In a previous post, I estimated how real estate performs at various levels of a stock market decline. In my opinion, the sweet spot for real estate outperformance is somewhere between a 15% – 25% stock market decline.
During such a level of decline, mortgage rates tend to fall as investors buy Treasury bonds. As a result, real estate demand increases because affordability increases. Further, during a stock market correction, money tends to flow out of the stock market and into real estate and other more defensive asset classes like bonds.
Once the stock market declines by ~30 – 35%, real estate price appreciation tends to stall as potential buyers rethink their decision to buy any asset, including real estate. After a ~35% decline in the stock market, real estate prices are most likely falling as people fear losing their jobs.
We know that forced lockdowns have hurt the real estate brokerage business as potential buyers aren’t able to visit open houses and transaction volume declines as inventory gets pulled out of the market. However, please don’t confuse the real estate brokerage business with real estate prices.
When the real estate market eventually opens up again, sellers should negotiate for a commission discount while buyers should ask for a commission rebate. The coronavirus pandemic might finally be the catalyst to permanently lower commissions. However, I do think a great listing agent is incredibly valuable for getting too dollar.
In this article, I want to present to you an example of how one property performed during a global pandemic and a lockdown. It’s an interesting example given the final sales price and timeline of the sale. I’ll then share a couple more examples.
Real Estate Outperformance During A Coronavirus Pandemic
One of the best types of real estate to own is a single-family residence with panoramic ocean views in San Francisco. To find such properties, you need to look for them on the western side of San Francisco in the Sunset, Golden Gate Heights, Parkside, and Richmond neighborhoods.
These are less densely populated areas with lower median home prices given it takes longer to commute downtown. With the coronavirus giving millions of people a taste of work from home life, I believe these types of properties will outperform over the coming decades.
Because real estate is my favorite asset class to build wealth, I’m always on the lookout for single-family homes that are for sale in these neighborhoods. I peruse through the latest listing online each week and bookmark various properties I find intriguing.
On February 21, 2020, I stumbled across a quaint three bedroom, three bathroom, single-family home with ocean views. The kitchen had been redone about five years ago with basic finishes. The bathrooms were remodeled maybe 20-25 years ago also with basic finishes.
Overall, the house has about 2,200 square feet of living space and is situated on 3,000 square feet of land. The main downside to the house is that it is one block away from a very busy street. The house was essentially move-in ready, although one could easily spend $100,000 updating the house with new windows, new wiring, and new bathrooms.
Here are some pictures of this humble abode:
The listing price was $1.495 million which is below the median home price in San Francisco of roughly $1.6 million. In other words, demand is very high at this price point. With mortgage rates so low, many dual-income couples can afford this price point if they have a 20% down payment.
The sellers set an offer date of March 6, 2020, two weeks after listing. This is customary in San Francisco as it allows the agent to host two broker tours on Tuesday and at least two open houses on two weekends. Two weeks also creates a small enough window for motivated buyers to put in an offer.
By March 6, the S&P 500 had already begun its downward descent. We had already all heard about the coronavirus when this house first came on the market on February 21, 2020.
The Final Sales Price
Guess what the final winning offer was?
How about $1.65 million for a reasonable 10% over asking during a coronavirus pandemic? Nope.
How about $1.8 million or 20% over asking as the S&P 500 and the Dow were crashing by 30%? Wrong again.
OK, surely $1.95 million, or a whopping $455,000 over asking was the winning price as the coronavirus shut down the Bay Area economy with shelter-in-place. Man, you are bad at guessing!
The property closed on March 25, 2020 for $2,088,000 or an incredible $539,000 over asking.
Besides the final sales price being 39% higher than the list price, the final sales price was also 7.5% higher than Redfin’s estimate of $1,946,632. Out of all the online real estate companies, I think Redfin has the most accurate estimates.
Another interesting point is the closing date. If the final offer was accepted on March 8, due to multiple offers and counteroffers, then the winning buyer closed on the property in 17 days on March 25. Therefore, the buyer likely paid all-cash for the property.
Finally, what’s also worth noting is that the buyer could have backed out of the property at any time before the closing, but didn’t. This buyer held firm despite the S&P 500 closing down ~30% from its highs on March 23 before rebounding.
