The Best Time To Buy Property Is When You Can Afford It

best time to buy property

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

Income: $100,000/yr

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.

Foreign investors buying US property because it is so cheap - best time to buy property

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.

Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

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.

102 thoughts on “The Best Time To Buy Property Is When You Can Afford It”

  1. Guillaume,

    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 !)

  2. 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.

  3. Derek McDoogle

    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.

  4. Michael Lee

    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.

  5. 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.

  6. 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.

  7. mistersquirrel

    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:

    1. mistersquirrel,

      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).


  8. 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 to see what is really going on with the real estate out here.

      1. 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.

          1. 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.

            1. 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:


    1. Darin,

      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!

      1. Ace,

        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.

        1. 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.

          1. 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.

            1. 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!

            2. Sam,

              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.

        1. 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 …

          1. 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.

        2. 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.

  9. This seems like a similar argument as to why you should invest in the market when you can, because waiting to time the market can end up costing you. Market fluctuations are inevitable (for both housing and stocks) and you cannot let that scare you from getting into a home. I also think that a little tempering of our expectations (buying a smaller more affordable home) can really help. Our expectations have grown over time, the average size for a house for a family of 4 has doubled since 1950. As time has gone on we have wanted bigger and better homes.

  10. This is so true. As a financial planner I used to have clients come in to get a mortgage every time the rates dropped. They couldn’t necessarily afford the property they wanted, they would just want to buy something because rates were low. It’s a bad idea to buy a home if you aren’t ready for the financial commitment. Good luck with your property search.

  11. Thomas @ i need money ASAP!

    Those home price indexes are quite telling. We’re definitely in an up swing again. There is no way I would be able to afford my house if we had to buy it now. We bought in 2009 (it was shear luck) after looking for 1 whole year. That year of looking was a godsend since we bought at almost the perfect time. Now our house is worth significantly more than we purchased it for. While thats great for us it also means we could never afford it if we had to buy now. I truly hope this isn’t the start of another crisis.

  12. Sam,

    You have a real estate obsession. Of course, this seems a common affliction in California.

    What impresses me about your second graphic, is the volatility of prices in California and especially San Francisco. Not something I would want any involvement. I prefer calm, stable, predictability.

    The Web 2.0 bubble will eventually burst, interest rates will begin to rise soon, and these property prices will start to creep down. Median incomes are not high enough to sustain this. In the long run, fundamentals always win.

    If the San Francisco median household income cannot afford a house with 20% down, and a conventional 30 year fixed rate mortgage, you are in a bubble!

      1. The Fed has been blatantly signaling its intention to induce moderate inflation.
        It will eventually succeed and interest rates will rise.

        Buy some TIPS and go scuba diving!

          1. What makes you think that tomorrow will be like today?

            Mortgage rates have already started to move higher. Which means even fewer people can afford to purchase an $800,000 house.

      2. Ok Sam,

        So you want to rent out your current home and purchase a different home to park your shoes. Nothing wrong with that. But since you seem to have little interest in any property outside of San Francisco proper, and all the properties for sale in the city itself are overpriced, I don’t see any good solutions to your dilemma.

        I would just sit on my hands. First rule: do no harm (or in finance: don’t loose money).

        Why not consider a suburban home? It’s not exactly a desert out there! LOL!
        The weather is actually better too!

  13. I wish I could find the article, but I can’t. Instead, I’ll do my best to paraphrase although I likely won’t do it any justice. A while back I read an intriguing article that suggested, or predicted rather, there would be a huge housing downturn in the coming decades with signs manifesting around the time we transition into the 2020’s. The driver? Not lending this time. Instead, the baby boom generation is going to start retiring in droves. In doing so, they will no longer want or need the large homes they raised their families in. They will want to downsize and become more mobile. Homes will start flooding the market and supply will far surpass demand because the subsequent generations are A) much smaller and B) oftentimes have different priorities in life. Some retirees who are unable to sell might simply walk away from their homes especially as they get older and can’t keep up with maintenance, yard work, etc. or afford someone to do it for them.

    The areas of the the population that are growing, such as the Hispanics, tend to live in extended family situations with generations occupying the same dwelling. So, they won’t be able to (income wise) or want to scoop up the superfluous supply of homes.

    So, in summary, the housing market is going to flatten out and decline for quite a while because the population growth is going to slow down and not be linear. I honestly don’t know how credible this theory is, but it does seem at least somewhat plausible. Of course, such a trend would probably have less impact in cities like SF, but large sprawling cities with big suburban areas could be really hard hit if this actually unfolds.

