The_golden_time_to_buy_real_estate_is_upon_us
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai. And in this episode, we're going to talk about
00:00:03.920 | my favorite topic, which is real estate. I think now, the end of 2019, up till around
00:00:12.320 | the spring of 2021, is an opportune time to buy real estate. And I want to share with
00:00:18.760 | you some reasons why I think it's an opportune time to buy real estate. And let me first
00:00:23.420 | preface by saying that I am totally biased for real estate. I think it is the absolute
00:00:28.440 | best way for middle class Americans and for people who want to get rich to build wealth.
00:00:35.260 | It's easy to understand. You understand the rental income, you know how to improve the
00:00:40.800 | property, you know how to hustle to get tenants, the laws, the maintenance, the insurance,
00:00:47.360 | everything's out on the table. Whereas with stocks, it's a little bit hard to figure out
00:00:51.800 | sometimes. You've got to understand the income statement, the balance sheet, the cash flow
00:00:55.160 | statement, you need to understand the strategy, the competitive dynamics, and so forth. Now,
00:01:00.680 | obviously, stocks have done phenomenally well in 2019 and since 1926, frankly. But for the
00:01:07.600 | average person, I think real estate is more easy to digest and understand and build wealth.
00:01:14.040 | So back in 2017, I had a very difficult decision to make. I had some really rowdy tenants,
00:01:19.840 | they're always four to five dudes since I started renting it out in 2014, who would
00:01:25.240 | give me a lot of problems. There were parties, neighbors complained, they tore up my floors,
00:01:32.000 | and they had dogs that ripped up my French doors and all that stuff. And it was just
00:01:36.080 | a real big hassle. And they gave me a heads up that they wanted to move. Well, they actually
00:01:42.460 | wanted to get the rent lowered. And I was like, "No, I'm not." Based on how much you
00:01:46.480 | guys have been crushing my property, the house had been rented between 2014 and 2017 for
00:01:52.120 | $8,200 to $8,800 a month. And I definitely could have lowered the rent to keep them,
00:01:58.720 | but I just didn't feel like it at the time because I was going to be a new dad in 2017.
00:02:05.080 | And so I said, "Okay, thanks a lot, guys. Just fix up the house. Nice having you. See
00:02:09.600 | you later." But I did feel that I should try to get better tenants instead of sell
00:02:15.520 | the property. And so for 45 days, I aggressively looked for new tenants, and I couldn't find
00:02:22.280 | any at the $8,800 a month level. The best I got was $7,500, which is about a 14 plus
00:02:29.520 | percent drop. And that was pretty surprising to me. And so it made me think, maybe 2017
00:02:36.840 | is the time to sell and simplify my life. And I asked you guys what you thought, and
00:02:42.400 | over a thousand people filled out a poll. And the majority said, "It's time to simplify
00:02:47.480 | life and sell." At the end of the day, you cannot lose if you lock in a win. And I tried
00:02:52.720 | to sell this property in 2012 for $1.7 million, and I got no offers. I got some whispers saying,
00:02:59.760 | "Hey, how about 1.5 million?" You know, just really lowball offers. And I said, "Forget
00:03:04.480 | it. I'm just going to live and enjoy my house." And that's what we did until 2017. So long
00:03:10.640 | story short, I ended up selling the property in 2017 for $2.75 million with some credit
00:03:17.000 | back. And I was really relieved. I used those proceeds to reinvest in real estate crowdfunding,
00:03:23.840 | in municipal bonds, as well as in the stock market. So I went from semi-passive income
00:03:30.880 | with lots of headache, actually, to completely passive income. And so far, things have gone
00:03:37.480 | pretty, pretty well since 2017. The stock market's at all-time highs. Bonds have ripped
00:03:43.000 | higher in 2019 because rates have collapsed. And real estate crowdfunding, so far, so good.
