Stock market corrections remind us how meaningless money is if not enjoyed. I’ve most of my investable assets in various index fund ETFs, and six figures invested in actively managed portfolios to hunt for home runs. So far, I’ve only found one home run in Netflix over the past several years. And ironically, the joy I get spending $10 a month for Netflix’s streaming service FAR OUTWEIGHS the joy I’m feeling from making tens of thousands of dollars in Netflix returns!
In this post, I’ll share how I’m planning on taking advantage of an unfair situation to potentially improve my financial well-being. Afterward, I’d like everybody to think about what type of messed up situations are happening in your area that can be exploited as well!
MASTER PLAN TO BUY A NEW HOME
After buying my fourth property in early 2014, I swore I was done buying more. I found my dream home with panoramic ocean views on two levels. Any more property would put my real estate allocation as a percentage of net worth uncomfortably above 40%. I’d much rather focus on my online endeavors to grow wealth.
But despite my best efforts to encourage startup employees to ask for better compensation packages given they’re taking outsized risk for their potential reward, there’s currently no hotter industry where people want to go work. I’ve failed at my secret attempt to push people away from San Francisco to prevent my city from turning into Zoo York.
The great irony is that everybody blames techies for driving up rents and home prices. Yet, the vast majority of techies cannot afford to comfortably rent their own $3,600/month one bedroom apartment or own the median $1,100,000 home in San Francisco by the time they turn 30 because they’re underpaid! It’s just the shear number of new employees moving into the Bay Area that is causing upward pressure on prices.
Despite the high cost of living, the San Francisco Bay Area is still great due to the plethora of opportunity to make it big one day. Uber is valued at over $60B, AirBnB is valued at $24B, Pinterest is valued at $10B, and SoFi is valued at over $6B based on their last funding rounds as of 2018. This is nuts since none of them existed 10 years ago!
Thousands of startup employees will see six and seven figure windfalls when their companies eventually go public. Capital raised from outside of the Bay Area is making some Bay Area employees rich. As a result, you want to own San Francisco real estate. After all, the average pick and shovel merchant got much richer than the average gold digger.
The unfair situation: One of the biggest injustices startup employees face, besides being relatively underpaid, is that they have NO LIQUIDITY. Not only do they have no liquidity, they might have negative liquidity if they decide to leave and buy their options within 90 days of departure. On the other hand, the founders and early investors have the option of selling a portion of their holdings during each round of fund raising. We saw the Secretly founders each cash out for $3M and then shut down their company within 12 months to the detriment of their employees.
Dropbox and Jawbone aren’t public companies, yet their founders have multi-million dollar houses in Hawaii and Montana respectively. Why? Because they were able to cash out for millions during earlier funding rounds. Meanwhile, most of their employees are stuck. The founders know that if they go public, they will see a massive devaluation in their company given late stage private market valuations are absurd. If they can sell their stakes regardless of being a public company, screw the employee’s desire for an IPO!
Opportunity! Due to this asymmetric financial disparity between founders and employees, it may make sense for me to buy another property before these thousands of startup employees get liquid. I’ve spoken to perhaps a couple hundred startup employees in their 20s and 30s and almost all want to buy a home, but can’t until there’s an IPO. Even though I don’t want another home, the opportunist in me sees another chance to potentially make a huge return with relatively less risk. Let’s take a look at the Facebook example below.
IPO MATTERS MORE THAN COMPANY VALUATIONS
Just look at what San Francisco real estate prices did after Facebook IPOed in 2012. I even wrote a post called, Should I Sell My House Due To Facebook Going Public? Thank goodness I didn’t! In retrospect, what I realize now is that it takes much longer for IPO money to work its way into the real estate market due to the IPO lockup period and the time it takes to find a home.
I’m not saying that Facebook is the only reason why the median SF home price has rocketed 65% since 2012. There are obviously lots of positive economic factors involved. But there is NO DENYING that Facebook’s thousands of new millionaires had an upward effect on home prices.
Some pundits say that because companies like Twitter, Lending Club, and Square aren’t doing so hot in the public market, there will be a negative effect on SF Bay Area real estate. I agree! At the margin, I expect home prices in the region to flatline or fall over the next several years as prices far outpaced income growth.
But what these bearish pundits don’t realize is that company liquidity is more important than company valuation. Even if Uber, Airbnb, and Pinterest all see their valuations cut by 50% in this next downturn, they are still worth $30B, $12Bn, and $1.75B, respectively. Again, none of them existed 5-10 years ago, so all this value creation is simply a bonus.
