Snap Inc. finally went public at $17 and is now worth around $26 billion after a meteoric 45% rise in its first day of trading, followed by an unsurprising fall. With ~1,900 employees almost liquid, funny money capital will inevitably rain down on the Southern California ecosystem!
What’s even more exciting is that Snap Inc. was able to sell stock to the public at a trailing 55X revenue multiple with no profits compared to a 14.5X multiple for Facebook and a 4.5X revenue multiple for Twitter today. In other words, investors either really believe in the growth projections for Snap Inc., and/or the scarcity of big internet/tech deals is forcing investors to pay a premium.
Since most of us do not work at Snap Inc., don’t have spouses who work at Snap Inc., nor were we investors in Snap Inc., we won’t benefit directly from their IPO. However, most of us are logical thinkers who can make observations of how to benefit when the 150-day lock-up period is over and capital is recycled into the community.
The most obvious beneficiary of IPO riches is real estate. We’ve all learned firsthand or from story books how paper multi-millionaires lost everything during the 2000 dotcom crash because they couldn’t sell quickly enough or they didn’t buy hard assets. At least once a week while I was working, the guy who made me a breakfast croissant reminded me how he was once worth $3 million.
Staying wealthy for longer is all about turning funny money into real assets. Money will also flow into cars, fine art, entertainment, and other luxury goods as well. But real estate is where the common person can expect to benefit the most.
Real Estate Beneficiaries Of Snap IPO
Besides Venice Beach being the biggest beneficiary of the IPO given that’s where Snap Inc. is headquartered, Marina Del Ray, Manhattan Beach, Hermosa Beach, Redondo Beach, Pacific Palisades, Santa Monica, and Mar Vista should all benefit as well. Once these markets get sufficiently tight, the benefits continue to fan out across the city.
Folks who hold real estate in these areas should stay put and watch their net worth grow so long as there is no great economic crash. Folks who are waiting to buy should start aggressively hunting for their perfect property in the fringes now before the lock-up period expires in Q3 2017.
If you can find a good deal that cash flows positively after a 20% downpayment, and you plan to own the property for the next 10+ years, then you’re probably going to do OK despite the large property price rally since ~2012. Google and Facebook have moved in, turning industrial lots into campuses in nearby Playa del Rey.
What’s very interesting is that according to Zillow, Venice Beach property is only expected to go up by 0.7% over the next 12 months due to plenty of inventory and a 95% surge in the median home price since 2012 ($815K to $1.585M). In other words, the market is COLD in part because many of the locals have already bought up Venice Beach property in anticipation of a Snap Inc. IPO and a recovering economy. However, the Zillow forecast is before the real-time explosion in value we see in Snap Inc’s shares today, and perhaps now there’s an opportunity to “snap up” properties at a discount before prices march higher again.
Zillow forecasts a slow market for Venice Beach. Opportunity?
For investors who don’t live in Los Angeles, the next best way to profit is to scan for real estate crowdfunding deals in the LA area. I’m still bullish on the heartland, but the Snap IPO could very well be the catalyst for another frenzy in coastal real estate markets.
Due to the strength of the Snap IPO, I’m pretty sure my thesis of buying SF Bay Area real estate during the winter of 2017/2018 ahead of the Airbnb and Uber IPOs will become mainstream now. For SF buyers, we’re experiencing a perfect moment where prices on the high end and in the condo market have softened about 5% – 10% since early 2016 due to a large influx of new condo supply. Weakness will probably last until mid-2018, giving us more time to save up, until either one goes public.
Airbnb generated about $1.7B in revenue in 2016 and is expected to grow revenue to $2.8B for 2017. Airbnb is currently raising a new round of funding based on a ~$30-33B valuation. In other words, its revenue multiple is only 10 – 11X compared to Snap’s 55X revenue multiple. Given a rising tide lifts all boats, I’m sure Airbnb’s valuation just ticked up at least 10%. If you assign Snap’s 55X revenue multiple to Airbnb’s 2016 revenue, Airbnb would be valued at a whopping $93.5B! Not gonna happen due to different growth metrics, but it’s fun to extrapolate.
SF Bay Area prices surged post-FB’s IPO.
Meanwhile, Uber is even larger, with $5.5B in revenue in 2016 and perhaps $7B+ revenue for 2017. Uber is currently valued at roughly $60 – $66B, or ~10 – 12X trailing revenue. Snap’s IPO probably neutralized all of Uber’s recent negative press with regards to valuations. For fun, if we apply Snap’s 55X revenue multiple to Uber’s revenue, you get a market capitalization of $385B, equal to another Facebook.
Bay Area property went ballistic after the Google and Facebook IPOs, but so has most coastal city property since 2012 due to a recovering economy. Southern California property will likely continue to stay strong post-Snap’s IPO. With ~10,000 new millionaires looking for a home after Airbnb and Uber’s IPO, the Bay Area will likely reignite since less than 1% of the housing stock trades at any given moment. The key is to buy ahead of the liquidity events because although the market discounts in advance, it never fully discounts the true value until the event actually happens. For example, even after a proposed company buyout, there is still a spread between the offer price and the trading price.
For those of you who don’t live in LA or SF, that’s OK. Real estate crowdfunding can at least help you get closer to the frenzy. Just looking at RealtyShare’s platform, here are a couple deals in San Francisco and Los Angeles.
San Francisco Example
RealtyShares San Francisco Investment Example
Talk about depressing photography for its featured image! This property is located in Cole Valley, a desirable neighborhood within walking distance to the UCSF campus and a 15-minute subway ride to downtown. I’m surprised by the low $5K minimum and short 12-month term paying a healthy 10.5% interest. But perhaps by the time they’re done rehabbing the place, it’ll be just in time to benefit from a big IPO.