00:03:48.760 | 12% to 16% IRR over the past three to four years. But what about now? End of 2019 and
00:03:56.440 | onwards? Well, I think it's time to buy property again, physical real estate. And I'm going
00:04:01.880 | to share 12 reasons why. So the first reason is that prices have softened all across the
00:04:07.960 | country. It turns out selling in 2017 looks to have been the recent median sales price
00:04:12.560 | peak, according to the Federal Reserve Economic Data, managed by the St. Louis Federal Reserve
00:04:18.840 | Board. Check out the post. You'll see this clear chart that shows that late 2017 was
00:04:24.560 | the peak, and now we've been fading down about 9% since. If we look what happened after
00:04:32.560 | the previous peak in late 2006, we saw the median sales price go from $255,000 down to
00:04:38.760 | $210,000. That's a 17% decline during the worst recession of our lifetimes. And that
00:04:45.400 | occurred over a two and a half year period. Home prices gradually ticked higher from late
00:04:51.000 | 2009 until 2012, before exploding by up 55% from $220,000 to $340,000 in the second half
00:05:00.440 | of 2017. So today we're at $310,000, median sales price in America for the fourth quarter
00:05:07.760 | 2019. That's a 9% decline. So it's not as bad as a 17% decline. I also don't think we're
00:05:13.920 | anywhere close to being in the conditions we had in 2007, 2008, not just yet. So prices
00:05:22.880 | have declined. That's point number one. Two, mortgage rates have collapsed. Back in 2018,
00:05:29.320 | you can get a 30 year fixed mortgage rate for about 4.875%. That was the average. Today
00:05:35.640 | that average is about 3.75%. And if you look at 5-1 arms, back in 2018, they're averaging
00:05:42.760 | about 4.125%. And today you can get it for 3.4%. And those are just the averages, right?
00:05:50.920 | Like if you read Financial Samurai, you listen to this podcast, you know how to get a lower
00:05:55.440 | mortgage rate. I've been talking about that aggressively recently, because third quarter
00:06:00.880 | 2019 was the time to pounce. I was able to refinance my mortgage to a 7-1 arm at 2.625%.
00:06:08.400 | Now, of course, I had to transfer funds and do the relationship pricing thing. But that
00:06:13.840 | said, my cash flow is up about $1,050 a month just by refinancing. So think about this in
00:06:21.920 | terms of thousands and thousands of other homeowners refinancing. That's good for the
00:06:26.960 | economy. And also think about the higher ability to buy, the higher purchasing power by new
00:06:33.760 | buyers right now, where suddenly they can afford much more home. So another positive
00:06:38.120 | for real estate.
00:06:39.360 | Three, the stock market is back to an all-time high. And we've been saying this a lot lately,
00:06:45.360 | because almost every year, except for 2018 and I think a previous year, the stock market
00:06:50.000 | has done well. This year in 2019, we're up over 23%. We're over 3,050 on the S&P 500,
00:06:58.320 | which is an incredible, incredible performance. If you look at the 2019 S&P 500 predictions
00:07:04.680 | by 10 of the most followed Wall Street analysts, only a couple, 20% of them had 3,000 as a
00:07:13.720 | target. So this is pretty amazing how strong the stock market is performing. And the S&P
00:07:19.080 | 500 is one indicator of the economy's health. So unless analysts and CEOs are wrong about
00:07:24.720 | earnings growth this year and going forward, the economic outlook still looks quite strong
00:07:30.800 | over the next 6 to 12 months at least. Because remember, stocks and the stock market are
00:07:38.720 | a function of future earnings growth. Expectations are baked in 6 to 12 months ahead. And so
00:07:44.520 | you want to look at the stock market as a key indicator for the economy. Now, of course,
00:07:50.320 | things turn on a dime, just like we saw in 2007. But there were clear catalysts in 2008
00:07:56.680 | that caused the stock market crash. You saw Lehman Brothers go down, Bear Stearns go under,
00:08:03.080 | and it just was a huge unwinding. I think it's unlikely the stock market's performance
00:08:08.080 | and the physical real estate market's performance will remain decoupled for long. It's already
