Despite all the hype about massive workforce migration to lower-cost cities due to the work from home trend, I now believe the migration trend may be slower than hotly anticipated. The best near-term real estate investment opportunity really is right in your city.
We've been talking about investing in the heartland of America since 2017. I'm glad everyone from the mass media to various famous pundits is now on board after most of our nation has experienced more than two months of lockdowns.
Hometown firms such as Google, Facebook, Twitter, Square, and Salesforce are either allowing their thousands of employees to work from home until the end of the year or forever. To retain talent and stay competitive in attracting talent, other companies must follow suit.
And it's not just other tech companies that need to allow their workforce to work from home indefinitely. It's other industries as well that pay similar wages and vie in the same talent pool.
For example, the finance industry began to relax its dress code and reduce its arduous interview process after it saw many of its targeted candidates get lured away by the tech industry in the early 2000s.
However, in addition to investing in real estate in cities that will benefit from mass migration out of more expensive, more densely populated cities, also take a hard look in your back yard.
Why The Mass Migration Trend To Low-Cost Cities Will Be Slow
The best near-term real estate investment opportunity is investing in less centrally located areas in your existing city. The simple reason is that it is extremely difficult to leave an existing life behind for a new city.
I know it's difficult to leave from first-hand experience because my itch to leave San Francisco began in 2012 when I left my job. By 2014, my urge to leave surged higher once we started my wife's severance negotiation process.
We figured that once both of us had left the workforce, we would relocate to Honolulu, Hawaii and live a more relaxed lifestyle during our mid-30s and beyond.
With the cost of living in Honolulu ~30% cheaper than in San Francisco, we would be able to stretch our retirement income further while also being able to keep our minds mentally sharp writing on Financial Samurai.
What Prevented Us From Leaving
1) In 2012, I tried to sell our home in the northern part of SF and failed. We pulled the listing after 29 days after some sharks were looking to offer 15% below asking. With such a large asset outstanding, I was reluctant to leave it behind in the hands of someone else. The home was ultimately sold in 2017.
2) In 2014, we found our “Hawaii home” in San Francisco. The home was in a quiet neighborhood with ocean views. We spent 18 months remodeling the property, largely because our contractor disappeared for six months. We didn't want to move after spending so much time and effort fixing up the place.
3) We had our first child in April 2017. As new parents, we wanted stability for at least one year as we tried to figure everything out. We liked our doctors and wanted to stick with them. Besides, what a great way to maximize our house we had just remodeled.
4) Our son got into our local preschool in 2019. I had thought we would be rejected by every school since we are nobodies. But as fate would have it, we bumped into one of the teachers at the science museum every week for a year before our son was eligible to attend. He recommended us for admission. After spending so much time and money on the application process and knowing how difficult it is to get into preschool, it felt bad to decline the acceptance.
5) We had our second child in December 2019. Preschool was going well, although we were all getting sick more often. We thought preschool would be the perfect relief during the day so we could focus on raising our baby daughter.
6) Preschool shuts down in March 2020 and the San Francisco lockdown ensues on March 16, 2020. Even if we wanted to leave right now, it would be an extremely unpleasant moving experience. We'd have to sell our stuff, work with movers, and find storage if we can't sell and ship everything.
We'd then need to hire someone to either sell or rent out our existing house. Then we'd need to find a rental house in Honolulu for at least 30 days. Then we'd have to quarantine for 14 days once we get to Hawaii.
It's Hard To Leave If You're A Regular Person
Do all these reasons sound like excuses for not leaving? Sure. Everything is rational. We could have left if we really wanted to. I'm just pointing out some of our friction points. The best real estate opportunity is where residents are the stickiest.
Besides, San Francisco is a nice city. With moderate weather, amazing food and entertainment, great snowboarding in Lake Tahoe 3.15 hours away, Napa Valley 1.15 hours away, and endless coastline, it would be odd not to enjoy living here if you have the financial means.