This is a typical two-unit San Francisco property I wanted to buy back in 2003 for under a million bucks. The idea was to live in one unit and rent out the other for five years until I saved up enough money. Then I’d rent out both units, buy a larger two unit building, live in one unit, and repeat until amassing at least six rental units generating $250,000 in gross rent while retiring by age 40 in Hawaii! Oh well. My current life will have to do.
A 14-minute commute from 333 Parnassus Ave to RealtyShares office. Not bad.
I’m intimately familiar with this neighborhood because I live close by and just checked out an amazing rehab several streets down last weekend that is currently pending (picture below). The developer basically did what the current sponsor for the Parnassus property wants to do, and that’s buy a two-unit building, rehab it and sell each unit for a profit.
Check out the comp below. $2,095,000 is for the top unit with a cottage in the rear. The bottom unit is asking $1.79M. Given the unit went into contract after two weeks on the market, it’ll likely sell for more than asking. Once this post is published, I’m off to spend two hours this Sunday looking for more clues as to what’s going on with the property market!
Comp to 333 Parnassus. So much nicer photography.
Los Angeles Example
RealtyShares LA Investment Example
Here’s another short-duration investment of 12 months with an 11% annual interest and a higher $15,000 minimum. Unfortunately, 3124 Rowena Avenue is about a 35-minute drive away from fabulous Venice Beach.
I highly doubt a Snapchat millionaire is going to want to live in this place. But perhaps a forward-thinking Snapchat millionaire might be looking for multi-family rental properties in LA that generate 10%+ annual gross rents to ensure her fortune lasts longer than a fashion trend.
For 13 years, I invested ~80% of every annual bonus into real estate to diversify away from a highly cyclical industry whose profitability was always under attack. I knew from month one that I wouldn’t last much more than 10 years in the business. By the time I couldn’t take working anymore, I found comfort knowing my real estate investments would help keep me afloat due to rental income and appreciation.
3124 Rowena is a 33-minute drive to fabulous Venice Beach… if you’re lucky
Look In Your Own Backyard
Let’s say you have no interest trying to gain exposure to boomtowns through real estate crowdfunding. You might just have a real estate investment opportunity right where you are.
I’d like everybody to do some research on share whether there are any impending IPOs in your city. You may likely see the same positive effects on your local real estate market as we’ve seen here in SF and LA.
In summary, the success of Snap Inc should:
- Embolden more private companies, especially in tech/internet to go public
- Raise current valuations of private companies in the same category
- Increase investor demand for private companies similar in size and type
- Increase the number of people investing in private equity who normally would not
- Increase hiring by private companies who now have more funding
- Create a larger startup and investor ecosystem in Southern California
- Create FOMO in other cities who wonder why can’t they also start their own ecosystem
- Embolden more individuals to become entrepreneurs
- Create international copycats
- Increase the rents and property prices of surrounding areas
Finally, some of you may be wondering whether I’m willing to buy SNAP at a 55X+ revenue multiple? Hell no! And you better believe every single investor and employee is looking to cash out as much of their pre-IPO shares as possible without sounding alarm bells to latecomers.
I want to see at least a quarter of public performance before making any investment decision. Snap Inc. may become the next Facebook or it may become the next Twitter. Who knows. What I do know is that Snap Inc. has $3.4B more on its balance sheet to spend on growth. I’d much rather try and earn a 10% return selling picks and shovels rather than mining for gold.
Related: Why Is US Property So Cheap Compared To The Rest Of The World?
Readers, what are some other ways to profit from the Snap Inc. IPO? Anybody from Venice Beach or the surrounding area want to provide some local color? Where do you think SNAP stock goes from here? Please point out any flaws in my investment thesis and challenge me! I want to thank a personal finance consulting client of mine who inspired me to write this post because he actually lives in Venice Beach and asked about my thoughts on this subject again.
I was quite surprised by the SNAP IPO mostly because I haven’t followed the company at all and have never used the app before. There definitely has been a lull in tech IPOs though as you mentioned so I’m sure a lot of people were really eager to participate in this one. It’s hard for me to believe their valuation is that high simply because I have no past or future intentions of using the app, but the numbers certainly indicate a lot of people do and that it is in fact worth quite a lot.
It’ll be quite interesting to watch the SoCal real estate markets over the next couple months and out a few years. I don’t know much about the LA region myself because I have only been down there for work on two brief trips, but your logic makes sense to me!
Funny enough we just wrote our bearish take on the snap IPO. The company is trading at something like 30x Next year sales with negative earnings.
The company literally (as the millenials say) loses more money than it makes in revenue. This is fine since the top line should double over the next year (likely more). All that said, the market is essentially saying the stock is worth $30B+ in today’s dollars. That’s all “market cap” really means.
There are a lot of companies with market caps at $30B that will have an easier time getting to $30B in cash flow over their life.
All that said, facebook’s only real competitor is Snapchat since their fancy filters are targeting the youth. Fb seems to be strategically cutting them off which shows they view snap as their main nemesis so maybe all the hype is worth it.
We’ll be putting a trade on right before the lock-up expires.
Good news? Yes Venice beach will see housing price appreciation so could be a great time to buy before they do!
Happy Sunday Sam!
Ever since I started reading your posting, I learned a lot about finance.
Appreciate everything you post on the site !
LA is getting nicer and nicer, I think you have connected the dots between IPOs and property prices. I try to stay out of the city and more in the suburbs, but the buy multifamily and rent some is what I’d like to do.