00:08:13.880 | been decoupling for two years now. In fact, take a look at various REITs. I personally
00:08:19.200 | own the REIT O and OHI. They're going gangbusters. We're talking 25%, 35%, 40% returns. Look
00:08:28.880 | at the home building stocks. Look at Home Depot. They're all outperforming the S&P 500
00:08:34.720 | year to date, including dividends. Just look at VNQ. The Vanguard Real Estate Index ETF
00:08:40.760 | is up over 30%. So to me, it's really hard to imagine a continued decoupling of physical
00:08:48.000 | real estate prices and these instruments, stocks and REITs and so forth, that continue
00:08:54.480 | to do very, very well. So I think there's going to be a convergence, and maybe the stock
00:08:59.320 | market will fade a little. But I think real estate will tick up a little, physical real
00:09:03.880 | estate, that is. 4. 2020 is a presidential election year. If we know one thing about
00:09:10.000 | power-hungry politicians, it's that in order to stay in power, they've got to do everything
00:09:15.180 | possible to help ensure the economy keeps growing. The only caveat is if a candidate
00:09:20.480 | from the far left wins. If this happens, I think the S&P 500 is going to go down easily
00:09:25.600 | 20%, if not more, as investors anticipate higher taxes and business-unfriendly policies
00:09:32.760 | in the future. Now, think what you will about politics, but investors, people, companies,
00:09:39.800 | they like stability. They don't want to get thrown a curveball and swing and a miss. Let's
00:09:45.840 | look at the presidential election odds tracker. Donald Trump is currently favored to win with
00:09:51.760 | +110 to +120 odds. So that means if you bet $110 to $120, you win $100. Elizabeth Warren,
00:10:00.680 | interestingly enough, is number two at +375 and +300. So in other words, you've got to
00:10:08.360 | put up $300 to $375 to win $100. Three is Joe Biden, seems like a pretty moderate guy,
00:10:15.960 | +550 to +600. So you've got to put up $500 or $600 to win $100. And then there's Bernie
00:10:23.200 | Sanders, +1100 to +1200. So that is an indicator that he's probably not going to win. So you've
00:10:30.800 | got to really think about Donald Trump, Elizabeth Warren, and Joe Biden. Five, the devil you
00:10:37.000 | know is better than the devil you don't. So that can relate to politics, but it really
00:10:41.760 | relates to taxes. Once the state income and property tax deduction limit of $10,000 was
00:10:46.480 | introduced and the mortgage interest deduction limit was lowered from $1,000,000 to $750,000
00:10:51.800 | for 2018, there was a lot of uncertainty regarding how this would affect a homeowner's tax bill.
00:10:58.760 | There's a lot of postulation that obviously those who live in more expensive areas of
00:11:03.560 | the country like New York, Boston, DC, San Diego, San Francisco, LA would get hit hardest.
00:11:11.000 | That's logical. But now that homeowners have gotten to see what the exact damage is, homeowners
00:11:16.600 | and tax experts can now make more calculated home ownership decisions going forward. In
00:11:21.680 | my opinion, as someone who owns real estate in San Francisco, the salt cap limit hasn't
00:11:26.880 | hurt as badly as some people feared due to the doubling of the standard deduction and
00:11:31.520 | the decline in mortgage rates. I personally haven't noticed any difference and even got
00:11:36.600 | a small federal tax refund like I normally do every year for the past 10 years.
00:11:42.800 | Six, rents. Rents continue to tick up. The value of a property is ultimately based on
00:11:48.320 | its rental income. Some coastal cities will have lower cap rates due to faster property
00:11:53.300 | price appreciation, while heartland cities will have higher cap rates, which offer tremendous
00:11:58.880 | value to income seeking investors. Again, take a look at the post where you can see
00:12:04.200 | this clear national rent chart where rent just keeps on ticking up. It's a very smooth
00:12:10.120 | line and the national average rent in the end of 2019 is about $1,480. And that's just
00:12:17.280 | a mix of all types of properties, all types of rental properties. And if I look in San
00:12:22.400 | Francisco, we're finally seeing an uptick in rents since peaking in about late 2016.
