Hello everybody, it's Sam from Financial Samurai. And in this episode, we're going to talk about my favorite topic, which is real estate. I think now, the end of 2019, up till around the spring of 2021, is an opportune time to buy real estate. And I want to share with you some reasons why I think it's an opportune time to buy real estate.

And let me first preface by saying that I am totally biased for real estate. I think it is the absolute best way for middle class Americans and for people who want to get rich to build wealth. It's easy to understand. You understand the rental income, you know how to improve the property, you know how to hustle to get tenants, the laws, the maintenance, the insurance, everything's out on the table.

Whereas with stocks, it's a little bit hard to figure out sometimes. You've got to understand the income statement, the balance sheet, the cash flow statement, you need to understand the strategy, the competitive dynamics, and so forth. Now, obviously, stocks have done phenomenally well in 2019 and since 1926, frankly.

But for the average person, I think real estate is more easy to digest and understand and build wealth. So back in 2017, I had a very difficult decision to make. I had some really rowdy tenants, they're always four to five dudes since I started renting it out in 2014, who would give me a lot of problems.

There were parties, neighbors complained, they tore up my floors, and they had dogs that ripped up my French doors and all that stuff. And it was just a real big hassle. And they gave me a heads up that they wanted to move. Well, they actually wanted to get the rent lowered.

And I was like, "No, I'm not." Based on how much you guys have been crushing my property, the house had been rented between 2014 and 2017 for $8,200 to $8,800 a month. And I definitely could have lowered the rent to keep them, but I just didn't feel like it at the time because I was going to be a new dad in 2017.

And so I said, "Okay, thanks a lot, guys. Just fix up the house. Nice having you. See you later." But I did feel that I should try to get better tenants instead of sell the property. And so for 45 days, I aggressively looked for new tenants, and I couldn't find any at the $8,800 a month level.

The best I got was $7,500, which is about a 14 plus percent drop. And that was pretty surprising to me. And so it made me think, maybe 2017 is the time to sell and simplify my life. And I asked you guys what you thought, and over a thousand people filled out a poll.

And the majority said, "It's time to simplify life and sell." At the end of the day, you cannot lose if you lock in a win. And I tried to sell this property in 2012 for $1.7 million, and I got no offers. I got some whispers saying, "Hey, how about 1.5 million?" You know, just really lowball offers.

And I said, "Forget it. I'm just going to live and enjoy my house." And that's what we did until 2017. So long story short, I ended up selling the property in 2017 for $2.75 million with some credit back. And I was really relieved. I used those proceeds to reinvest in real estate crowdfunding, in municipal bonds, as well as in the stock market.

So I went from semi-passive income with lots of headache, actually, to completely passive income. And so far, things have gone pretty, pretty well since 2017. The stock market's at all-time highs. Bonds have ripped higher in 2019 because rates have collapsed. And real estate crowdfunding, so far, so good. 12% to 16% IRR over the past three to four years.

But what about now? End of 2019 and onwards? Well, I think it's time to buy property again, physical real estate. And I'm going to share 12 reasons why. So the first reason is that prices have softened all across the country. It turns out selling in 2017 looks to have been the recent median sales price peak, according to the Federal Reserve Economic Data, managed by the St.

Louis Federal Reserve Board. Check out the post. You'll see this clear chart that shows that late 2017 was the peak, and now we've been fading down about 9% since. 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.

That's a 17% decline during the worst recession of our lifetimes. And that occurred over a two and a half year period. Home prices gradually ticked higher from late 2009 until 2012, before exploding by up 55% from $220,000 to $340,000 in the second half of 2017. So today we're at $310,000, median sales price in America for the fourth quarter 2019.

That's a 9% decline. So it's not as bad as a 17% decline. I also don't think we're anywhere close to being in the conditions we had in 2007, 2008, not just yet. So prices have declined. That's point number one. Two, mortgage rates have collapsed. Back in 2018, you can get a 30 year fixed mortgage rate for about 4.875%.