I tried to play the real estate game in LA about a year ago–I got beat out on everything I tried to bid on with all-cash offers of $100k or so above asking price… Since I was trying to invest in rental real estate for current income, the cash flow just didn’t make sense anymore. It was hard to find anything with a cap rate of more than about 4-5% that wasn’t in a super high-crime area. I think the market has slowed down a little bit, but it’s still hard to get excited about that cash flow–especially if you’re levered and have to pay for financing. At this point, I’m just doing lending-side stuff (mainly through Fundrise and Yieldstreet), and I’m planning on buying rentals in Texas in the next couple years. There’s a much better chance of getting a 10%+ cash-on-cash return there. (I may kick myself if LA real estate appreciates through the roof though…)
I have done 8 deals in TN for 20% cash on cash return with approx $30K profit built in on purchase after repairs. Be willing to look around the country.
And I believe you too. Most of us are way too focused on our local markets, even if cap rates are too low. I believe this will change over the next 5 – 10 years with the real estate crowdsourcing industry opening up markets all over the states.
Let’s just hope the economy doesn’t implode like in 2008-2009. I don’t think it will, but you never know.
Great Post!
I too believe in converting our life gains into real assets. There’s that “tangible effect” of knowing that you have a real asset. Something that you can touch.
But having said that, If I had a short-term huge profit, I would consider other investment options, like for example a passive portfolio of ETFs. I would see with all the options available, and then figure it out the cheapest to invest at that moment.
Also in the case of real estate, I prefer to look for opportunities to “rebuild”. We can try to lower the price… and construction (remodelations / improvements) doesn’t scare me. I actually love to do it.
I just finished up a landscaping backyard project. It took 4 weekends and it’s been extremely satisfying to “rebuild” and create value. Being able to expand and rehab property is one of the easiest ways to increase profits if you know the right people.
Those average looking houses wouldn’t sell for more than $100k from where I come from, prices in San Francisco are truly insane. It looks like that 95 % of price is composed of location and the building itself is actually worth 5 % of the price (materials, planning permissions and construction work). Hawaiian cardboard boxes (typical houses in Hawaii look like wooden/plank cottage) are worth even more. I am not against investing into real estate, as it actually is my largest investment portfolio (currently own 4200 sq ft strip center and 3500 sq ft triplex, fully paid off), but in case of LA market, I think, I’ve missed the train, for retail investors from average locations like me, the prices are too high to jump on in the first place, I just don’t see the discount anymore, there is no premium. What makes the LA region so special that cannot be achieved in any other state in the future? Policies are changing, politics are changing, California’s debt is huge in relative comparison to other states and the actual valuation of tech industry is overblown. I believe that prices in LA area are now in a phase of saturation and the long term premium in real estate deals cannot be found in California.
I would also not make macroeconomic statement based on the example of Snap’s IPO’s first trading day, one should not try to chase rationale on a stock exchange, especially not first year after IPO. Those are mine humble opinions. Take it as a general opinion from independent retail investor who does not have any stake in LA’s real estate (other than few REITs holdings with diversification across entire USA).
Thanks for sharing your opinion. And yet, I think San Francisco is one of the cheapest international cities in the world due to the tremendous INCOME opportunities here. Always look at the income side of the equation when evaluating costs.
If you can land a $250,000 pay package as a 26 year old, earn $350,000 as a 30 year old, AND you can find someone who also makes these same figures, it’s no wonder why prices are higher here than elsewhere. Six figure income is a dime a dozen here. We’ve seen a huge boon where individuals have gotten wealthy owning real estate and who’ve cashed out and bought elsewhere much cheaper.
I’m planning on cashing out myself and moving back to Hawaii within 3-5 years. So much cheaper there!
LA, SF, and NYC prices are elevated because they are desirable, largely due to the population that lives there.
It is typically a group that highly values education and is not that concerned about other background issues (race, sexual orientation, etc). Therefore, it draws high-achievers from all backgrounds and creates a positive feedback cycle. If you are an Ivy league grad or a member of the 1%, odds are out-of-proportion that you will end up trying to live in one of these cities or another global “supercity”. Given that wealth is flowing upwards rapidly, the cycle is likely going to stay intact as there are not a lot of “global” cities in the US.
That’s not to say that we won’t see a rise in value for startup and midwestern cities. I am betting on that (as well).
Snap’s IPO is going to raise the real estate prices a bit in Los Angeles. The same with tech companies moving over to Silicon Beach, our equivalent of Silicon Valley. Unfortunately, I don’t have much to invest in the real estate and would probably be priced out when looking for a home.
I agree with this plan but shouldn’t the size of the company bear some evaluation as well? Snapchat has 330 employees. How much of a ripple will this really cause in a the overall LA market? I think the ripple will be very focal due to the small number of employees.
Where did you get 330 employees? Their filing highlighted almost 1,900 employees.
The ripple is way bigger than just their employees and Venice beach. The success of their IPO could literally create billions of extra value in other companies.
In summary, the success of Snap Inc should:
Embolden more private companies, especially in tech/internet to go public
Raise current valuations of private companies in the same category
Increase investor demand for private companies similar in size and type
Increase the number of people investing in private equity who normally would not
Increase hiring by private companies who now have more funding
Create a larger startup and investor ecosystem in Southern California
Create FOMO in other cities who wonder why can’t they also start their own ecosystem
Embolden more individuals to become entrepreneurs
Create international copycats Increase the rents and property prices of surrounding areas
I’d call it more of a splash than a ripple. If we were talking about a small # of people (1,900 is still small) suddenly cashed up with $50k each, that’d be a ripple.
But we’re talking about way more money than that. Once that lockup ends, you’ll suddenly have a whole bunch of people – many looking to become first-time home buyers – with multiple millions of dollars at their disposal. In cash. Enough to bypass financing entirely, and with no fear of entering bidding wars. That WILL heat up the market, especially at the above-median price levels.
Oh Snap, I just got owned!
1- I was wrong about the number of employees. I had googled this but didn’t look carefully enough as the date of the “330 employees” article is more than a year old.
2- Both of you make great points in regards to the other potential effects.
