I sold my San Francisco rental property for $2.75 million just 2 years ago, and now Im convinced its once again the right time to buy real estate

A Golden Opportunity To Buy Real Estate Is Emerging

Back in 2017, I had a very difficult decision to make. My rowdy tenants gave notice and I had to decide whether to sell my rental property or try and find new tenants.

The house had been rented between 2014 – 2017 for $8,200 – $8,800 a month. But when I went to find new tenants at a similar rent in 2017, none were to be found. Instead, I got a couple of offers for only $7,500 a month after 45 days of looking.

Because my tenant situation gave me stress and my son was just born, I really felt that 2017 was a good time to sell. Further, I was running up against the $500,000 tax-free profit exclusion limit.

Earlier, in 2012, I had tried to sell the house for $1.7 million and received zero offers. My agent at the time told me one couple was looking to lowball me at $1.5 million and I told them don’t bother. Fast forward five years, I was able to find my one and only offer for $2.75 million so I took it.

After paying fees, taxes, and the $800,000 mortgage, I was left with about $1,800,000 in proceeds. Over the next 60 days, I invested $600,000 into dividend-paying stocks, $600,000 into CA municipal bonds, $550,000 into real estate crowdfunding, and left ~$50,000 in cash.

So far, the reinvested proceeds have done well. But most of all, the reinvested proceeds have provided a greater amount of passive income with minimal work on my part. I’m extremely thankful I was able to free up time since mid-2017 to be a stay at home dad.

I’m also thankful to the FS community for sharing their thoughts about whether or not to sell back in 2017. After over 1,000 votes, 75% of you said sell, which gave me added confidence to let my once beloved property go.

In this post, I will argue that a golden opportunity to buy real estate is once again upon us. My spidey senses are telling me it’s time to buy at least one property before January 1, 2021.

After I finish telling you why I’m getting bullish on real estate, I’d love for those of you who are bearish to blow my arguments to smithereens.

Why It’s Time To Buy Property Again

1) Prices have softened all across the country. It turns out, selling in 2017 looks to have been the recent median sales price peak in the United States according to the Federal Reserve Economic Data (FRED) maintained by the Federal Reserve Bank of St. Louis. See chart below.

If we look what happened after the previous peak in late 2006, we saw the median sales price go from $255,000 down to $210,000 (-17%) over the course of 2.5 years. Some time in 2H2009, home prices bottomed.

Home prices gradually ticked higher from late 2009 until 2012, before exploding ~55% higher from $220,000 to $340,000 in 2H2017.

The median sales price has since fallen from $340,000 to roughly $310,000 in 4Q2019, a 9% decline.

2) Mortgage rates have collapsed. Mortgage rates have declined by over 1% across various mortgage types since their highs in 2018. Although the average mortgage rate for a 30-year fixed is 3.75% and 3.4% for a 5/1 ARM according to Freddie Mac below, if you employ my mortgage rate strategies, you can do better.

Even if I didn’t get a lower mortgage rate through relationship pricing, I still could have refinanced my mortgage at 2.875% with a no-cost, 10/1 ARM. Instead, I refinanced to a no-cost, 7/1 ARM at 2.625%

Average mortgage rates in 4Q2019 per Freddie Mac

With hundreds of thousands of homeowners wisely refinancing their mortgages in 2H2019, more money will be spent to help prop up the economy. My cash flow is up a little over $1,000 a month, which I plan to mostly reinvest.

3) The stock market is back to an all-time high. 2019 is shaping up to be a banner year in the S&P 500, with the index up over 22% (3,040+) at the time of writing. The S&P 500 is one indicator of the economy’s health. Unless analysts and CEOs are wrong about earnings growth going forward, the economic outlook still looks strong. If U.S. corporates are doing well, unemployment will remain low and wage growth should continue to grow.

It is unlikely the stock market’s performance and the physical real estate market’s performance will remained decoupled for long. In fact, take a look at various REITs, homebuilders, and Home Depot. They are mostly outperforming the S&P 500 YTD. For example, including dividends, VNQ (Vanguard Real Estate Index ETF) is up about 29%.

4) 2020 is a presidential election year. If we know one thing about power-hungry politicians, it’s that in order to stay in power, they will do everything possible to help ensure the economy keeps growing. The only caveat is if a candidate from the far left wins. If this happens, the S&P 500 will likely decline by 20%+ as investors anticipate higher taxes and business unfriendly policies in the future. The stock market and economy prefer certainty over uncertainty.

5) The devil you know is better than the devil you don’t. Once the state income and property tax deduction limit of $10,000 was introduced and the mortgage interest deduction limit was lowered from $1,000,000 to $750,000 for 2018, there was a lot of uncertainty regarding how this would affect a homeowner’s tax bill. Now that homeowners have gotten to see what the exact damage is, homeowners and tax experts can now make more calculated homeownership decisions going forward.

In my opinion, the SALT cap limit hasn’t hurt as badly as some people feared due to the doubling of the standard deduction and the decline in mortgage rates. I personally haven’t noticed any difference and even got a small federal tax refund.

6) Rents continue to tick up. The value of a property is ultimately based on its rental income. Some coastal cities will have lower cap rates due to faster property price appreciation. While heartland cities will have higher cap rates, which offer tremendous value to income-seeking investors.

National average rent 2009 - 2019

As a landlord in San Francisco, rents have stabilized since peaking in early 2016. Rents are now starting to creep back up a little. The below chart now clearly shows what I experienced in 2017. I aggressively marketed my place for 45 days, and the best I could do was a 14.7% drop.