That was the average. Today that average is about 3.75%. And if you look at 5-1 arms, back in 2018, they're averaging about 4.125%. And today you can get it for 3.4%. And those are just the averages, right? Like if you read Financial Samurai, you listen to this podcast, you know how to get a lower mortgage rate.

I've been talking about that aggressively recently, because third quarter 2019 was the time to pounce. I was able to refinance my mortgage to a 7-1 arm at 2.625%. Now, of course, I had to transfer funds and do the relationship pricing thing. But that said, my cash flow is up about $1,050 a month just by refinancing.

So think about this in terms of thousands and thousands of other homeowners refinancing. That's good for the economy. And also think about the higher ability to buy, the higher purchasing power by new buyers right now, where suddenly they can afford much more home. So another positive for real estate.

Three, the stock market is back to an all-time high. And we've been saying this a lot lately, because almost every year, except for 2018 and I think a previous year, the stock market has done well. This year in 2019, we're up over 23%. We're over 3,050 on the S&P 500, which is an incredible, incredible performance.

If you look at the 2019 S&P 500 predictions by 10 of the most followed Wall Street analysts, only a couple, 20% of them had 3,000 as a target. So this is pretty amazing how strong the stock market is performing. And the S&P 500 is one indicator of the economy's health.

So unless analysts and CEOs are wrong about earnings growth this year and going forward, the economic outlook still looks quite strong over the next 6 to 12 months at least. Because remember, stocks and the stock market are a function of future earnings growth. Expectations are baked in 6 to 12 months ahead.

And so you want to look at the stock market as a key indicator for the economy. Now, of course, things turn on a dime, just like we saw in 2007. But there were clear catalysts in 2008 that caused the stock market crash. You saw Lehman Brothers go down, Bear Stearns go under, and it just was a huge unwinding.

I think it's unlikely the stock market's performance and the physical real estate market's performance will remain decoupled for long. It's already been decoupling for two years now. In fact, take a look at various REITs. I personally own the REIT O and OHI. They're going gangbusters. We're talking 25%, 35%, 40% returns.

Look at the home building stocks. Look at Home Depot. They're all outperforming the S&P 500 year to date, including dividends. Just look at VNQ. The Vanguard Real Estate Index ETF is up over 30%. So to me, it's really hard to imagine a continued decoupling of physical real estate prices and these instruments, stocks and REITs and so forth, that continue to do very, very well.

So I think there's going to be a convergence, and maybe the stock market will fade a little. But I think real estate will tick up a little, physical real estate, that is. 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've got to 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, I think the S&P 500 is going to go down easily 20%, if not more, as investors anticipate higher taxes and business-unfriendly policies in the future. Now, think what you will about politics, but investors, people, companies, they like stability.

They don't want to get thrown a curveball and swing and a miss. Let's look at the presidential election odds tracker. Donald Trump is currently favored to win with +110 to +120 odds. So that means if you bet $110 to $120, you win $100. Elizabeth Warren, interestingly enough, is number two at +375 and +300.

So in other words, you've got to put up $300 to $375 to win $100. Three is Joe Biden, seems like a pretty moderate guy, +550 to +600. So you've got to put up $500 or $600 to win $100. And then there's Bernie Sanders, +1100 to +1200. So that is an indicator that he's probably not going to win.

So you've got to really think about Donald Trump, Elizabeth Warren, and Joe Biden. Five, the devil you know is better than the devil you don't. So that can relate to politics, but it really relates to taxes. 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.

There's a lot of postulation that obviously those who live in more expensive areas of the country like New York, Boston, DC, San Diego, San Francisco, LA would get hit hardest. That's logical. But now that homeowners have gotten to see what the exact damage is, homeowners and tax experts can now make more calculated home ownership decisions going forward.

In my opinion, as someone who owns real estate in San Francisco, 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 like I normally do every year for the past 10 years.

Six, rents. 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. Again, take a look at the post where you can see this clear national rent chart where rent just keeps on ticking up.