3- Before this article was written, I was researching this area as I have family nearby and have been interested in bicoastal living + usually stay in the Venice area whenever we go to CA (usually annually). I slowed my search because I thought prices were stalling. I didn’t realize how large this splash will be and I appreciate your comments!
4- Rethinking this entire thread is also reminding me of how “small” the high-end real estate market is. For example, there are less than 1,000 apts over $3m in downtown Manhattan. Given that there are about 15-20,000 people making over $1m per year, even in NYC, 2,000 additional millionaires would definitely reshape that market.
Looks like I am back to Zillow – West Coast edition!
I got slaughtered by the Lending Club IPO. Never again.
Didn’t Buffett say he never invested in them? (I think historically they generally under perform.) Thanks for sharing your experiences! It’s good to learn from other people–otherwise it’s too easy to get swept up in the hype.
Same here Mike. I got in at $15 when they allowed some users to purchase shares before the IPO, watched them go up to about $30, then sold out and cut my losses when they came all the way down to $11, i believe now they are $6. Lesson learned on my part that just because it is an IPO doesn’t mean i ‘need’ to get in on it, because there’s no rule that companies going public have to be good companies! Now i know to be more cautious next time. Thankfully i only invested a relatively small amount of money.
That multiple for the Snap IPO is crazy! Unreal how big just a simple idea came to be. West coast real estate is the next market I plan to diversify into through Fundrise. I’ll be watching it closely over the next couple of months.
Hey Sam,
I’m extremely familiar with the area! As an investment, purchasing in the Venice Beach area is interesting, but I would NOT live there myself. The local population is extremely colorful and fun to visit, but many of the homeowners I have met liked the local culture until they started living there.
It can be a little overwhelming. A current local problem is the prevalence of people living in RVs in the area and dumping their personal waste either on the street or in nearby trash cans. There are prolific complaints to the City Attorney, but they have no resolution. It’s against the Municipal Code, but the City Attorney has yet to win a case against the RVs.
As far as reaching the beach from Rowena in 33 minutes…only at 3 am! This is LA, home of gridlock & public transit is a sad joke. :)
I laughed at the 33-minute commute too. I’d say not even at 3 am–there would probably be road work :).
“Colorful locations” are ripe for profit opportunities. I’ve seen this description time and time again before folks bought and made killings.
One example is the Mission District in SF.
Jack is right, Sam. I grew up in manhattan beach and have spent a lot of time in Venice. I would never raise my children in Venice. It has been the way it is for 50+ years. Venice is never going to lose its tourist reputation aka muscle beach, street vendors, tarot card readers, lots of drugs and gangs. It’s the original ‘beach culture’ city in LA and possibly California. No bueno. Hermosa beach, redondo beach, el segundo and marina del Rey will receive most of the real estate increase benefit. Manhattan beach is already infiltrated with Hollywood money and is already crazy expensive so I decided not think you will see as much of a property value increase there.
As a millennial with friends in the industry and searching for a home on the west side I have to disagree. Venice has changed drastically (just ask the locals) and it’s where everyone wants to live in a place that has more “color” then SM, Brentwood, manhattan beach, and Culver.
It’s an interesting thesis. Is there any other evidence besides just SF that IPO’s inflate surrounding property prices over time? Given the various risks of investing in CA, we need a little more solid data to go on here.
There’s no doubt Snap is bubbly. All the usual Millennial idiocy aside, Snap will have to somehow make their brand and branding the centerpiece of a future empire… of what? But bubbles don’t pop on the very first handful of ridiculousness. Given that Apple, Facebook and Google are currently reasonably valued vs their IPOs, we would be only in the first inning of another potential bubble. We will have to sucker in all the investing-reluctant Millennials for their first personally-involved bubble to really have a go at it. I believe that will happen because FOMO is ultimately all powerful!
I have to wonder if it will be LA that sees the rise or these people will take the money and run. I.e. Will these people buy in LA or will they retire and buy a home in somewhere more vacation like? I know executives will probably keep going, but if I was employee number thousand getting a nice 2-3 million dollar pay day I’d be moving away from the city and to a nice vacation home somewhere less expensive and nicer.
I’m an avid reader of your blog! Love all the research/hard work you put into it.
I have a personal question, my Senior in HS daughter got accepted at Univ. of San Francisco, she’s thinking of majoring in Accounting and got accepted into their business program. What do you know about the school and the area? We are from Chicago. She received a $10K scholarship as it’s a Jesuit College and she attended a Jesuit HS so the cost is $40K vs. 50K.
Thoughts?
I know you’re not asking me but that’s expensive as…well, expensive, add in rent and I’m not sure the quality of the program makes up for the cost of attendance.
I think in the Bay Area Berkeley and Santa Clara are the two go to places for business. And Stanford of course. Stanford and Santa Clara are in nicer areas. SF is a different place. Have her visit before hand and really picture what it would be like to live there, not vacation. Many people love it. I would never live there or LA ever again. Ever.
Most accountants at the Big 4 start around 55-60k a year that I’ve seen + bonus and relocation on their bachelor degrees (some even had the extra MPA too). Assuming you work there I’ve seen the trend line takes until 30-32 to cross over to making over 6 figures (living in semi pricey cities).
Personally, I wouldn’t pay 40 or 50k a year to graduate and have a 55-60k salary. Plus living costs. If you have 200-250k lying around for them I’d probably have them go somewhere cheap and give them the rest of their money as a down payment, investment account etc. If it’s in a 529 maybe have the rest saved for a top MBA program (which is what many often do after the accounting degree – later on from what my friends have done).
