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.
Related: BURL: The Real Estate Investing Rule To Follow
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.
Guillaume, Movetoasia.com says
Always a tricky question to answer but I guess 3 factors tends to insure a stable growth and perspective : economics, demographics, foreign policy. Mentioning those 3 aspects, from my investigation, I found that Vietnam and Cambodia are 2 places in south east asia with great potential of growth (and even after covid time !)
Max Briggs says
This article appears to argue that since property prices increase faster than incomes you should buy property ASAP. I have two counterpoints:
1. This could actually mean that the price increases are unsustainable and the market is due for correction. If people are in the same income percentile but affording less and less, at some point something has to give. The plot of the shiller home price index only shows about 15 years of data, and yes they go up and to the right. But the entire thesis of Shiller, when he made the dataset and analyzed it was that the actual long term trend is flat, and that increases indicate bubbles. He used that analysis to correctly predict the 2008 crash and sees similar issues now. So… I don’t know that buying a house in a skyrocketing market is always advisable.
2. If the difference in the price of rent and the price of a mortgage is very substantial then renting and investing the difference in stocks could very well beat the investment in your primary residence. Real estate doesn’t appreciate very fast, it’s the leveraged appreciation that allows you to keep pace with stocks, and you aren’t 5:1 leveraged on a primary residence because you continue to make payments throughout the life of the loan. So you’re return on investment is likely to look more like 3% than the 5:1 leveraged 15% that you may expect from a rental property.
Derek McDoogle says
I did not know that with 20% down, you don’t have to pay the wasteful PMI insurance. My brother told me that she would like to get to her house before she gets married so that they can have a place where to live together. I will suggest to her to make sure they save a little more than 20% of the value of the house so that they don’t run out of cash.
Michael Lee says
Your 30/30 rule is good advice about when you are ready to buy a house. I have never heard someone say that they believe that you should be able to put 20% down on the house and have another 10% saved away. The next time that I am in the housing market, I will be sure to follow your rule.
Hi Sam, what do you think of buying an old house? Say a ranch house built in the 60s or 50s? By the time its mortgage is paid it will be 80 years old which is very old. I may be able to afford a newer house built in the 90s but then the lot will be much smaller. Some people say older houses are more sturdy than newer ones.
Financial Samurai says
The land is the most important component, then location, then expansion potential.
Have an inspector look at the construction of the house. S/he can tell how sturdy it is.
Houses in SF are 100+ years old and remodeled all the time.
Reid K. says
If someone is buying for investment purposes, there is one thing that many property developers in Asia do which is selling units “off-plan”. You have to make sure it’s from a reputable developer, of which there are many, but you can essentially “reserve ” a unit, put a ~10% down payment, and not pay the rest for 5 years when the property is complete.
Many of this happens in booming markets such as Malaysia and Thailand, allowing you to make money without even having to purchase the property yet. I bought property 3-4 years ago in this part of the world, and had them double in price before even having to pay for the condos, having my money sit in stocks/bonds in the meantime and make more money.
I’ve heard it asked: “When’s the best time to buy a property” – the answers are always “now” and “never”. Property AND Equities do pretty much the same thing. If you’ve got them and you hold them, you’ll do well.
What kills most people is one of two things:
a) over-leveraging (too much mortgage, lack of liquidity for your commitments or new opportunites) and
b) trying to time the market
Personally, I kissed about 40-50k away because I tried to sell my apartment high and buy low. If I’d just stayed invested then I’d be that much richer.
This guy has a take on it. It’s UK-centric but given how crazy the brits are about property it’s worth a read:
You are missing an item on your list.
c). Making long term projections of your employment/income stability
Now, more than ever, we cannot rely on a 30 year career in the same job at the same company. This poses a problem as you need to be within the same geographic area in order to hold on to your house for an extended period of time. If your job dries up and you need to move to another part of the country or state for employment, you may very well lose a lot of money on your home investment. You don’t get the luxury of waiting out a bad market. This is like buying equities that you may be forced to sell within a short time period because they are tied to you paying a large amount of your income to maintain (shorting stock with 5 to 1 leverage).
Financial Samurai says
Man, if only I bought a London flat near Hyde Park 10 years ago! Gahhhhhhhh……. London makes San Francisco seem dirt cheap. Seriously.
I would have to disagree with your premise about “buying when you can afford it”. Timing and valuation analysis are critical elements in any investment decision. Take the equity market for example, would it have been wise to buy stock in a company that is overvalued by 40% because you have enough cash to make the purchase and like the abnormally high dividends they are throwing off? Property markets are the same way but with greater risk as you must pay taxes, maintenance, and insurance on them. There are areas in this country that are 30-40% overvalued and there are areas that are 30-40% undervalued. If you don’t want to get fleeced of your hard earned money, you need to do your research and figure out where on the valuation scale your “investment opportunity” stands. Here in southern California, unless you are buying away from the water (i.e. inland empire or higher crime communities) you are speculating, not investing. All the big money has decided to pull out as ROI on property is negative in many beach communities. I recommend you read http://www.doctorhousingbubble.com to see what is really going on with the real estate out here.