It's a very smooth line and the national average rent in the end of 2019 is about $1,480. And that's just a mix of all types of properties, all types of rental properties. And if I look in San Francisco, we're finally seeing an uptick in rents since peaking in about late 2016.

And this is really interesting because finally, after two, two and a half years, people now can see what I saw back in the middle of 2017, where I experienced like a 15% drop in rental asking price. So if you're in the mix, and I'm trying to give you in the mix real time data, you know, ahead of other people who are not in the mix, who are just postulating and pontificating about their finances, what's going to happen.

So I think this is one of the reasons why you should continue to listen to Financial Samurai and read the articles, and you should continue to read and listen to things from people who've actually experienced what they're talking about. It's really important because money is too valuable to be left up to straight up pontification.

Seven, the millennial generation is in its prime buying years. I remember, I don't know, five years ago, eight years ago, everybody's saying, Oh, millennials, they're not going to own cars, they're not going to own real estate, they're going to live a different lifestyle. Well, hey, guess what? Millennials are now in their 30s, late 30s, which means they've had 10 plus years to save for a down payment.

They're also at a stage where they're settling down and having children. Hey, that's what happens. There's probably no bigger catalyst to own a property than children. Your nesting instincts go into overdrive as you strive for stability. The wants and desires for every single generation is the same as it ever was.

One of the interesting things that I found out from doing this research is the adult composition of homebuyer households for the National Association of Realtors. So 65% of all homebuyers are married couples. That makes sense because kids and so forth. But the second largest demographic of homebuyers is the single female at 18%.

And then the third largest homebuyer demographic is the single male at only 7%. So in other words, single females are outnumbering single males by two and a half times in terms of buying a home. I think this is fascinating, really fascinating because I thought I was going a little bit crazy as I was walking around my neighborhood.

Within a six block radius, there's like six, seven adult men ages 25 to 45 still living at home, but no adult women. So this data actually backs up what I'm seeing that single females seem to be much more financially responsible when it comes to home buying at the very least.

Now, it's not the end all be all to buy a home, but it does show that at least your credit score is decent and some lending institution is willing to lend you money to buy property. So for all this discussion about the gender wage gap, it sure seems like single women are getting their financial act together quicker and better than single men.

Further, women are just more educated. If you look at the statistics for college graduates, and it seems like they're not putting their lives on hold, which is great. I love it. All right, next, there's a wave of tech IPO liquidity coming due. For example, Wednesday, November 6, 2019 is when about $20 billion worth of Uber stock is going to get unleashed to the market.

So that's why you're seeing pressure in the stock. What other companies like Lyft and Pinterest, they went IPO in the first half of 2019, thousands and thousands of employees and billions and billions of dollars are going to be unleashed, unleashed to the market. And ultimately, I think that capital is going to find a new home in physical real estate.

Nine wage growth is reaching new highs. So the real median household income finally broke out to a new high in late 2017. The latest data is $63,179 at the end of 2018. That's pretty good because the previous peak was in 1999, at around $61,800. So the real median household income didn't really go anywhere from 1999 until 2016.

Man, that's a long, long time to have stagnant wages, but we're finally breaking out. And that's a good thing for the real estate market. 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.

Let's think about it for a bit. Don't be offended. Look, why are you putting your property on the market in November, December, January, which is a terrible time due to the weather and also due to the holidays. Nobody's really moving during these months either. The time to list is really in the spring when there's a lot more demand, when people have gotten paid their year end bonuses and when people are motivated.

I've been running Financial Samurai since 2009 and the traffic is always greater in the first half than in the second half because people are much more motivated to work on their finances. It's the same thing with working out. The gyms are all packed in the first quarter and they're all empty in the second and third quarter because people give up.

So winter is a great time to buy folks. Look at properties that have been listed for 60, 90, 120, 200 plus days. If they're listing during the winter still and they're not pulling the listing, I think they're motivated sellers and you can probably get a much, much better deal.

