When Will The Real Estate Bubble Explode? Be Careful Investing Now

Are you anxious about being in a real estate bubble that could explode? After a massive run-up in real estate prices since the pandemic began, the likelihood of a real estate bubble is growing.

That said, I don't think the property market will crash anytime soon. With an accommodative Fed, a Federal government that wants to spend huge stimulus money, low interest rates, and job growth, the housing market will likely stay buoyant for years.

But let's dig deeper, given nobody can know the future for sure.

When Will The Real Estate Bubble Explode?

I went to an interesting real estate drinks/dinner and wanted to share some feedback I received after speaking with several real estate veterans.

Unbeknownst to me at the time, the dinner was reserved for Qualified Purchasers, individuals with over $5 million in investments or institutions with over $25 million in investments. In other words, these folks all have long-term investing experience with significant capital at risk.

It's always good to see what people do with their money, in addition to what people say. Here are some thoughts from three people I spoke to.

1) 20 Year Veteran In The Hotel Business

“I said back in 2010 that the real estate cycle would end by 2020, and I still believe the cycle will end by 2020 today. The hotel business is notoriously boom bust, even more so than the residential market.

The LA market, where I have the most expertise is absolutely flooded right now. They are going to be in a world of hurt. You want to be selling any marginal properties you have. It's worth giving up some of the upside so you don't get slaughtered on the downside when the real estate bubble pops.

But the hospitality industry is making a comeback as the economy opens up. Therefore, I would look to buy prime location hotels to capture the travel boom. One of the good places to look for such deals is through CrowdStreet, a great real estate investing platform for accredited investors.”

2) Ex-Real Estate Managing Partner At $20B+ Hedge Fund

This guy had just left his job of 10 years to spend more time with his young daughter. I'm assuming he was easily making $2 – $3 million a year, which is a hefty sum to give up.

He bought a SF investment property in 2010 and just sold it this August, 2017 for about 70% more than he had paid. He said, “These prices make no sense anymore. The city is now super congested, employees aren't able to comfortably afford the rent or purchase prices based on incomes, and supply is increasing.

I'd much rather live in the suburbs, where you get so much more for so much less. It's time to start worrying about the housing market again. Prices seem to have risen too much, too quickly.”

When Will The Real Estate Bubble Explode? Proceed With Caution - San Francisco median sales price appreciation

3) Real Estate Debt Investor

I asked this fella what he thought about investing in real estate debt with target 12% – 15% returns and a 5+ year holding period given the hotel business veteran above said the real estate bubble was going to burst in 2010.

He said, “Not a bad idea. With a 5+ year debt fund, you'll be able to ride out the cycle. Debt payments are more predictable and defensible in a downturn than are equity payments.” As a small time landlord during the last downturn, I can attest to this. Instead of cutting or raising rents, I just kept them stable. By the time the recovery began in 2010-2011, I was able to raise the rents to market rates when new tenants moved in.

History Of The Top Of The Stock Market

Watching Out For A Real Estate Bubble

Let's be clear: nobody knows when the good times will end. I sold my San Francisco rental house in the summer of 2017 largely due to lifestyle reasons, and the ability to earn money easier in other ways. Oh, I also hated paying $32,000+ a year in property taxes. In 2021, the housing is probably worth 15% more. But it also depends on whether they improved the home or not.

You may be tempted to sell your home yourself in a hot market. All I know with high certainty is that 30 years from now, the stock market and your local real estate market will likely be higher than where it is today after several corrections. And our children will wonder looking 30 years in reverse why we didn't do more to build the family fortune.

If you decide to sell, make sure you know the risks of using a bad realtor. Thus, don't rush your decision making process. Find a good fit. Your property is likely your largest asset after all.

The key for all real estate investors is to NOT get emotional about your investments. Stick to a disciplined approach based on valuation multiples, rental yields, and cap rates.

Although I loved living in my rental house for almost 10 years, it was time to move on after someone offered my 30X its annual gross rental income. The more you can focus on the numbers, the better investor you will be in the long run.

Achieve Financial Freedom Through Real Estate

Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.

In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the way to go. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

About the Author

Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world.

During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.

FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.