Financial Samurai says
It’s definitely frustrating being a renter, so I can empathize.
How old are you now and when do you plan to buy?
30 years old. I plan to buy when a decent house (i.e. stand alone 3 bedroom in a good neighborhood) is no more than 3 times the average household income of its zip code.
Financial Samurai says
Sounds good. What is the multiple now? And when do you think that multiple will ever get down to 3x?
The price to income ratio is currently is over 8.0! I think it will get down to 3.0 when any of the following things happen:
a). Federal Reserve increases interest rates above 6% for 30 year treasuries (they will have to eventually to entice people to purchase long term bonds)
b). Baby boomers start to pass away leaving their cash poor children with multi-million dollar estates and a very large property tax bills.
c). Mortgage interest tax break is turned into an income tax credit that renters are eligible to receive as well. This idea is being floated in congress as I write this.
d). California eliminates proposition 13 forcing home owners to be reassessed at current market values. This will eventually be needed to balance our state budget and service our state pension commitments.
Financial Samurai says
Sounds good. When was the last time the price to income ratio hit 3.0? And if it does hit 3.0, what makes you think you can buy if other people are seeing such good deals as well?
Do you think by chance the “income” portion of the ratio is understated given banks are very stringent now (I’m going through the mortgage app process and it is tougher than ever)?
Check out these posts:
The other macro dynamic in play here for home prices is the dual income household. 30 to 40 years ago, dual income households were much less common. Over the last two decades, highly educated women have entered the labor force and thus pulling in very high salaries. Thus two earner married couples pushing up house prices.
The problem is of course, in the United States, you can only legally have one spouse. It’s going to be extremely difficult to increase household income in the current stagnant wage environment.
So here we are again. Enthusiasm is exceeding reality!
Where the DINK theory starts to fall apart is when you look at all of the regions/pockets in the United States where housing is more affordable now than it has been 30-40 years ago. Take the rust belt for example, housing there has been cheaper than anytime during the last 50 years (Michigan, Ohio, Indiana, West Virginia, etc …) relative to average income.
Buying a house right now is like buying a stock and leveraging yourself 5 to 1 in order to do so. Only, its more restrictive as you cannot buy into an index of homes you want to own, you can only buy a single home, and you better hope the neighborhood does well over the next 30 years or you are going to be out a lot of money you don’t even have.
It’s more like DIWKs – Double income with kids.
To understand the US economy and the housing market, you absolutely must understand the middle class. The middle class buys the cars, homes, iPhones, etc. without them; there is no economy.
The American middle class lives in the suburbs (across the entire nation). They don’t own beach houses in San Diego. They live in three bedroom single family homes. Own two or three cars and are primarily interested in family friendly neighborhoods with good schools. Typically both husband and wife work.
Now if you wish to dig into micro economics: West Virginia has always been poor. It’s coal country. Coal is dead, due to fracking technology.
The Great Lakes states have suffered the loss of manufacturing jobs over the past few decades due to China and robotics technology. Consequently, a drop in median household income. The other big factor: plenty of open land to build upon.
FYI: The macro trend is changing. First off the United States remains the worlds number one manufacturer, but more importantly; it has become too expensive to produce and ship from China. Fracking technology has brought an over abundance of cheap natural gas, and manufacturing technology has advanced by light years. There are now un filled jobs in manufacturing. These are high skill/education positions and pay very well.
Financial Samurai says
It’s kinda sad if the average American middle class owns two to three cars. Surely, this can’t be the case. And if true, these are two heavy dead weights dragging down people’s finances.
Well, the middle class American family is the largest consumer of automobiles.
Typically, there is a car for each family member with a driver’s license and both husband & wife work. In most US suburbs, public transportation is not developed enough to be practical.
Thus, you see anecdotes such as people commuting from Fairfield/Vacaville to San Francisco every day and clogging up the Bay Bridge!
So yes….. It’s sad when cities have not invested in good public transportation infrastructure. FYI: Buy a house near a BART station!
Here is a related article to what we are discussing:
I have an interesting anecdote: I have a really old family friend (decades); he made his living (career as a small business person) doing painting and house renovations. His big buck jobs were always on the North Shore (Wealthy suburbs along Lake Michigan, north of Chicago. Think Hamptons and you’ll get the flavor).
These were always the most difficult people to collect payment from. He said that they had all this illiquid wealth, but no cash.
Financial Samurai says
Dual Income Household + BANK OF MOM & DAD!
Bank of mom and dad only has $120,000 in their 401k. You may want to read “Baby Boomers: Poorer in Old Age Than Their Parents” here …
Financial Samurai says
The media loves misery. You’ll just have to trust me when I say the Bank of Mom and Dads I see are putting health downpayments on $800,000+ properties or paying all cash here in SF, and Manhattan and other major world financial cities.
This is an excellent point.
Intergenerational wealth transfer. I think that might be part of it. But I suspect much of the recent California real estate value run-up is caused by well financed investors.
In any case, it does seem like sales volume is starting to drop.