The buyer either had his downpayment safely in cash or Treasury bonds, had lots of surplus money, didn’t care about a stock market crash, was glad to move money into real estate, or a combination of all four.
If you are looking to buy real estate, please follow my recommendations on how to invest your downpayment as the time nears.
The Strength Of Prime Real Estate
One example does not provide irrefutable evidence that real estate performs the best during a 15% – 25% stock market decline. Nor does this example prove that down 30% – 35% in the stock market means that real estate prices stall out. After all, the strength of real estate prices is often property and location-specific.
However, this example does show how strongly real estate can outperform in a violent bear market caused by a frightening pandemic. It is clear that properties in this neighborhood were significantly outperforming the S&P 500 while it was crashing. If the property’s value tracked 1-for-1 with the S&P 500’s decline, it would have sold for $1,365,000 instead of for $2,088,000.
If the S&P 500 was flat during the time of sale, I would have guessed the property would have gotten at most $1,900,000, or $405,000 over asking. I certainly would have not guessed over $2,000,000. Therefore, it is possible the violent selloff in the stock market pushed the value of this house even higher.
If you plan to buy real estate, here are some key takeaways from this property sale example:
- Look for property that is priced around the median home price for your city. A property priced close to the median or lower helps ensure the highest amount of demand, no matter what market.
- Single-family properties tend to perform stronger than rental properties since single-family properties usually don’t rely on rental income.
- Find a property with a unique attribute, like a large lot for expansion, ocean views, or designed by a well-known architect.
- Proper marketing is very important to get the maximum price. Although selling fees are still outrageous, great marketing really does matter for getting top dollar.
- Neighborhoods with lower density may become more attractive given neighborhoods with higher density (apartments/high-rises) seem to have experienced a higher number of coronavirus cases.
- Don’t just look at the most popular neighborhoods with the closest commute. Due to the rise of ridesharing and telecommuting, widen your search for better value.
Although the world is now filled with uncertainty, there is one certainty real estate will always provide: shelter. And when you’re forced to shelter-in-place, your home becomes increasingly valuable!
Other Strong Property Sales
Here are some other recent alerts I received that also show strength in the real estate market in the SF Bay Area during the height of the pandemonium.
Below is a lovely Oakland single family home with five bedrooms, three baths, 3,130 sqft that was asking $2,595,000 on March 12, 2020 and sold for $2,810,000 on March 27, 2020. It was very nicely renovated in 2016.
Below is a San Francisco single family home with five bedrooms, six bathrooms, and only 4,645 sqft that sold for a whopping $9,500,000 on March 27, 2020. Although the final sales price wasn’t over its $9,500,000 asking price, the sales price is about $460,000 over Redfin’s estimate price. I bet the new owner is probably going to put in more than $1 million for renovation.
Here’s another example of a single family home in Golden Gate Heights that sold for 10% over asking. It was listed on Feb 28, 2020 and closed on April 14, 2020, well into the pandemic. It is completely renovated home without a view. But it is very well done.
If you’re looking to buy a single family home, hopefully you can find some deals in this market. Unfortunately, I’m not seeing many as sellers pull their listings, causing an even greater shortage of inventory.
Transactions will likely grind to a halt in 2Q2020 due to shelter-in-place. So long as the S&P 500 doesn’t dip too far below 2,300, I think many real estate markets will outperform or just stay frozen until the economy opens up.
If you’re looking to invest in real estate, take a look at Fundrise, one of my favorite real estate marketplaces today. You can diversify into real estate for as little as $500 into one of their eREITs, instead of leveraging up with debt to buy a single property. Although past performance does not equal future performance, Fundrise has shown relative stability during the previous two flat to down markets in 2015 and 2018.
Readers, are you seeing some strong sales in your neighborhood during these volatile times? If you are a buyer, are you seeing any deals? Why do you think the media does not differentiate between the real estate brokerage business and real estate prices in their headlines and articles?
Financial Samurai, I notice that you own two condo rental properties and often discuss that you wish you had bought another condo in NYC. Most real estate investors have advised that I not buy a condo for an investment but rather buy multi-families. Can you please explain why you have chosen condos? The cap rates and control are lower with condos but is it the ease of ownership you like? Thanks.
I have one rental condo in SF that I bought in 2003. As my first property, it was what I comfortably could afford at the time. My other property is a 2/2 condo in Lake Tahoe. I bought it for lifestyle reasons as I didn’t want to maintain it.