That’s all just my opinion though. I’m an engineer so I haven’t studied the opportunities that much but I know in engineering we all start around the same if you have the right skills and grades regardless of firm. The exception is mostly just what firms target your school. But UCSF is a nobody in my books in terms of prestige. If this is U Chicago (you said 50k but didn’t list the other school so assuming UChicago since you live there), then she’ll have better opportunities as being a target school for major firms like MBB = more money assuming she’s top of her class.
I’d make the decision based on money though and go all in for the graduate degree. For perspective, I took the full ride I had at a top 50 engineering school. Got in at a firm and got a full ride to a top 10 engineering on my company dime. And now it looks promising of getting another full ride for top 10 MBA through another program that should cover me.
Use whatever you can to make the most impressive resume. UCSF isn’t that prestigious to me so why pay a premium is how I look at it?
UCSF is different from USF. UCSF is a top 3 medical school in the country.
Any impending IPOs or emerging startup scene where you are from?
Point proven on them not being prestigious enough then (if people can’t tell the difference haha). That being said it is tied with Johns Hopkins at 3 so not bad, but his daughter is looking for accounting… so less relevant than their medical school/graduate programs (though it looks like USF is where she got in and not UCSF – ignorance on my part, I don’t live out in Cali, so apologies there).
I live in the southwest… very few tech companies coming here unfortunately :( We only have lots of defense contractors and support companies for defense contracts in my community. I don’t foresee any of them striking it rich besides the big dogs who already did (Northrop, Lockheed, etc). That being said all of the engineers here are probably wealthier than the ones at Google when you account for cost of living and quality of life (not necessarily in $ terms, but maybe if you have to spend everything to live in the Bay area). Of course that excludes some that get massive IPO money! But as your analysis has shown going to a startup statistically isn’t worth it, but that leads me to my next part!
Question for you Sam! Why do you think you’ve had trouble getting jobs for all the tech companies out there? Is the MBA much use? I’m approaching the age where I need to decide if I should get one. I have a BS and MS (top 10 program) in an engineering field, make 6 figures, can likely get a full ride to a top 10 MBA program (Tuck or Haas but easily top 20 – pretty sure I could get in to some of the M7 but not sure I can get a full ride). I’d probably go for Tuck or Haas full ride vs HSW paying so I’m trying to decide if it’s worth it at all or in what scenarios. What doors would it really open for me?
If I went for the MBA I would try and telecommute and work full time to not forego salary but not sure how much I gain out of that. Care to chime in what a MBA + MS in engineering brings you from what you’ve seen out in the Bay Area? Maybe make it easier to land a leading role at a company that will have a future IPO or just become an established executive :P?
I think I couldn’t get a FT job in tech because of many reasons:
* I have no tech skills.
* Not very smart.
* Don’t have a diverse background (Asians are an overrepresented minority).
* Have a lifestyle business many interviewers have straight up said they want, and would leave their job in a heartbeat if they could have my business.
* Wasn’t 100% enthusiastic about work. I really can’t stand work politics.
* Make more than my potential bosses I interviewed with.
* Same age or older than many of my potential bosses and colleagues.
What makes you believe you can get a full-ride to Tuck or Haas? This could be a great post if you have a hack for this.
You’d be surprised at home large the Google pay packages for mid-level engineers are. I had one perspective tenant write $480,000 in annual income from Google at 28 years old.
Related: Is An MBA A Big Waste Of Time And Money?
Hi Chris – An upcoming IPOs coming out of Chicago? How’s the local government situation there and property taxes? Are you bullish on Illinois?
Couldn’t reply above for some reason.
I’ve read that post on the MBA probably 3-4 times now actually. But to me it won’t be a big vacation. I still plan to work 40 hours a work and do the school… I think I could do it and manage solid grades but it’ll be undergrad all over again with 90 hour weeks!
So it sounds like you think that tech companies look down upon your MBA and lack of tech degree (which is exactly how my company is). So perhaps a MBA wouldn’t hurt me in tech since I have 7 years of technical background work
Well I had a near 4.0 GPA in engineering, tons of great work experience, phenomenal recommendations (all these stats got me full rides into Berkeley and Carnegie PhD, and a couple other top programs too in engineering). If I can get those I’m confident I can get into the MBA programs. Berkeley’s admission rate for the EECS (not sure if this is true since it was a link to Quora and the berkeley link has since been disabled) was 3%. Combine that with the fact I got full rides to undergrad and graduate school I think it’s likely the MBA will come pretty easily. Especially, when I cross reference the data posted on MBA Data Guru and see I’m one of the top applicants off of my stats. There are fellowships I think I should get easily at Haas and Tuck too because of all that but M7 I’m less familiar on their fellowships and scholarships so I think I could likely get in but I’m not too sure on the full ride.
So would you think M7 having to pay for myself is worth going to over Haas or Tuck for free? Considering I’d work so not have to lose out on that opportunity cost of the money. Then I have to make the decision between Haas and Tuck’s legendary alumni network. Thoughts are welcome, though you will be bias towards Haas I’m sure ;)! I’m eyeing Finance and Real Estate for my focus like you did!
Jon,
If you can get a free ride to Haas or Tuck, then I think you’ll be fine whatever you do. I don’t know many people who get double Master’s degrees, but the people I do know who have stayed in school longer than normal tend to regret the decision.
For feedback, may I ask what propelled you to start talking about business school and asking about your situation when I wrote a post about profiting from the Snapchat IPO?
Thanks
Yeah, that’s the thinking on going to either as well. So I don’t think it would hurt and can only help if there is no cost (besides the living costs). As for staying in longer than normal, I was completely salaried during my first Master’s and that was covered so it was no cost there either. I’m looking at another situation on the second one… so I’m not sure I’d regret it so much as maybe hate a Tuck winter!