00:12:29.240 | And this is really interesting because finally, after two, two and a half years, people now
00:12:34.880 | can see what I saw back in the middle of 2017, where I experienced like a 15% drop in rental
00:12:42.800 | asking price. So if you're in the mix, and I'm trying to give you in the mix real time
00:12:48.400 | data, you know, ahead of other people who are not in the mix, who are just postulating
00:12:54.280 | and pontificating about their finances, what's going to happen. So I think this is one of
00:12:59.240 | the reasons why you should continue to listen to Financial Samurai and read the articles,
00:13:03.440 | and you should continue to read and listen to things from people who've actually experienced
00:13:10.240 | what they're talking about. It's really important because money is too valuable to be left up
00:13:14.480 | to straight up pontification. Seven, the millennial generation is in its prime buying years. I
00:13:20.880 | remember, I don't know, five years ago, eight years ago, everybody's saying, Oh, millennials,
00:13:25.640 | they're not going to own cars, they're not going to own real estate, they're going to
00:13:29.360 | live a different lifestyle. Well, hey, guess what? Millennials are now in their 30s, late
00:13:34.720 | 30s, which means they've had 10 plus years to save for a down payment. They're also at
00:13:38.680 | a stage where they're settling down and having children. Hey, that's what happens. There's
00:13:43.480 | probably no bigger catalyst to own a property than children. Your nesting instincts go into
00:13:48.220 | overdrive as you strive for stability. The wants and desires for every single generation
00:13:54.040 | is the same as it ever was. One of the interesting things that I found out from doing this research
00:14:00.240 | is the adult composition of homebuyer households for the National Association of Realtors.
00:14:06.200 | So 65% of all homebuyers are married couples. That makes sense because kids and so forth.
00:14:13.560 | But the second largest demographic of homebuyers is the single female at 18%. And then the
00:14:20.640 | third largest homebuyer demographic is the single male at only 7%. So in other words,
00:14:27.880 | single females are outnumbering single males by two and a half times in terms of buying
00:14:33.560 | a home. I think this is fascinating, really fascinating because I thought I was going
00:14:38.440 | a little bit crazy as I was walking around my neighborhood. Within a six block radius,
00:14:43.360 | there's like six, seven adult men ages 25 to 45 still living at home, but no adult women.
00:14:51.320 | So this data actually backs up what I'm seeing that single females seem to be much more financially
00:14:57.640 | responsible when it comes to home buying at the very least. Now, it's not the end all
00:15:03.040 | be all to buy a home, but it does show that at least your credit score is decent and some
00:15:08.800 | lending institution is willing to lend you money to buy property. So for all this discussion
00:15:13.760 | about the gender wage gap, it sure seems like single women are getting their financial act
00:15:18.480 | together quicker and better than single men. Further, women are just more educated. If
00:15:25.560 | you look at the statistics for college graduates, and it seems like they're not putting their
00:15:29.680 | lives on hold, which is great. I love it. All right, next, there's a wave of tech IPO
00:15:35.440 | liquidity coming due. For example, Wednesday, November 6, 2019 is when about $20 billion
00:15:43.120 | worth of Uber stock is going to get unleashed to the market. So that's why you're seeing
00:15:46.520 | pressure in the stock. What other companies like Lyft and Pinterest, they went IPO in
00:15:51.000 | the first half of 2019, thousands and thousands of employees and billions and billions of
00:15:55.480 | dollars are going to be unleashed, unleashed to the market. And ultimately, I think that
00:16:01.680 | capital is going to find a new home in physical real estate. Nine wage growth is reaching
00:16:07.440 | new highs. So the real median household income finally broke out to a new high in late 2017.
