The best time to buy property is when you can afford it. Perhaps my belief is not as true for cities that are dying from the inside.
But for those people who want to buy property because their incomes are growing, a baby or two are on the way, or they simple no longer want to be price takers in an ever rising rental market, buying property when you can afford to buy is most likely a good choice.
It's important to realize that if you rent, you are short the property market. Every time rents and property prices go up, you're losing. If property and rental prices go down, you're winning.
Over the long run, shorting the property market doesn't make sense because property prices having been going up since the beginning of property ownership in our country.
Shorting the property market is like shorting population growth or inflation. Bad move if you want to build wealth.
I encourage readers to be at least NEUTRAL property. And the easiest way to be neutral property is to own your primary residence. Your asset will rise and fall with the market, and your payments will remain fixed or go down in real dollar terms over time.
The Best Time To Buy Property
Inflation is really a tricky beast. Just when we think a particular amount of rent or an asking price seems too high, 5-10 years from now, these asking prices tend to look cheap.
In 2017, I realized I could no longer comfortably afford to purchase my single family house in San Francisco. As a result, I decided to sell the home for $2,745,000 and buy something cheaper in a different neighborhood.
I asked several property owners in Hong Kong, Singapore, Manhattan, London, and Paris whether they could afford their homes today. At least half of them admitted they no longer could at today's prices.
Inflation will sneak up on you while you're busing working, taking care of family, and living your life. The best time to buy property is when you can afford to. You won't always get the timing right. But if you run the numbers extensively, plan for bad case scenarios, you should be fine.
A Home Buying Rule To Follow
Consider following my 30/30/3 rule for property buying. This rule will help you buy something affordable, while also minimizing yourself of a blowup.
The 30/30/3 Rule
1) Cash flow: Don't spend more than 30% of your gross income on your monthly mortgage payment.
2) Down Payment. Save at least 30% of the value of the home as a down payment. 20% is for the downpayment to avoid PMI insurance. The other 10% is for a healthy cash buffer.
3) Value of the home. The value of the home you wish to purchase should be no greater than 3X your annual gross income.
Remember this rule too: You can always refinance your home, but you can never change your initial purchase price.
Good Example Of The 30/30/3 Rule
Down Payment: $120,000 in cash saved
Desired Home Value: $400,000
You take out a $320,000 mortgage after putting $80,000 down. You still have a $40,000 cash buffer. Your monthly payment is $1,918/month PMI. At a 6% mortgage rate, you are paying just 23% of your gross monthly income in mortgage payments. In case of layoff, you have 21 months of mortgage coverage with your $50,000 buffer.
Lending Standards Are Getting Stricter
Although I think the best time to buy property is when you can afford to, it's more difficult to get a mortgage nowadays. For example, the global pandemic caused lenders to tighten their lending standards. Here are some examples from Wells Fargo bank:
- Temporarily stopped allowing for cash-out refinances
- No longer fully counting RSU values when calculating how much a person can borrow
- Schedule E income (rental income) is no longer includd when calculating how much a person can borrow – big shocker
- Home Equity Lines Of Credit (HELOC) have currently stopped
- Minimum downpayment is 20%
- Raised minimum credit score to qualify for a mortgage to 680
In other words, lending standards are as strict as it gets. As a result, perhaps there is upside to real estate liquidity if there is a reversion to pre-pandemic level standards sooner.
To get the best mortgage rate possible, check out Credible. Credible is my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free.
Why Didn't You Buy When Property Prices Were Lower?
Because I was stupid. How about you? The biggest mistake one could have made was selling their property between 2008-2012, if money was the primary reason for the sale.
The second biggest mistake is therefore not buying property between 2008-2012 given prices were depressed and competition was also much less.
I didn't buy additional property in 2008-2012 because the markets were falling apart from 2008-2010, and I was already figuring out a way to leave a job that no longer paid as well or provided as much pride. Leveraging up felt like the wrong thing to do at the time.
In retrospect, leveraging up was the absolute right thing to do at the time to create more wealth. Now that I've regenerated enough income to purchase a place, everybody else has made more income as well.
In 2020, the real estate market was tricky. With so much of the economy shut down, it was prudent to try and get a discount. In 2021, vaccines are now widely available and more states are reopening. Things are starting to return back to normal in most of the country.
More people are also looking to improve their quality of life. Real estate is back in high demand in many areas, including San Francisco, and mortgage rates are still quite low. Based on everything I've been observing, the housing market won't crash anytime soon.
Buying Property In The New Decade
Over the long term, shorting the property market by renting is a losing proposition. Thirty years from now you will be paying even higher rental prices while owning no assets.
Hopefully you will have used the savings you generated from not owning and invested it wisely to generate wealth. But we all know that few people are disciplined enough to consistently invest the difference over a long period of time.
There will probably be many times when you can afford to buy a property, but don't because you are unsure about your future. That's absolutely fine.
What I'm suggesting is that you figure out your future as quickly as possible because the price trend for desirable properties in desirable locations is almost always up and to the right. As soon as you find that perfect property, you'll realize that everybody else has found that perfect property as well.
The only way to get that perfect property is to be the top bidder. The winner's curse is a dangerous situation to be in because your offer price leaves you no room for error. Only you were willing to pay that top price at that moment in time.
My Property Buying Journey
I decided to buy my first property in 2003 because I knew that I would be in San Francisco for at least three years because that's how long the Berkeley MBA part-time program would last. I felt with about 90% certainty that I would stay for at least five years after purchase, and I ended up living in SF for 11 years post purchase.
The longer you can stay in your property, the better in general due to the outrageous cost of moving (5% selling commission, transfer taxes, etc).
In fact, I encourage all property owners to go on strike and never sell your property so long as the selling commissions are so high.
I plan to continue buying property in the San Francisco Bay Area because the job growth and innovation is tops in the country.
Time To Face Reality About Property
Here's the simple fact about affordability: It's your income growth vs. a property's price growth. Given the median household income is roughly $64,000 vs. the national median home price of roughly $320,000, the median household income has to grow by at least 4X the pace of price appreciation for affordability to occur.
Once affordability does occur, it simply might not last very long. Imagine if you lived in San Francisco where the median home price is $1 million dollars compared to the median household income of $74,000. No wonder why only 36% of residents own property.
If I can't increase my income by 2X for two years, I can't afford to buy a property of at least equal value to my current primary residence. There's no point in buying a lesser property that lowers the quality of my life just to build more wealth. I'm at a stage in my life where I'm very focused on optimizing lifestyle over money.
I bought one of my houses 15 years ago when I just started making enough money to barely buy a single family home. If you were to ask me back in 2005 whether I'd be making much less income later in life, I wouldn't believe it. I would probably feel a little depressed as well.
We all think we'll just keep on making more money over time – at least until we reach our peak earnings years in our 50s. The reality is that life isn't linear at all. Some of us burn out, change industries, go back to school, get married, have kids, experience poor health, or make bad investments. We must adopt a savings habit to help buffer when times are lean.
If you want to buy your first property and can afford to buy, then I suggest you do a lot of research now and buy. The most important step is to properly analyze the property's cash flow just in case you have to rent it out.
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.
Refinance your mortgage: Check out Credible, my favorite mortgage marketplace where prequalified lenders compete for your business. You can get competitive, real quotes in under three minutes for free. Mortgage rates are still near all-time lows. Take advantage before the Fed starts raising rates again.
Updated for 2022 and beyond.