You were talking about schools above and that got me to ask about your schools since you went to Haas, I thought perhaps you would then be qualified to discuss MBA’s as you’ve probably researched them back when you applied vs. all of my colleagues who it’s not on their radars being engineers. Trying to add new perspective. And your IPO comment made me think MS + MBA = possible executive at IPO company in the future. At the end of the day that would still be profiting wouldn’t (even if 5-10 years down the line). But I do think going back for say ANOTHER MS/MBA (i.e. a stats and mba) could make me regretful if Renaissance Technology didn’t give me an opportunity to try there haha!
My love of this site, and other similar ones are the ability of them to expand my mind and offer insight of new ways to optimize my wealth development strategy. To me it’s using all of the information and then processing the noise in the signal (bad inputs/data) to make the best possible investment decision and mitigate my risk. So that’s my inputs here!
I have really enjoyed your real estate commentary of late. Interesting connection from IPO to real estate that makes complete sense. So many other people besides the investors will see huge uptick from this IPO in the local area.
Now to send this article along with others to the wife about the crowdfunding. Will finally sway her to use our extra money for real estate somehow.
Thanks for the article!
-Cameron
It would be interesting to see how many of the big money people are still in the area though. I know nothing of snap chat but I’m from the Bay Area of California originally.
My wife was the 11th person on board of a company that had a nice IPO. Met and became friends with several of the folks that were hired as the company exploded. ( as an aside: it was amazingly interesting to watch as Christmas parties went from small but nice gatherings with a bunch of young people getting blasted and having a ball to large events with suits and ties and folks on their best behavior). Anyway those employee #200+ didn’t get tens of thousands of shares. By the time of the IPO my wife and her shares were halfway across the country contributing to another economy entirely.
Although there will be some beneficial effect I question how much it will move the market. Although I have a couple of properties in the Bay Area I’m thinking of exiting but now I’m curious just how many local millionaires will come out of an Uber IPO.
How much did your wife make from the IPO if you care to share?
There are ~500-700 homes available in SF for sale on any given day. I would say there are less than 150 homes out of the 500 – 700 an Uber IPO millionaire would want to buy.
I estimate there will be 3,000 – 6,000 Uber millionaires by IPO, of which, 50% of them will probably look to buy their first home (see employee demographic). The tightening of supply and a surge in demand will be immense. This is a relatively small town with an impending MASSIVE wave of wealth crashing down soon.
Well maybe I’ll hold on and wait it out then. As long as it flows cash why not.
In regards to the IPO <1M. Wasn't a tech IPO the likes of a Facebook or LinkedIn etc. just saying that I'm not sure if the 1k employee at say a Facebook is still getting 50k shares or if it falls off rapidly as the company grows.
As employee #11 of a company that IPO’ed, I’m surprised she made < $1 M, was she a key employee?
I was employee #20+ at a tech company that IPO'ed and got about 0.30% of the company, but I was a nobody going in. I know at least one guy, employee #100+, who got 0.5% but they thought he was key.
While I fully acknowledge your point here, Sam, and recognize the “business sense” of the whole thing, allow me to say one thing: Facebook has been devastating for us mere mortal middle-classers here on the Peninsula. It catapulted an already ridiculous real estate market into the hyper-ridiculous. Without expletives, I can’t begin to express my anger at what Facebook hath wrought in my hometown. Granted, FB was only one piece in the vast puzzle of Silicon Valley, but it’s a very personal piece for me because of its geographical proximity and high-stakes impact.
This was my very first thought (even before reading your column) regarding the Snap IPO— “Look out Venice Beach— you haven’t a clue what’s about to hit you.”
I can already hear your rebuttals, Sam— I know all the rational arguments. I just had to say something about the human impact. While the objective concept of “Oh, buy up real estate in the immediate vicinity of a company that’s IPO’ing!” makes perfect business sense and is, as you would say, totally rational, my personal experience of one of these “events” compels me to point out that there are very real human consequences.
Forgive the wallow. It’s just been unbelievably painful to experience the impact of the FB IPO here on the Peninsula. Seeing what’s about to happen to Venice Beach roils those waters for me. I guess the truth is I’ve just never been hard-@ssed enough (or confident enough) to be a REAL Financial Samurai; I’ve failed to “compete” as my home became one of the most ridiculously expensive places in the world to live. If I’m honest (and by FS standards) that’s no one’s fault but my own. Doesn’t make it any easier to swallow, though— especially when you know that executive assistants at FB make upwards of $250k per year.
I realize this doesn’t really lend much to the discussion here, but thanks for letting me say it. This post just hit a little close to home.
Alchemist – this should resonate for you.
theguardian.com/technology/2017/feb/27/silicon-aa-cost-of-living-crisis-has-americas-highest-paid-feeling-poor
Not trying to diminish the pain this causes for mortal middle classers, but even for the “immortals” things aren’t living up to the dream.
Best to not hate the players, or the game. Better to figure out how to make the game work for you.
This is media sensationalism.
If you make $160K a year, that’s about $112,000 a year after tax. Even if you spend $36,000 a year on rent, you still have $76,000 a year to spend, or $6,333.
Anybody who can’t get buy on $6,333 a month AFTER spending $3,000 on rent is a fool. A serious fool.
But the media loves these stories because they know it’ll piss people off.
Thanks for sharing. Palo Alto prices are ridiculous. $2.7M median is amazing. It would have been nice to go long PA property 15 years ago, but we can’t go back in the past. All we can do is predict the future, which is actually quite easy since we have case studies from Facebook and Google.
We must recognize what may be about to come, and make investments accordingly.
It’s too late for me to buy a sweet Pacific Heights Bay view single family home b/c I didn’t have enough money at the time of the downturn. But, I decided to make due with what I had and search elsewhere. That’s where I found Golden Gate Heights for so much less, for what I think is so much more w/ the panoramic ocean views. Keep searching for new places!
Anyone know of any way of non-US residents to participate in US crowdfunded real estate deals? RealtyShares won’t touch you if you’re non-US resident.