    1. Maybe. But I’ll take gains all the way until 2020. That would be quite nice!

      4,000 units built, 38,000 new residents over the past 3 years who’ve come into SF. We have a serious housing shortage.

      What is your current living situation?

      1. Well, I don’t know if the theory meant there would be gains all the way to 2020! Just that there could be a severe downturn starting about that time. And, yes, it seems like SF and many other parts of the Bay Area might be much less susceptible to a “Baby Boomer” induced downturn.

        My living situation? I’ve been a renter since having to walk away from my home in 2008 due to the toxic mold and seller disclosure issues. I’d like to get back into owning my primary residence especially as my family grows, but don’t quite have enough yet for a 20% down. I’m targeting the full regular cash injection because I simply don’t want to waste any money on mortgage insurance. I also don’t want to deal with the hassle of fighting the back to remove it when I’ve achieved a LTV of less that 80%. We are close on the down, but as the local Northern Cali market continues to rebound, we have to set our savings target incrementally higher.

        Fortunately, for us, we sort of go against the “rents are increasing” premise. We are in our 4th year at our current location (a large, upscale apartment complex) and the landlord hasn’t raised the rent on us once yet. It is privately owned, so that’s probably part of it. Plus, I think the management values high quality renters who don’t cause any trouble and always pay on time!!

        1. Good stuff. I just bid on one place and lost. I knew what the winning bid would be, but I decided against it.

          I’m looking at this new place with 180 ocean views. It is sweet but I bet it goes at least 10% over.

          Do you think people feel a lot of anxiety that prices might “run away from them”?

  14. Sam,
    Sure seems that you have done some very intense analysis. However, after following lots of your posts about Real Estate, I have come to the conclusion that you are biased towards San Franscisco. While the metrics support your analysis, I see very little comparative analysis for other parts of the country or the world (not that you have to, but San Fran isn’t the epicenter of Real Estate).

    Additionally, I don’t recall much analysis on Commercial Real Estate or Multi-Family Residential (I could be wrong, so please correct me if I am). Any reason for this?

  15. No concern about SF allowing high-rise buildings? Pretty unique risk that’s really hard to hedge. It would worry me, but I’m not in tune with the local view on that.

    1. We’re seeing high rises come up. But renters and owners are so strong here, we would vote down a high rising of all the city beyond downtown.

      Here’s a stat: 4,000 new housing units over the past 3 years, but 38,000 new SF residents during the same period. Supply cannot catch up.

  16. Paying market price for goods is not the same as shorting something. I am not shorting bananas when I go grocery shopping, and I am not shorting property markets when I pay rent.

    Rent is closer to a long-term contract or hedge than it is anything. By renting, I have established a fixed price for my housing. That is not something that a property owner can do. My risk level and my monthly expenses are known and non-variable until the contract is renegotiated. The property owner must keep a large cash cushion on-hand to take care of expense volatility. You can argue that I pay a premium for such options, but I would argue that rental prices are a rather inefficient market. There are always landlords that are in a pinch and will underprice their goods. Business acumen is not a pre-requisite for a mortgage.

    From a purely financial standpoint, renting and investing is often a better choice than buying. It is certainly a more flexible one. If I ever buy a property it will be because of emotional reasons.

    1. There’s definitely nothing wrong with renting. I would say your rent is NOT fixed, however, as rents will rise over time.

      But I’d love to hear your perspective 5 or 10 years from now to see if you feel the same way. Are you a student now, and if not, how long have you been renting?

      1. I am not a student. I am an early 30-something with a low six figure income living in Chicago.

        I have been renting for the past 7 years. During that timeframe my rent has remained unchanged. I pay ~$900 / month for an 800 sq. ft. 1 bedroom apartment. Actually I only pay half of that. I charge my wife for the other half :)

        There is not a single, comparable property in my neighborhood that would have put me further ahead financially than where I am now. The taxes and maintenance / association dues alone on a comparable property would be in the $3-400 a month. Not to mention the costs associated with tying up capital, paying interest on a loan, etc…

        For now, I choose to rent and invest every spare penny that I have. Eventually I will buy a house, but not because I believe they are financially good investments. I will buy one because I believe they are emotionally good investments… good for raising families, not good for raising net worth.