Given I knew in real-time that rents were weak, it was straightforward to conclude that property prices were likely capped in the short-run and may weaken as well.

San Francisco rent index Zillow

7) The Millennial generation is in its prime buying years. Millennials are now in their 30s, which means they’ve had 10+ years to save for a downpayment. They’re also at a stage where they are settling down and having children. There’s probably no bigger catalyst to own a property than children. Your nesting instincts go into overdrive as you strive for stability.

You can see from the chart below by the National Association of Realtors® Home Buyer and Seller Generational Trends study that married couples dominate the home buyer demographic, followed by single females. No surprise, the single male is way behind the single female when it comes to home buying.

I’ve mentioned this before, but there are now eight males over the age of 25 still living at home with their parents within a six-block area around my house. One of my biggest fears as a dad is raising a son who does not grow up to be an independent man by 25. I cannot be too soft.

Adult composition of home buyer households

Below is another interesting graphic I found that shows where millennials are buying the most homes. They certainly aren’t buying as many homes in California or Washington, Hawaii, Florida, New York, New Jersey, Washington D.C. or Boston.

This buying trend gives me confidence that buying property in non-coastal cities is a good long-term trend. I’ve now got Ogden, Grand Rapids, and Des Moines on the top of my radar when I look at deals on RealtyMogul (most for accredited investors) and Fundrise (accredited and non-accredited) my two favorite real estate crowdfunding platforms.

Just like how stock investors shouldn’t fight the Fed, real estate investors shouldn’t fight multi-decade demographic trends.

Where millennials are buying the most and fewest homes

Google is spending $13 billion on real estate in Nevada, Ohio, Texas, and Nebraska in 2019 and beyond. Uber signed a 450,000-square-foot lease within The Epic, a mixed-use development in Dallas, Texas. Their office is set to open in 2022. The trend towards the heartland is as clear as day.

8) Wave of tech IPO liquidity coming due. Companies such as Uber, Lyft, and Pinterest went IPO in 1H2019. Their 6-month lockup is expiring in 4Q2019. I’ve spoken to a dozen employees at these companies and they all plan to sell some stock to diversify their net worth. Not only do they plan to sell some stock before 2019, they also plan to sell another chunk in 2020 to minimize their tax bill.

The common reinvestment theme for their tech IPO proceeds is to buy a property somewhere in the Bay Area or back home where they originally came from. The other theme is to join a new startup and try to get rich again. After going public, Uber, Lyft, and Slack have been disappointments, which is making employees more anxious to sell and diversify.

9) Wage growth is reaching new highs. Real median household income finally broke out to new all-time highs in 2017. The latest data is $63,179 at the end of 2018. I’m confident when the 2019 data comes out in 2020, the real median household income will go up further.

Real median household income

10) Winter is here again. Winter is my favorite time to buy property because anybody listing during this time tends to be a more desperate seller. Think about it. The weather is usually at its worst during winter. The holidays put people in wind down mode. Fewer people are graduating from school during the winter. And people are waiting for their year-end bonuses to be paid in the new year.

11) Hot foreign money has cooled off. Before 2017, a lot of coastal city buyers had to compete with wealthy foreign money, especially from China. Foreign buyers caused bidding wars and a lot of competition for potential local buyers. The Chinese government has since clamped down on hot money outflow to purchase foreign property. As a result, Chinese buyers of U.S. real estate is down over 50% YoY in 2019.

From a foreign capital competition perspective, the time to buy is when their spigots have been shut off. Eventually, foreign money will come flooding into America again, especially if there is a resolution with the trade war. There have been over two years of pent up demand for U.S. property. When the demand is finally unleashed, it will probably result in all-cash bidding wars once again.

Top foreign buyers into US residential properties from 2016 - 2019

12) The next recession won’t be as severe. During the 2008-2009 financial crisis, the median home price in America declined by ~17% over a 2.5 year period. I do not believe we will go through a downturn of a similar magnitude because lending standards have been so incredibly tight post the 2008-2009 recession. For example, I got rejected for a refinance back in 2014 because my 1099 income was too abysmal. Yet, I had enough in my investment account with the bank who rejected me to pay off my entire mortgage times two!

Since 2009, only people with excellent credit scores have been able to get mortgages. Negative amortizing liar loans have disappeared. It has also become common practice to buy a home with a 20% or greater downpayment again.

With so much home equity that has been accumulated since 2009 by very creditworthy borrowers, most homeowners should be able to weather a financial crisis much easier than in the past.

Since its late-2016 peak, the median sales price in America is already down ~9%. Even if home prices continue to decline and reach the same magnitude as the previous recession, there’s only 8% left to go.

Real Estate Looks Good: Prove Me Wrong!

I’m thankful to have sold my rental property in 2017. Although paying the commission was painful, the peace of mind I received from not having to manage the property as a first-time dad was priceless. Further, the reinvested proceeds have done well so far with no work needed on my part.

With wages up, home prices down, and mortgage rates down, I plan to buy another property very soon. All I ask is that nobody buy property until I take down another home with an ocean view. The opportunity to profit, have a bigger home for a larger family, and pass down cheap property to my children 30 years from now is too tantalizing not to take action.

Thanks for your cooperation!

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Readers, please let me know whether you think buying a property between now and 2021 is a mistake and why. Will buyers today be viewed as lucky in the future? What are you seeing in your neck of the woods? Please state the location you are referring to. Note: I will update this post every 3-6 months to see where we stand.

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