This is an interesting question. Just reviewing a thing similar in Germany. Seems like a world class place but years behind in this area.
Probably could set up some contract – holding company by US citizen. Would be messy but think that would be one way around it. Solid contract and it could be pretty bullet proof
Hah! My heart skipped a beat when I scrolled through this post and saw 333 Parnassus scroll into view! I just invested in that property (via RealtyShares) a few weeks ago, as my “tester” transaction. Seems like a perfect example of a home that’s ripe for an uptick in price for the reasons you mention.
So far though, it’s the one and only coastal RE investment in my quiver. I can’t shake the feeling that at least for the short to medium term, prices are simply too high and it’s a dicey time to purchase. I’d rather (and do) put more $$ into things like the heartland eREIT you called out here recently via FundRise.
Flight of RE capital from expensive coasts to less expensive inland towns is powerful and real. I grew up in the Reno/Tahoe area due to my parents doing exactly that, and witnessed firsthand the effect of capital flight from the SF bay area as more and more people sold expensive homes in California, and shuffled their money into homes in nearby Reno.
I wish there was a “not quite heartland but just a smidge inland from the coasts” eREIT!
I like your idea of benefiting from the IPO via real estate. In TN and TX, this doesn’t work as well as our state’s are pro free market and the obstacles to building are low. However, CA is ruled with the tight fist of Stalin and it’s impossible to build anywhere. So the existing stock has to go up in price in order to offset periods of high demand. The Cato institute wrote a great paper on this.
https://www.cato.org/publications/commentary/why-california-home-prices-are-so-high
We bought our home in the bay area in 2012 and hustled to buy ahead of the Facebook liquidity event when millionaires would flood the streets. Competing with all cash offers from overseas investors is bad enough, add in newly minted millionaires and us “mere mortals”* don’t stand a chance.
*And by mere mortals I mean folks making healthy salaries as two software engineers in the valley. On the one hand the valley being the valley is what has made my personal wealth possible. On the other hand I can’t help but feel guilty about all the people being priced out of this area, some of whom have grown up here and think of this as home.
Yep, that would be me. Dang it. The funny thing is, having grown up here, I still think of it as just being “home”— middle class, no big deal, tract home areas in a place that happens to have good weather. That’s *it*. But it’s become an absolute freak show of weirdness. Shacks in bad parts of town go for a million bucks. As I continued to pile up down payment funds over the years, the prices just continued to get more and more insane, remaining elusively beyond reach.
I fully subscribe to the FS creed of taking personal responsibility for one’s financial well-being, so I really shouldn’t kvetch…. but SHEESH! Silicon Valley has warped my native heath beyond the pale.
Three things this analysis overlooks:
1) Size of grants. A large portion of this 1,800 employees don’t have multi million dollar grants. Even senior engineer grants started falling below $1m over a year ago.
2) Taxes. Snap started giving RSUs a while ago which are taxed less advantageously and bring the grant value down substantially.
3) Vesting schedule. Snap has a 1 year cliff and a 10/20/30/40 vesting schedule, versus the more standard 25×4. So, even 2 year employees only have 30% of their grant vested.
Put this together and a 2 year employee with an initial RSU grant now worth $2m will actually have $2m*30% vested*60% left after taxes = $360k
Not a huge windfall. But over time as more stock vests and the stock price increases…
Good thing one isn’t assuming all employees quit once lockup expires. Most will continue to earn their salaries, vest more shares, and get more shares.
No rational person is going to leave before vesting the majority of their shares when they see the public, liquid value on the table.
In your calculation, $360K isn’t huge, but it is more than enough to put 20% down on a median priced property finally. The downpayment is what homebuyers in expensive locations lack the most, not the income.
BTW, an acquaintance at Uber just got a raise valued at $500,000 over the next three years. He’s most certainly going to stay for longer.
I wasn’t saying they would quit once lockup expires, sorry if something was communicated in a confusing way! The employees won’t leave, but the vesting schedule will ensure there isn’t a large influx of capital into the real estate market at one time.
My calculation also assumes a package worth $2m. I would posit that this is only true for less than 500 of the employees. So less than 500 of the employees will be getting enough cash to make a down payment in the next 6 months. Let’s say 30% of them live in different cities since Snap has multiple engineering offices. 350 people…
Not surprised at the Uber raise. I work in tech so know how that goes!
SNAP worries me a bit and I think partly because I’m just past the demographic that really uses this type of app religiously since I’m in my mid 30s. I almost think we’re to the point where we were around 2000 when all the tech companies were given ridiculous valuations without the supporting fundamentals to support the pricing. SNAP currently has no real monetary value besides the virtual platform to share information, which I know is value added, but harder to quantify. What worries me is that this might be like a Zynga flash in the pan type investment. I think like Buffet, understand the business or don’t get in. Either way loved the article and excited to see what transpires.
I think everybody realizes the funny money valuations of companies today, which BOLSTER my thesis that more people will look to diversify away from funny money and into real assets. I’m absolutely certain there is a higher inclination to diversify away from internet/tech stocks this time around than in 2000. I was present during that time and I’m deep in the weeds during internet explosion 2.0.
Just a FYI – the SF example you provided, the borrower had Chapter 7 and 13 bankruptcy filings during 2010 and 2011 – glad Realtyshares disclosed that but would definitely make me what to stay away from it.
Excellent heads up! This is why I like the plan of crowdsourcing brains so we can thoroughly vet everything before committing a single dollar. I need this, as do others bc so many things look good in a bull market.
Any IPOs coming out from your city?
Heck no…Orlando has nothing coming it’s way but even then I have been forced about 20 miles out of downtown Orlando in order to final affordable rental properties. Takes me a 9 months to find one now.
