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

Financial Samurai

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 above, 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%.

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.

Markets Insider

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%.

Financial Samurai

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.

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.

Financial Samurai

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.

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.

Financial Samurai

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 above 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.

I also found another interesting graphic 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 and Fundrise, 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.

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.

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.

FRED via Financial Samurai

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.

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.

US National Association of Realtors, via Financial Samurai

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.