The other main reason for not leaving is our social network. I love my group of tennis and softball friends. I've built up a lot of social capital over the past 19 years. Further, in the good old days, not so long ago, there was always something exciting going on in The City.
If you are a regular person with friends, a home, a family, and a job, moving to a different city is difficult. There has to be something extremely enticing to make you want to pack up and leave.
That something is usually a better job opportunity.
However, if your job allows you to actually relocate, would you leave all your friends behind just so you can save money? Unlikely, since you're not going for a new, better-paying job opportunity.
In fact, moving will likely stunt your professional growth because you will be away and therefore miss important networking opportunities once a new normal office business routine is established.
The only reasons why you would leave your city is if you:
- Have few-to-no friends
- Have family elsewhere you want to be with
- Are bored out of your mind
- Are already very established in your career
- Feel like you can't effectively compete
- Found a new job opportunity that allows you to work remotely and pays more
- Have a mobile business
- Have enough passive income for retirement
- You're super rich and want to save on taxes
There's also another big issue to consider about relocating to a lower cost area of the country to save money. Companies aren't stupid! Instead, companies are focused on profit-maximization.
Organizations that allow employees to work remotely in lower-cost areas will logically want to pay these employees a little bit less. There's nothing to prevent a company from hiring an English-speaking employee across the globe for 80% less if it is going to allow 100% remote work.
Facebook has already said it will pay employees less for relocating. Other companies will do the same to stay competitive.
If your pay is a little bit less, the desire to relocate to save money gets tempered. Instead, of taking a pay cut and leaving your life behind, there's a much easier solution.
Relocate to a lower-cost area in your city. It's so much easier than moving to one of the unhappiest cities in America to save money. Who wants to move to Houston or Dallas?
Best Near-Term Real Estate Investment Opportunity
After living in the more expensive, northern part of San Francisco for 13 years, I wanted a change of pace. Everybody looked the same, worked at the same jobs, went to the same parties, did the same events, and ate the same food.
I also wanted to save money since neither my wife nor I had full-time jobs and we wanted to start a family. If we could find a more quiet neighborhood in San Francisco that was more family-friendly that also cost less, we'd move. And move we did in 2014.
By moving just three miles west, we were able to reduce our housing expense by a whopping 45%! The house we sold in 2017 cost $1,326 a square foot. The house we bought in 2014 cost $725 a square foot.
Not only did we cut our housing expense by 45%, but we also cut our food, basics, and entertainment expenses by at least 30%.
For example, it used to cost $15 pre-tip for a haircut where I used to live. That was the cheapest barber I could find since my hair was already so luxurious. But when I moved to my new neighborhood, the average barber charged only $11.
If it's just to save money, you can easily save 20% – 50% by moving to a lower cost area of your city. You should absolutely do this rather than relocate to an entirely different city just to save money.
Our move across town was a relatively painless affair that took only three hours. I discuss this concept in the proper geoarbitrage strategy to save money.
Further, the air is much fresher and clean out west as well, especially when we have the occassional forest fire burning north or south of San Francisco.
Think Rationally Before Moving
I'm absolutely certain the vast majority of people thinking about leaving cities to save money will eventually come to the realization they don't have to go to such extremes.
After all, if millions can more often work from home, an extra 15 – 45-minute commute two or three times a week is no big deal.
Further, if you can work from home and keep the same salary, then relocating within your city to save on living expenses becomes an absolute no brainer. In this scenario, you are triple-winning.
In addition to researching the best cities to buy real estate, spend time expanding your real estate investment search in your own city.
The Types Of Real Estate You Should Consider Buying
Cheap ridesharing options have already made commuting from less centrally located areas of your city much more affordable. With work from home becoming more common, the demand for property in less densely populated areas in or around your city will boom.
Here are the types of property in your city you should consider investing in:
- Single family homes over condominiums if your budget allows.
- Small condominium buildings three stories or lower that allow easy stairwell access to all units versus mega condominium projects where an elevator is the main way in and out.