My personal valuation of snap is $14 billion max. It’s overvalued, I want to know who the buyers of the shares are who will hold it for the long term. Cause I won’t. Then it will be decided on how snapchat will outpace facebook’s copying. Facebook has more talented coders in the 1000s, more money to sink in and lose to the tune of $1 billion cash yearly. Let’s make you an engineering director at FB who is given the order by Zuckerberg himself of, “Let’s beat snapchats guys.” So you would copy the exact same features, putting better more experienced coders than the 25-27 yr old coders at snapchat. The areas of snapchat where it looks like they are using a small team of 10, you would use a team of 100. You as fb don’t innovate, you simply just copy every little detail. Overtime of 3-4 yrs this strategy would wipe out snapchat. This is the same strategy Bill Gates used to wipe out many, many companies for his Windows platform. I don’t see snapchat beating out fb in 5 yrs time. I see instagram stories becoming #1 and maybe snapchat will still be around as #2 or vastly insignificant. Fb, fb’s ceo, fb’s top management team, assets, systems, hardware, codebase all have more competency than snapchat.
But Mark Zuckerberg didn’t want airbnb, pinterest, reddit. On top of it all, Mark Zuckerberg wants snapchat. And will continue to come after it for the next 5 yrs.
I find the Snapchat IPO to be concerning. Clearly shows a lot higher investor risk appetite. The valuation is ridiculously high. Snap already has a market cap similar to many blue chip companies like CBS or Sprint haha! So far Facebook has been the only one to monetize their vast user base, but who knows maybe Snap can as well.
My friend bought a place in Manhattan Beach not too long ago. He’s very interested to see home demand statistics over the next year.
Hi Sam, long time reader first time poster. Have you written else where about this theory that you were in a “highly cyclical industry whose profitability was always under attack”? I’m curious to learn more about that and would love to read your thoughts if already posted. Cheers.
Howdy, I wrote about the industry here: https://www.financialsamurai.com/should-i-work-on-wall-street/
Sam, the SF property you profiled was the same one I made a bearish comment about in your Realty Shares post and then forgot about it. Today I checked both the funding status and it is not surprising that the target property is still having challenges to obtain the funding after so many months. Other debt properties I have seen get funded in a day or two. I have invested in other properties on RealtyShares and PeerStreet and only time will tell. On the plus side, owning in the Bay area makes me at least neutral property :-)
You Can pay two million for a trendy dump in San Francisco.
You can also buy a castle in Scotland for two million.
being trendy is expensive, right Sam?
Ah, but there are really no $2M dumps in SF. That’s media trying to cherry pick the worst looking place to create a scene, when they don’t highlight how large the land is.
Here’s a $2M dump with panoramic ocean views.
I’d rather buy a rare Ferrari that appreciates or depreciates less than buying a regular car that depreciates quickly!
If you have the money and connections this is a viable thing.
A coworker has been in the Ferrari loop for a long time (and apparently it takes a LONG time). Having a history of buying gets you priority on new models. Buy and drive for less than a year. Sell for a profit to people who can’t get in on the model for a new purchase.
Go figure. I always thought people lost money on those things.
I’m curious what other industries will be impacted by Snap’s new millionaires. Do the clothing retailers, cosmetic surgeons, etc also have a big bump when that money shows up?
I’d imagine that this would be the effect over a period of time. As more money enters the local economy, prices will go up or down depending on the changes in consumption…and with them some salaries will change too. I don’t think the net effect will be that substantial from just a single company’s IPO, though. You’d need more than one company to strike it big to make any single location notice substantial bumps in income. Interestingly enough, we’re noticing a lot of that happening here in Chicago because of the thriving technology market. A lot of technology companies are doing very well in Chicago, which is causing a lot of people to pay attention to all the markets here.
I’m pretty disappointed in myself – I had a chance to work at Snapchat about a year and a half ago. I could’ve gotten in with some pretty stock options and a chance at the real estate close to their office. But I opted down a different road. :(
Ah well, every decision is perfect in retrospect. Kind of funny that my decision is haunting me even while visiting one of my preferred blogs. :)
Ah, but if you were smart enough to get a job offer from Snapchat, surely you got an even better offer elsewhere?
Unfortunately I never received an offer from Snapchat. I feel like I should’ve hustled harder so that I could’ve!
But it’s definitely not a tragic ending. I was fortunate enough to work at two hot companies, and that led to me getting a pretty solid job with some really hot stock options in Chicago. Can’t complain! :)
Thanks for everything you do!
Hey, Sam.
Long time reader here, your posts just keep getting better.
Was wondering what areas do you think will profit most from the upcoming tech IPOs (Airbnb, Uber, etc.)?
If we were looking for something more affordable to benefit from this, would some parts of Oakland be a good choice?
I feel like I’m missing something with RealtyShares. Other than I would like everyone to do well in life, why would I care if I lend to someone that buys a rehab home and property values skyrocket during the loan period? Am I not only getting back my principle plus interest? In that case, what value is it to me that the housing values go up (other than it probably being a safer investment)? Am I *also* participating in the appreciation of said property?
Secondly… I understand that the interest rates lenders pay on RealtyShares is higher than what they’d pay from a bank, but they’re willing to do so because of a quicker turnaround, etc. Say I lend 10k for 1 year at 10%. If the lender completes the rehab, rents the home out and is now able to qualify for a lower interest loan from a traditional lender, takes out a mortgage at a much lower rate and pays the RealtyShares loan early, is there anything in it for me? An early payoff penalty paid by the lender perhaps? I feel like if I put in 2-3 hours researching a potential investment and after 3 months the 1 year loan is paid in full I have to go through my same process of searching for the next loan to make… perhaps 3-4 times per year. Rather than earn $1,000 interest on the initial loan for 2-3 hours work I might get $900 for 8-10 hours work.