I do think buying a two-unit or four-unit building would have brought me more wealth, as I ended up buying a single family home in 2005 with space I didn’t need. But I still sold it for a handsome sum in 2017.
This article should help: The different types of real estate to buy
And this one on buying and managing rental property.
Long time reader of your site and this particular item peaked my own interest as a landlord/investor myself. I have been analyzing sales in San Fran, LA, San Diego, etc that have closed in the past week and it appears the vast majority of sales are going for over asking price. San Francisco in particular appears to have the highest percentage, some I’ve seen over 20% and they’re selling quickly! I believe it is too early to tell how this will play out, but perhaps this can be a tell that real estate is being used a hedge in these uncertain times. New purchases may start do decline as banks tighten their lending requirements, however low supply from lack of construction since the last recession may in fact save real estate from a large downturn this time around.
There is definitely a rotation into real estate from Stocks. Then you look at tech stocks like Netflix at all time highs, so people have the money. And people are also working up that stocks can lose value overnight where is a lease with real estate, they can have a place to live and enjoy life.
I have closed a home on April 3 2020 in Austin. I got interest rate 2.75% fixed for 30 yrs, so i went for it. Lot of people discouraged me by pointing real estate will go down 40%-50%. One thing people doesn’t realize is that 2008 crash was fueled by mortgage and financial. It is not a system failure in 2020. I highly doubt RE will go down in high demand markets like Seattle, SF bay area, Austin , Dallas. For me , Buying luxury home should be in good school district , low crime rate area. Rental property should be closer to public transport and closure to major employers.
Amazing rate. How did you get the 2.75% fixed? Did you buy any points?
Nope. I just got lucky when i locked the rate on March 03 2020. Thanks to my amazing loan processing officer, I didn’t buy any points. In fact, paid closing costs around $2k (for under writing, loan processing,appraisal ,credit report, attorney fee, escrow fee) which is common.
Still lots of listings and pending/selling properties in Seattle…except for our South Lake Union condo, which has been on the market for almost 3 weeks now. Going to do a $20k price reduction to see if anyone bites, but if no offer after that, we will probably just wait this out =/
Dude, that’s not a single family house. That a town house. Or in Baltimore we call them row houses.
Single family home does not have a shared wall.
When I was in SF 18 years ago I rented a room for $400 at this old German lady’s house. It was a real free standing house with at least 10 foot clearance from adjacent neighbors. It was 4 bedrooms, not sure how many square feet. It was in Twin Peak, pretty foggy area, but my room does have an unobstructed view to the ocean on a clear day.
I wonder how much that house is worth now $2.5, 3 mil?
You think the house has now appreciated by another 20-45% just a week or so later? Maybe, given the stock market is rebounding, but I doubt it.
Real estate is worth significantly lower today. You just don’t know it yet. Even Zillow and others pulled out of all pending contracts in their iBuyer programs. Even they know Real estate will now be worth significantly lower than before the pandemic. As many many people and companies across the country will stop paying their rent and mortgages, it’s a little reckless to say real estate outperformed during a pandemic.
It’s fine to have an opinion. That’s why we have a market and you were welcome to sell all your risk assets in March. However, these are real-time examples during the worst of the sell-off so far.
I understand if you are scared right now given all that’s going on, but to deny these examples of outperformance doesn’t make sense. They are closed transactions.
Will know soon whether 18th Ave had a buyer using mortgage
Either way – likely had the cash needed out of the market before or shortly after the offer
It says market was decent going into this – still hard to read current market
Interesting thing looking at some of the recorded sales and owner / loan records in SF – some are buying the house getting the mortgage while working for a big name like Linkedin, Facebook, then jumping to a private venture backed firm (riskier)
Hey I read your article on real estate and the Coronavirus. Had a few comments and thought maybe you would get a chance to respond. I’m from NYC and real estate here seems almost impossible to break into. My neighborhood average for a single family home is 1.2 million. At 20% down you would need well over 100k for a down payment plus the millionaire tax and no more SALT deductions. With the Coronavirus in full effect here I was interested in it’s impact on real estate and came across your article. On average there are anywhere from 10-15 deaths per day in each neighborhood in each borough. There is no way to tell if everyone is Coronavirus related or not because of the lack of testing. Who is going to test the deceased that were not tested when they were alive?