00:16:15.040 | The latest data is $63,179 at the end of 2018. That's pretty good because the previous peak
00:16:23.800 | was in 1999, at around $61,800. So the real median household income didn't really go anywhere
00:16:33.520 | from 1999 until 2016. Man, that's a long, long time to have stagnant wages, but we're
00:16:41.160 | finally breaking out. And that's a good thing for the real estate market. 10, winter is
00:16:46.560 | here again. Winter is my favorite time to buy property because anybody listing during
00:16:51.940 | this time tends to be a more desperate seller. Let's think about it for a bit. Don't be offended.
00:16:57.560 | Look, why are you putting your property on the market in November, December, January,
00:17:02.840 | which is a terrible time due to the weather and also due to the holidays. Nobody's really
00:17:08.120 | moving during these months either. The time to list is really in the spring when there's
00:17:13.440 | a lot more demand, when people have gotten paid their year end bonuses and when people
00:17:18.040 | are motivated. I've been running Financial Samurai since 2009 and the traffic is always
00:17:23.480 | greater in the first half than in the second half because people are much more motivated
00:17:28.400 | to work on their finances. It's the same thing with working out. The gyms are all packed
00:17:33.000 | in the first quarter and they're all empty in the second and third quarter because people
00:17:36.920 | give up. So winter is a great time to buy folks. Look at properties that have been listed
00:17:41.760 | for 60, 90, 120, 200 plus days. If they're listing during the winter still and they're
00:17:48.000 | not pulling the listing, I think they're motivated sellers and you can probably get a much, much
00:17:53.200 | better deal. 11. Hot foreign money has finally cooled off. Before 2017, a lot of coastal
00:18:00.400 | city buyers had to compete with wealthy foreign money, especially from China. Foreign buyers
00:18:05.880 | cause bidding wars and a lot of competition for potential local buyers. Since then, the
00:18:10.680 | Chinese government has clamped down on hot money outflow to purchase foreign property
00:18:15.400 | and it's always been curious to many people because their rules and regulations state
00:18:18.960 | they can only bring out around $50,000. So how the hell are they buying $1 million, $2
00:18:24.080 | million, $5 million properties? So there's been a crackdown and as a result, Chinese
00:18:29.800 | buyers of US real estate is down over 50% year over year in 2019. So from a foreign
00:18:36.680 | capital competition perspective, the time to buy is when their spigots have been shut
00:18:41.840 | off. Eventually, foreign money will find a way to leave and flood into American real
00:18:48.400 | estate again, especially if there's a resolution with the trade war and relationships between
00:18:53.820 | America and China in general. There have been over two years of pent up demand for US property.
00:19:01.200 | When that demand is finally unleashed, it's probably going to result in all cash bidding
00:19:05.460 | wars once again. You know it's going to happen. It's just a matter of time because capital
00:19:10.320 | is fluid. It always tries to find value wherever that value is in the world.
00:19:16.680 | The final point I want to make about why now is a good time to buy property is because
00:19:21.760 | the next recession won't be as severe. We know from the data that during the 2008 to
00:19:27.800 | 2009 financial crisis, the median home price in America declined by 17% over a two and
00:19:33.720 | a half year period. I do not believe we will go through a downturn of a similar magnitude
00:19:38.760 | because lending standards have been so incredibly tight post the 2008-2009 recession. For example,
00:19:45.720 | I remember clearly getting rejected for a refinance back in 2014 because my 1099 income
00:19:51.040 | was too abysmal. Yet I had enough in my investment account with the bank who rejected me to pay
00:20:01.080 | off my entire mortgage times two. Think about that. You got $2 million in investments, you
00:20:08.440 | want to refinance a $1 million mortgage and the bank still says no even though you never
00:20:14.320 | missed a payment? That's crazy. The banks have been shutting out qualified buyers since
00:20:21.400 | 2009. Only people with excellent credit scores have been able to get mortgages and people
00:20:27.640 | with steady jobs. Those negative, amortizing liar loans have all but disappeared. Further,
00:20:33.440 | it has also become common practice to buy a home with a 20% or greater down payment.