11. Hot foreign money has finally cooled off. Before 2017, a lot of coastal city buyers had to compete with wealthy foreign money, especially from China. Foreign buyers cause bidding wars and a lot of competition for potential local buyers. Since then, the Chinese government has clamped down on hot money outflow to purchase foreign property and it's always been curious to many people because their rules and regulations state they can only bring out around $50,000.

So how the hell are they buying $1 million, $2 million, $5 million properties? So there's been a crackdown and as a result, Chinese buyers of US real estate is down over 50% year over year in 2019. So from a foreign capital competition perspective, the time to buy is when their spigots have been shut off.

Eventually, foreign money will find a way to leave and flood into American real estate again, especially if there's a resolution with the trade war and relationships between America and China in general. There have been over two years of pent up demand for US property. When that demand is finally unleashed, it's probably going to result in all cash bidding wars once again.

You know it's going to happen. It's just a matter of time because capital is fluid. It always tries to find value wherever that value is in the world. The final point I want to make about why now is a good time to buy property is because the next recession won't be as severe.

We know from the data that during the 2008 to 2009 financial crisis, the median home price in America declined by 17% over a two and a half 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 remember clearly getting 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. Think about that. You got $2 million in investments, you want to refinance a $1 million mortgage and the bank still says no even though you never missed a payment?

That's crazy. The banks have been shutting out qualified buyers since 2009. Only people with excellent credit scores have been able to get mortgages and people with steady jobs. Those negative, amortizing liar loans have all but disappeared. Further, it has also become common practice to buy a home with a 20% or greater down payment.

Before 2008, people were putting down 5%, 3%, 0% and when the market went down, people said well, I don't have that much equity, so here are the keys to you, which really crushed the neighbors and the people responsible for continuously paying their mortgage obligation. So I don't think it's going to be as bad this time.

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 so much easier this time around. 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 about 8% left to go.

No rational person who has built up 20%, 30%, 50%, 80% in equity is going to let his or her home go for a 18-15% decline. It's just not going to happen. So I really believe real estate looks pretty decent over the next 12-18 months and I'm happy for you guys to prove me wrong because I love different perspectives.

Also realize that real estate is local. Your market will be different from my market here in San Francisco. Understand the local economy, what businesses are doing, what the tax laws are doing, what new rules might be created. Who knows? But it's up to you to find out. And there's really one other positive thing I want to share in this podcast which I haven't shared in the post.

And that is after doing a survey asking "Is now the time to buy physical real estate again?" 56% of you said "No, prices will collapse or continue to go down because we haven't entered a recession yet." That's pretty logical to me. And then 40% of you said "Yes, now is the time to buy physical real estate again because wages are up, mortgage rates are down, the economy is strong, stocks are at all-time highs, and we've been correcting since 2017, so this decoupling can't last forever." And then 4% of you said "Other" and you explained your thoughts in the comments in my post.

I would be more nervous buying physical real estate right now or over the next 18 months if 70+% of you said "Yes, now is the time to buy." It gives me a lot more comfort when there's a balanced viewpoint. 56% "No" and around 40-44% "Yes." That's a great balance and that creates a healthy market.

It's when there's mania, 70, 80, 90% people say "I gotta buy Bitcoin, I gotta buy tulips, I gotta buy marijuana stocks, whatever." That's when you know that a turn is going to be right around the corner and if you hold on for too long you're going to get crushed.

So I really appreciate and like this feedback because there's over 1600 voters and that's statistically significant. Just look at Gallup polls. They make conclusions based on 500 responses or 1000 responses, sometimes a couple hundred responses. This is 1600 of you educated folks who care about your personal finances coming from all over America and all over the world frankly, giving your viewpoint.

So my plan over the next 6-12 months is to buy that Oceanview property in San Francisco which I think is undervalued. Come up with your own plan, talk to your loved ones, talk to smart friends, banter around before making one of the biggest investment decisions of your life. I know I'm going to be locking down something because I believe in real estate long term and you've got to do what's right for you.

So thanks so much for listening in on my favorite, favorite subject, real estate. If you like this episode and you like this podcast, please subscribe and share it around. Take care everyone.