From an employee’s perspective, a 50% decline in company valuation means that instead of a hoped for $200,000 – $3M windfall over a four year vesting period, as is the case for most startup employees, the windfall may be “only” $100K – $1.5M. $100K – $1.5M plus any base salary savings during the vesting period should be more than enough to buy a $700,000 – $3M property.
Less than 1% of the entire housing inventory is for sale at any given point in time. In San Francisco, there were roughly 480 listings in the month of December 2015. Imagine if just 1,000 of Uber’s 5,000+ employees decide to buy homes after their IPO lockup period is over? There will be tremendous upward pressure on Bay Area real estate prices.
VISUALIZE VARIOUS SCENARIOS
I don’t know the future, but I always enjoy planning for the future. Writing this post is a great way to hash out scenarios to make sure I’m as prepared as possible.
Ideal Likely Scenario : The real estate market softens between 2016 – 2017 due to a slowing global economy. There are specific property listings that can be had for at least 10% lower than 2015 peak prices. One of the private giants goes public in 4Q2017 as the stock market regains its legs. The IPO lockup period ends 6 months after listing date. As a result, thousands of people will be looking to sell stock and buy property in the summer of 2018.
Action: Buy property a $250,000 – $400,000 income earning couple would like to buy during the winter of 2017-2018. Target price: $1.2 – $2M. Winter is the best time to buy property anyway because anybody listing is a desperate seller. Look to then sell the property during the summer of 2019, 1.5 years after purchase for hopefully a $150,000 – $300,000 gain.
Unlikely Scenario: The real estate market becomes the most coveted asset class and rises another 20% over the next two years because the stock market is melting down. People pull their money out of the stock market and into real estate, a situation similar to the 2000 stock market crash. Companies like Uber and Airbnb delay going public until 2018 or later, leaving thousands of employees in the cold.
Action: Don’t buy anything. Consider selling my rental condo or rental single family home to simplify life. A stock market crash means there will be more tenant turnover and hassle.
Terrible Scenario: The stock market and private market get slaughtered so much so that any interest in buying property fades. People just want to keep cash and deleverage. As a result, the property market corrects by 20%-30%, and defaults rise once again.
Action: Don’t buy property due to increased debt and illiquidity. Instead, continue following my investing game plan in the stock market to potentially benefit from a rebound.
One consistent solution: Save, save, save in order to have the OPTIONALITY to take advantage of buying opportunities. An Uber IPO could potentially boost property prices by an additional 20%, resulting in a 100% cash on cash return on a 20% downpayment. I know it’s coming. What I don’t know is the market environment during the time of its IPO. Related: Invest Or Save For A House Downpayment?
TAKE ADVANTAGE OF MARKET DISCONNECTS
The world is messed up. Your key as a Financial Samurai is to BE AWARE of and TAKE ADVANTAGE of all the unfair things in the world. If you know thousands of people in your area will see huge inflows of cash due to upcoming IPOs, then you should get ahead of the curve by buying what they plan on buying before prices rise.
You know the federal government punishes individuals who make over $250,000 a year by phasing out deductions, adding extra investment income taxes, charging a higher marginal income tax rate up to 39.6%, and forcing you to pay outrageous healthcare costs. As a result, you don’t bother killing yourself trying to make more money.
You know your female boss feels pressure to vote for Hilary Clinton. Therefore, you wisely display your support for Hilary next time you talk to her, even though you think Hilary is a little disingenuous and robotic. Getting paid and promoted or surviving a mass layoff is highly dependent on whether your boss likes you.
You know rich parents buy their kids’ way into the best private universities. As an average person with no special privilege or massive inheritance waiting, you work harder than everybody else and try to make your own fortune through entrepreneurial activities so that you too, can one day give your kids a massive head start.
The financial world is yours for the taking. I’ve highlighted an opportunity I discern here in San Francisco. Whether I go through with my plan is a different matter. But what I do know is that I will be saving a lot of money over the next two years just in case!
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns. Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible.
Updated for 2019 and beyond. I actually ended up selling one of my rental properties in 2017 because someone offered my 30X annual gross rent ($2,740,000). I tried to sell the property for $1,700,000 in 2012 and NOBODY wanted to buy it. I reinvested $550,000 of the $1,800,000 proceeds in real estate crowdfunding for 100% passive investing. So far it’s been fantastic. The real estate market in SF, NYC, Seattle, Honolulu, Vancouver, London, and Toronto are slowing due to high valuations and increasing supply. Airbnb and Uber are finally set to go public in 2019.