00:20:39.120 | Before 2008, people were putting down 5%, 3%, 0% and when the market went down, people
00:20:46.480 | said well, I don't have that much equity, so here are the keys to you, which really
00:20:51.480 | crushed the neighbors and the people responsible for continuously paying their mortgage obligation.
00:20:58.040 | So I don't think it's going to be as bad this time. With so much home equity that has
00:21:01.560 | been accumulated since 2009 by very creditworthy borrowers, most homeowners should be able
00:21:07.600 | to weather a financial crisis so much easier this time around. Since its late 2016 peak,
00:21:14.600 | the median sales price in America is already down 9%. Even if home prices continue to decline
00:21:20.640 | and reach the same magnitude as the previous recession, there's only about 8% left to
00:21:25.920 | go. No rational person who has built up 20%, 30%, 50%, 80% in equity is going to let his
00:21:33.880 | or her home go for a 18-15% decline. It's just not going to happen. So I really believe
00:21:40.320 | real estate looks pretty decent over the next 12-18 months and I'm happy for you guys to
00:21:46.000 | prove me wrong because I love different perspectives. Also realize that real estate is local. Your
00:21:52.120 | market will be different from my market here in San Francisco. Understand the local economy,
00:21:57.800 | what businesses are doing, what the tax laws are doing, what new rules might be created.
00:22:04.200 | Who knows? But it's up to you to find out. And there's really one other positive thing
00:22:08.800 | I want to share in this podcast which I haven't shared in the post. And that is after doing
00:22:14.120 | a survey asking "Is now the time to buy physical real estate again?" 56% of you said "No, prices
00:22:21.800 | will collapse or continue to go down because we haven't entered a recession yet." That's
00:22:25.680 | pretty logical to me. And then 40% of you said "Yes, now is the time to buy physical
00:22:30.480 | real estate again because wages are up, mortgage rates are down, the economy is strong, stocks
00:22:35.920 | are at all-time highs, and we've been correcting since 2017, so this decoupling can't last
00:22:41.760 | forever." And then 4% of you said "Other" and you explained your thoughts in the comments
00:22:46.520 | in my post. I would be more nervous buying physical real estate right now or over the
00:22:52.720 | next 18 months if 70+% of you said "Yes, now is the time to buy." It gives me a lot
00:22:59.480 | more comfort when there's a balanced viewpoint. 56% "No" and around 40-44% "Yes." That's
00:23:07.040 | a great balance and that creates a healthy market. It's when there's mania, 70, 80, 90%
00:23:14.640 | people say "I gotta buy Bitcoin, I gotta buy tulips, I gotta buy marijuana stocks, whatever."
00:23:19.360 | That's when you know that a turn is going to be right around the corner and if you hold
00:23:24.520 | on for too long you're going to get crushed. So I really appreciate and like this feedback
00:23:29.360 | because there's over 1600 voters and that's statistically significant. Just look at Gallup
00:23:35.360 | polls. They make conclusions based on 500 responses or 1000 responses, sometimes a couple
00:23:42.200 | hundred responses. This is 1600 of you educated folks who care about your personal finances
00:23:48.560 | coming from all over America and all over the world frankly, giving your viewpoint.
00:23:54.440 | So my plan over the next 6-12 months is to buy that Oceanview property in San Francisco
00:24:00.200 | which I think is undervalued. Come up with your own plan, talk to your loved ones, talk
00:24:05.520 | to smart friends, banter around before making one of the biggest investment decisions of
00:24:11.280 | your life. I know I'm going to be locking down something because I believe in real estate
00:24:15.560 | long term and you've got to do what's right for you. So thanks so much for listening in
00:24:20.520 | on my favorite, favorite subject, real estate. If you like this episode and you like this
00:24:24.800 | podcast, please subscribe and share it around. Take care everyone.