        1. Sounds good. If and when you buy, come back to this post and let me know how your feelings change if at all.

          It’s hard to know how to feel about something if you haven’t experienced it first hand yet.

        2. Dude…… You live in Chicago? Go buy a house. Now is the time to do this.

          Go buy a single family home in the Northwest suburbs.

          I’m an old guy….. Trust me, you are missing an incredible window of opportunity.

          1. This is hilarious. The guy is spending only $900/mo on housing in Chicago, saving extra $$ and investing it, and you tell him that he’s missing an incredible opportunity to MOVE TO THE NORTHWEST SUBURBS? C’mon. What is the “opportunity”?

            I am so tired of hearing bull like this. The guy said he will buy a house for emotional reasons at some point, not investment.

            I lived in Chicago the last several years, and I know people who bought in the suburbs in 2005-7 who got stuck and couldn’t move because the house lost so much value. Even if housing is still depressed out there, that isn’t an argument to MOVE THERE. Samurai at least has the argument that SF is a hot market and tech money will flow in (though you could easily (EASILY) argue that tech has inflated expectations and will lag for several years, bringing SF back down with it) – what do the suburbs of Chicago have?

            This crazyness of owning to become rich has to stop. Buy a house when you are financially and emotionally ready for the commitment. There should be no other reason driving such a decision (“Oh, what a deal! I’ll be rich when the economy just picks up!”).

            1. This guy hasn’t moved for seven years; so, he and his wife are not going anywhere.

              30 years old is child bearing age. Children are better off in a house, in a good neighborhood, with good schools.

              With an income of $100,000/year, you could probably afford 80% of the suburban neighborhoods.

              Houses are cheap right now. The investment game is about “buying low and selling high”.

              Besides….. Renting your entire life is a 100% waste of money! When you pay rent, you are paying the landlord’s mortgage off. You might as well pay for your own.

            2. Curious Adam and all, are there really nice places to rent in Chicago for around $900/month as a 30 year old?

              You literally can’t get anything in SF for that… maybe a dungeon room, but that’s about it.

              I think the SF market is crazy. I lost out on one bidding war, but I purposefully didn’t bid too much. I’m going to try again on this one house with sweet 180 degree views. If I lose that one, I quit. I’m not overbidding when prices are at record highs.

              Although…. Apple and Facebook today did announce blowout earnings, and then there’s Dropbox, Airbnb, Box, etc who are going public.


  17. I noticed a few people mentioning the chance of an earthquake when you talk about purchasing in SF. Correct me if I’m wrong but for the most part single family homes usually don’t sustain much damage from earthquakes. Most of the damage can be seen in older larger buildings. Yes, its a concern but your emergency fund should cover most repairs sustained from an earthquake.

    I believe that yes we are experiencing a housing bubble – but this one is different. At least with this bubble we know that home owners can actually afford their homes due to increased lending regulations. We also know that SF is a hotbed for high paying jobs and there are no signs of this growth slowing down. Even if the Fed raises interest rates, the SF area housing market will continue to prosper with all these high paying jobs. Location, location, location…..

    1. I guess it all depends on how big the earthquake is. I spoke to my neighbor who owns a large building and around during the 1989 earthquake and he said nothing happened. Perhaps a couple dishes broke. He said the media has blown it out of proportion b/c he was close to the epicenter and it was no big deal.

      The stringent lending standards of the past 5 years and all these cash buyers gives me hope this is not a real bubble… yet.

  18. Sam – do you include HOA fees, taxes, estimated maintenance/refurbishment cost, etc in the CASH FLOW component of your 30/30 rule for home buying? These can be massive expenses. For example my HOA fees cost more (monthly) than the interest on my mortgage…

    1. Good question I think it’s a good idea to do so. For simplicity purposes, and an easier way to remember the rule 30/30, I’d like people to do some quick math by taking their monthly income X 30% and compare to the mortgage after their downpayment if they are in the ball park. All other expenses could indeed take up another 20% of one’s gross income.

      But of course, there’s potential tax savings as well that help offset the expenses by about 20-30%, depending on your federal tax rate, so it comes out to a wash.

      1. I suppose the other factor is – if you own multiple properties how would the cash flow rule play out? All mortgages combined should be ~30% of your gross income (from all sources including rental, passive incomes)?

        Of course every situation is different, just trying to wrap my head around your math.

        1. I cap it all at 30%, just like I would cap all car purchases at 10% of my income or less.

          The reality is, my property expenses are much less than 30% because my properties are cash flow positive and making me money every month. 30% is just a good rule of thumb. The cost as a percentage of income should go lower over time as income/rent goes higher and interest expense goes lower.