- Condominiums or single family homes that back up to or are near a beach, a lake, a golf course, or public park.
- Single family homes in the hills, which are harder to find and get to by the public.
- Condominiums or single family homes as far away as possible from public transportation routes (buses, trains, etc). This is a big shift from the past.
- Single family homes with backyards.
- Condominiums with large common open space.
The mass migration to lower cost areas of the country is a multi-decade trend. It's happening. However, now that everybody is all hyped up about the trend, I think expectations should be tempered.
Real estate is performing well so far due to a collapse in mortgage rates. There is also a great desire to invest in real assets. However, please don't get into a bidding war.
Instead, patiently look for the Doomer who doesn't read Financial Samurai. The Doomer is one who is willing to sell you his or her non-centrally located property at a discount. They are out there!
Bottom line: Before uprooting your entire life to try and save 50%+ on living expenses, try relocating to a different area of your city to save 20 – 50% instead. Besides, the more people who leave, the more livable your city will be. The best real estate opportunity may be right in your city.
Real Estate FOMO Is Coming Back In Big Cities
I was playing softball yesterday and got to talking with my 30-year-old friend who has been thinking about buying real estate in San Francisco since early-2020. But he was too nervous to take advantage last year.
He worked at Uber for four years and left last year to join another startup as a VP of Product. After selling off all his Uber stock, he cleared at least $2 million after taxes. I'm assuming he makes between $200,000 – $250,000 a year in salary at his new job.
When the pandemic hit in March 2020, he was very doubtful about buying real estate then, despite my encouragement. I even sent him my comprehensive post on how real estate gets impacted when stocks sell off to shake some fear out of him. There's no way you can read the post and not believe in some of my arguments.
Yet, every month we chatted in 2020 he said he wanted to wait. When I asked him what he was up to now, he told me he recently got preapproved for a mortgage and is ready to buy!
When I asked him why the change in heart, he said, “Now that there are vaccines, there's a clear path to recovery starting around the second half of this year.”
Then I asked him whether he was feeling some FOMO with the successful IPOs of Airbnb and Affirm. He responded, “Absolutely. I want to buy a place before herd immunity is achieved and before the people from Airbnb and Affirm get to sell their stock by this summer!”
And this, my friends, is an example of how investor sentiment works. Only until there is a “green light” do most investors dare to put significant capital to work.
The Future Of Supply And Demand
One of the key issues for today's buyers is low supply. Any rational real estate seller will hold off listing their property now. The path to recovery is now so much clearer.
Hence, there may be a wave of new supply coming to the market in 2022+. However, I bet there will be an even bigger wave of demand after there's an all-clear sign.
I believe the time to buy big city real estate is now, before there is herd immunity. People will rush back to big cities in waves once everything is good to go.
You are already seeing rents tick up. I'm personally looking to buy a condo in Manhattan. If I can buy property in NYC and San Francisco, it will act like a fantastic hedge against inflation. Further, it will provide a place for my children to live when they are older. As a result, the best real estate opportunities may now be on the coasts given they underperformed during the pandemic.
Real Estate Diversification
In addition to looking for the best real estate opportunities in your own city, look to diversify your real estate investments across the country where valuations are lower, net rental yields are higher, and growth rates may be higher.
Check out Fundrise and their eREITs. eREITs give investors a way to diversify their real estate exposure with lower volatility compared to stocks. Income is completely passive and there is much less concentration risk. For most people, investing in a diversified fund is the way to go.
If you are bullish on the demographic shift towards lower-cost and less densely populated areas of the country, check out CrowdStreet. CrowdStreet focuses on individual commercial real estate opportunities in 18-hour cities. If you have a lot more capital, you can build your own select real estate fund.
Both platforms are free to sign up and explore. I've personally invested $810,000 in 17 different real estate crowdfunding projects to diversify my investments and earn income 100% passively.
The Best Near-Term Real Estate Opportunity Is In Your City is a FS original post.