate.
Total New Demand From Tech IPO Boom
If we add up the total projected public values of Uber, Lyft, Airbnb, Palantir, Pinterest, and Slack, we're talking about a total public value of roughly $200B from 2019 – 2020.
Therefore, one can make an educated guess there will be roughly 10,000 eligible buyers and anywhere between 2,000 – 5,000 high intent buyers.
These 2,000 – 5,000 high intent buyers with $1 – $1.5 million in cash after tax are therefore looking for properties worth between $1 million – $7.5 million based on a 20% – 100% downpayment.
But how does 2,000 – 5,000 new buyers compare to supply? Supply is the KEY part of the equation to determine future prices.
Invest In Real Estate Elsewhere
If you want to buy a primary residence to live life and raise family in the San Francisco Bay Area, go for it. To take advantage of the tech IPO boom, you must can put down 20%. Ideally, you own the property for the next 5-10 years, if not a forever home. Transaction costs are still a killer when it comes to buying/selling and maintaining real estate.
Just know that SF Bay Area real estate prices are up 70% – 80% since 2012 and you could very well be buying at the short-term top. Prices could easily fall by 10%.
If you want to invest in real estate to make money once you own your primary residence, it's much better to invest outside of the SF Bay Area where cap rates are 3-5X higher, and valuations are 50% – 80% lower.
Real Estate In The Heartland
The tech IPO boom is nice. But there are strong demographic shifts towards the heartland. Noncoastal real iestate is going to be a multi-decade positive trend. Thanks to telecommuting, video chat, the internet, mobile phones, and new online tools, both companies and employees are moving to cheaper areas of the country.
The way to take advantage of this trend is through real estate crowdfunding. Such platforms like Fundrise and CrowdStreet allow investors to invest in the Heartland and the South with much less capital much more efficiently.
All the invest opportunities on their respective platforms have been pre-vetted so investors have a better chance at making a positive return. Information about the sponsors and the deals are all available, and what once required millions of dollars of capital to invest in commercial real estate can now be invested for as little as $1,000.
Cashing Out Of The Tech IPO Boom
I personally sold my San Francisco rental for 30X gross rent and reinvested $550,000 of the proceeds in 17 different noncoastal city commercial real estate projects with 4-5X higher cap rates.
I like this diversification since I still own my primary residence in SF and have one rental. But to be able to earn a higher rate of return passively as a new father now feels wonderful.
Buying San Francisco property in 2020 does seem attractive now that affordability is way up. I refinanced my primary residence mortgage to only 2.625% for a 7/1 jumbo ARM with no fees.
In June 2020, I was able to look in a preapproved mortgage for only 2.125%! It's crazy how low mortgage rates have come down. Check out Credible, the #1 mortgage marketplace where lenders compete for your business. It's free to sign up and get real quotes.
About the Author: Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends most of his time playing tennis and taking care of his family. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.
Related: Selling Property During the Tech IPO Boom May Be A Good Idea