  19. Austin’s downtown real estate market is really hot. He had a second rental in the same building he made 20% on last year. Across both it was 1.5 to 2.3.

  20. Brent @ All About Interest

    Great post. I love leveraging my money to buy an appreciating asset while interest rates are still low. I recently closed on my 3rd rental property. Austin is a like a baby San Fran, lots of tech companies, booming population and housing prices. It’s still nowhere near the prices in CA but a lot of people from CA seem to be moving here. I’m targeting rentals with positive cash flow and high projected appreciation. Income allowing, I may try to get another rental before the year is up.


  21. My dad sold his home yesterday. He had been there for three years and realized a 70% gain with no major improvements. The sale set a $/sf record in Austin. He’s now going to rent down the street. The fed has created a major asset bubble and it will correct. In general, you are best to pay all cash when interest rates are high and sell when low.

  22. One more thing. It’s true that it makes financial sense to hold onto a home in SF or NYC where the prices are sky high and likely to go up over the long run. However, life forces most people to leave the city and sell their homes once they have school aged children and leave for the suburbs. Unfortunately, the public schools in SF or NYC are not that great, so unless one is truly a very high income/networth family, it can become a huge financial burden to afford both a large mortgage and private school tuition.

    1. True. Life changes all the time. Selling to live in the suburbs where property taxes actually goes towards often times better free schooling for kids is an attractive proposition. The worst is paying property taxes AND paying for private school due to necessity.

  23. Are you concerned about earthquakes at all in SF? Also there’s been discussions of gradually eliminating or reducing the mortgage interest deduction recently. Do you think it’ll occur?
    Even with these factors, I absolutely agree with you that housing in highly desirable cities such as SF or NY is a great value over the long term since so many people with tons of money in both U.S. and overseas want to buy properties in these world class cities.

    1. I’m not. It’s kinda the same way I’m not worried about a terrorist attack against the Golden Gate Bridge. Got live life in the positive.

      Also, I’d much rather be on the West Coast than experience the hurricanes and winter blizzards every year guaranteed. It’s a personal decision everyone must make.

      But as I’ve written in these two posts below, I’m biased for the West Coast having lived on both coasts for over 10 years each.

  24. I think one criteria which is important to assist that makes the decision a bit more conservative is the same criteria you mentioned, but evaluating it based on a 15-yr mortgage instead of 20/25/30 yr mortgage.

    In my opinion, if it takes you 30 years to pay something off, then you can’t really afford it. It’s the equivalent of buying a house at age 29 and being BARELY done paying it by age 60… basically an entire standard career length!

    Just because you CAN borrow more doesn’t mean you SHOULD.

    Also, you’re likely to save at least 100bp/year in interest.

    1. I also agree that the condo I own (currently renting it out, but lived in it until late last year) I probably could not afford today. I got in around $95K in 2012 and it’s probably worth $135K if I had time to list and market it (Zillow says $150K).

  25. My wife and I are both 27 and we pushed ourselves out of our comfort zones the last couple years buying a couple rental properties and a new primary residence. It wasn’t easy maneuvering through all the mortgage requirements, but we did it, and I am happy we did. We have given ourselves roughly $700 a month in passive income and one property in particular has, at our estimate, taken a nearly 70% increase in value. We were so scared at the time – but so happy we took the risk now!

      1. We are in the Lafayette, Indiana area.
        Rentals seem to do very well in our area with Purdue University being here.

  26. Ha! Yes, you were stupid! Me too. I wish I had started a year or two earlier as well. If I had, I’d be sitting really pretty about now.

    But I’m doing well the way it turned out — 14 units and earning 10% each year. Not bad.

  27. So although I could afford my home now, I’m not sure I’d buy it at today’s prices…mostly because I’m cheap and always want a deal! The CA market is a little bit of an anomaly, so I agree that if you can afford it and you plan on being there, it is probably a good idea to jump in. My friends who have been on an overseas assignment in China are now starting to look for homes locally and they are shocked what little $1m buys you compared to a few years ago.

  28. Dan @ The Mad Real World

    Hi Sam,

    Good article. The 75% rule is pretty standard everywhere I have looked. 9 years of no vacancies is great though! Wow!

    I think if you looked around, you may be able to get your online income to be included.

    Another option is a commercial loan. You can use it for residential properties. They will look at rental income more than your personal income. I have used commercial financing for all of my rental properties. I am a poker dealer and most of my money is tips so my income on paper always looks lower than it is.

    1. Dan, yeah, seriously, not one month of vacancy in 9 years. Maybe I should be a property manager! I always have at least 30 days notice b/c they tell me ahead of time. They usually leave a week before the lease is up so I clean and update before the new tenant. I’ve been able to get tenants by the end of the last lease fortunately.

      I’ve decided to buy property for the luxury and adventure of living in it for the next 5 years. I don’t want to buy properties just to rent them out. It’s not a bad idea. I personally don’t want to do it.

  29. The first paragraph in “time to face reality” really struck a note with me. I recall back in 2007 when I first graduated from school making a pretty decent amount that I would never be able to afford a home at the market prices of the time.

    That was when I realized there had to be some sort of an imbalance with the market – if someone making more on their own than the average household in the US cant even begin to think about owning a home, its a problem. Then we all know what happen the next 4 years.

  30. Nominal house prices have gone up 8 times (from 20 to 160) on the Case Shiller Core Logic index whereas the SPY has gone up 18 1/2 times (from 100 to 1850) over the same 28 year period.

    Surely, renting cannot be tantamount to shorting the housing market.
    And short very successfully is what the clever Mr. Paulson did with CDSs on the sub-prime mortgages.

    1. Alas, it is. Mr. Paulson made a fortune for that 1-2 years. Check out his performance since.

      If you put down 20% on a home and it goes up 8 times, that is a 40X return on your cash vs. the SPY up 18.5X.

      1. That’s really non-sense as far as a primary residence goes, as you already admit that housing prices go up along with yours. What do you do when you cash out? Either buy another house (which has similarly appreciated) or rent (which you note goes up as well). Again, for primary residence, the wealth effect is muted by everyone else since you HAVE TO LIVE SOMEWHERE. It’s not like cashing out of equities and then having money to spend through retirement – the money you reap from a house often goes right back into another primary residence.

          1. Yes to own more than one. Sell and downgrade doesn’t solve the problem, right? Because you’re taking your profits and buying an asset that has appreciated at the same rate. As I said above, the wealth effect is “muted” (softened) if we’re talking about primary residence only.

            1. Downgrading does help.

              Property A appreciates 50% from $200,000 to $300,000

              Property B appreciates 50% from $1,000,000 to $1,500,000, which you own

              Sell property B, buy property A, pocket $400,000 difference assuming no fees, etc. Of course, the trick is to find a place you like.

      2. Yes, his performance has sucked, but it not on betting against the housing market.

        On a 100k house with 20% down and 7% mortgage interest over a 30 year period you would have paid out ~200k. Assuming you sold that 100k house at 8 times you would have gained ~600k.
        With the SPY, the same 200k would have grown to 1.1 million, a gain of ~900k beating the gains on the house.

        I suppose it’s a wash, considering the rent a SPY proponent would be paying over the 30 years and the property taxes, commissions, home repairs/improvement a home-homeowner would be enduring.

  31. I got two properties between 2008 and 2012. I’m cashing out now because I’m happy with the gain. We are looking for a new primary residence in a good area, but the inventory is really tight. The housing price is getting high all over the city. It’s probably a good idea for us to sell and hang on to the money until the market cool down a bit. I don’t know… If we hold off and the housing price keeps going up, then we won’t be able to afford the house we want…

  32. The First Million is the Hardest

    When I bought my house I couldn’t afford to put 20% down. But I realized that with property prices and interest rates where they were at the time, I might not have a better opportunity to make the leap. I may have jumped in a little prematurely, but I still feel that it was the right move considering all the other contributing factors at the time.

    1. And this is exactly why we’re all screwed – everyone overpays because they are “getting a deal” on interest rates and no one is ever going to want to leave their low-interest rate. What if your job moves? We’ll be a nation of renters.

  33. I bought 5 houses from 2010 to 2012 and I have bought 5 more since 2012. The key is getting a great deal, but my area is not as crazy as San Fran with prices. We did see 14% increase in prices this year. I am not sure what I would do if I lived in an area where prices were so high.

    I used to have 30% of my income in house payments, I never saved any money. Recently I started thinking what the bank says you can afford may not really be what you can afford unless you don’t want to save any money. I now go by the 10% rule. I want my house payment on my personal residence 10% or less of my income. That doesn’t work for everyone, but if you really want to save and invest a lot I think it is a great guideline.

    Most banks have those restrictions on income and rental income. it makes it difficult to qualify for another house; another reason not to max out what you can qualify for on your personal residence.

  34. Interest rates are playing a large role in affordability and timing right now. For many people, it makes sense to buy now with a lower down payment and pay PMI for a short period of time (<12 months) and lock in a lower interest rate, versus waiting to get 20% down but getting a higher interest rate.

  35. Even Steven

    When buying the house are you assuming the time to buy is for your current residence or would this be included as a rental?

    If it is only for your current residence, the time to buy is when you have checked off all the boxes: down payment, little to no debt, intentions to stay more than 3-5 years, and monthly payment far below what the lender says you can afford.

    A rental property I would say the time to buy is when the numbers work in your favor, which for simplicity sake is a cash flowing property.

  36. Low interest rates generate much more demand and prices go up. It is probably a great time to cash out, but where do you go? As a buyer, you should buy when interest rates are sky high. Unfortunately, you would have to pay cash because you could not afford much of a house. Just wait a few years and refinance. Simply said, you have to look for opportunities to buy. Companies like Blackstone bought up tens of thousands of homes during the financial crisis and is renting them out.

    I definitely could not afford my current residence at today’s prices.

  37. This is the best post on house buying that I have seen in a very long time. I’m about to have to move from one apartment to another in Northern VA and would like to buy, but prices are too high and I don’t have the down payment. I had a house in CO that I sold in 2012, and I broke even with all the improvements I did but keep getting those stupid Zillow notifications that the value has increased. ;)

    My current plan is to rent while I build up a down payment. I run a huge risk of interest rates increasing and values rising or staying flat, but it’s just the way it is sometimes.

    1. Kind of you to say Meghan. I’ve found I’m so into real estate that I have no problems banging out a 1,700 word post in no time. I really like tangible assets. Equities just feels so empty to me. And I hate having managers mess up the returns and having no say (minority shareholder).

      I don’t think you have to worry about interest rates increasing while you save. It’s the ever increasing prices that is worrisome. Like I say in the post, for our incomes to catch up with any appreciation in annual real estate is daunting.

  38. Jason (formerly of WSL)

    Sam, I’m surprised the broker only calculated 75% of the rental income. Honestly, I think that’s wrong based on my whopping 1+ years in the industry. :) There’s a pretty specific calculation we use based on the last 2 years of the Schedule E on your tax return. We only factor vacancy percentages if you’ve only owned the property for less than a year and haven’t claimed anything on your returns.

    1. Jason (formerly of WSL)

      I should add that it obviously depends on the loan program. Are you looking at conforming jumbo or a non-conforming product? Conforming jumbo (Fannie/Freddie) can go up to a $625,500 loan amount in SF and NC Jumbo can go well beyond that. I could look at the various guidelines; just shoot me an email.

    2. I’m not surprised. Lending is pretty stringent nowadays.

      He’s trying to be flexible, but can’t.

      Non-conforming loan baby! But, I’ve thought about just paying cash for a property and selling a lot of equities as well.Hope the new occupation is treating you well, and nice to hear from you!

      1. Sam,

        I couldn’t help but find out for sure as I was pretty confident your broker was incorrect. We have a helpdesk where I can ask our underwriters questions on things like this and our underwriting supervisor confirmed my thoughts:

        “I don’t know of any reason why we would calculate rental income differently on a non-conforming deal than on all of our other deals…we would evaluate the last 2 years’ tax returns and complete the net cash flow worksheet to determine rental income.”

        We’re a pretty large correspondant lender (i.e. we sell our loans) but we have 75 loan officers here and do about 500 loans a month…so it’s not like this answer is coming from a rookie that isn’t well aware of the guidelines.

        Just thought I’d let you know. I’d be more than happy to take a look at it if you think the vacancy part is the area that’s killing your ability to get a loan.

        All the best,

        1. Hi J,

          Thanks for checking. Its just Citibank’s mortgage lending standard. I’m fine with it. The rate is darn good at 2.375% for a 5/1 ARM jumbo as they provide discounts to long stand clients with over X amount with them. I can’t find this rate anywhere lower for a jumbo 5/1 ARM.

          1. That makes more sense. 2.375% is a bargain; gotta love banks/companies that actually incentive loyalty! Best we have is 2.875% with no points. You’d need 2.5 points to get down to 2.375%.

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