With that said the amount of deaths plus the growing unemployment, I would have to think that real estate would take a major hit. I would estimate almost half of the small business that have closed will not reopen when this is over. I just can’t see the owners overcoming not having a business open going on three weeks now. I would think this would cause many people to either pick up and leave, leaving a large hole in the rental and sales market. With so many deaths happening I could also see many homes going into foreclosure or estate sales. This would make the amount of homes available greater then demand. I would be interested to see if you think that real estate would take a major hit with how the Coronavirus is unfolding in NYC.
People at work were laughing when I told them about the Coronavirus back in January. I had the foresight to stock up on goods when the first cases hit California and Washington. Next thing you know you could not find a mask, sanitizer or toilet paper in NYC. I hope my foresight is right with the real estate market. People in the city are still not taking this as serious as they should be and I think this will last a lot longer then the governor or mayor think it will.
Th PPP is a game changer in my opinion. It makes me more confident that 2H2020 will see a recovery.
I want to buy a mountain view property in Tennessee pigeon forge area. I want to get a 400ks for les than 200k. Which will be possible in the next 9 months to 2 years
Sounds great! Keep us updated. It’ll be awesome for so many folks to get bargains if they happen.
I’ve been waiting 4 years for a beach property in Hawaii.
Hi Sam,
can you comment on Fundrise and what seems to be difficulty with withdrawing any money, even requests made prior to the pandemic issues and business closures? I was willing to pay small fees to withdraw the money to help with the purchase of a small business. Your thoughts please? thanks, Daniel
Good question. During temporary market disconnects, many private investments prohibit withdrawals to not negatively affect the entire portfolio. Having “bank runs” is not good for business, as huge redemptions create forced selling situations not based on fundamentals.
With Fundrise and other private real state investments, it’s better to invest in 3-10 year increments with money you don’t need. The illiquidity is actually one of the benefits of private investments because there are fewer investors who freak out and panic sell. Fundrise performance has been pretty solid during stock market downturns.
Hopefully nobody has to sell any of their passive income investments during a downturn. That is what the emergency fund is for. With the CARES Act, stimulus checks, and higher unemployment benefits, hopefully the majority of people can get through this 2-3 months self-imposed economic closure and come out fine.
I’m not touching any of my passive income investments. Just adding to dividend stocks initially since they’ve already been beaten up. Real estate is drastically outperforming stocks so far.
Never really thought about this, informative article! I figured during a crisis like this people would want to stay liquid and not lock their money up.
San Diego – The fewer contracts that signed in late FEB or early MAR are still selling with the same appreciated gains seen in the last year.
Bottom Line – It’s too early to make a judgement call. The next 4-12 weeks will be more of the telling story. And maybe much longer than that. Some mortgage payments are allowed up to 12 months deferral due to the pandemic.
I see 2Q as a write-off for many industries. It is a potential for buyers to take advantage, which is probably the same as in many industries. I will be aggressively looking.
Maybe they are buying, to stop making payments lol
(My first post) I would like to buy a place if the prices drop however, I am in a rent-controlled 1bd. apartment w/garage parking in a great SF neighborhood and pay $980.00 mo. I have managed to save and invest over the years and have about $725,000, 1/2 in stock market now. Should I even be thinking about buying at my age (50).
Depends on your needs. $980/month is cheap. Hard to give a rent-controlled apartment up. But also hard to live so frugally for so long with your one and only life. What’s your income security like?
I always enjoy spending up on a house since I spend so much time in one.
Income security was great until recently but still pretty solid. I forgot to mention my partner of 10 years is paying $1,400 so combined it’s $2,400. A 1 bd. is too small for both of us but doable if nec. But you’re right! I would want to buy to improve quality of life and enjoyment NOT primarily as an investment. I like the carefree lifestyle of renting but I could get a speed freak neighbor from hell again!
Gotcha. Your partner is extra security then. I would look for deals during 2Q. It’s easy to do online and there is no downside.
I’ve never regretted spending up on a better life. It gives me max joy to replace old windows, update a bathroom, play with my son in our little backyard etc. If my house goes up in value in 10-20 years, great. If not, it’s fine b/c I enjoyed living in it and not paying rent.
Although, paying property tax is very painful!
Earlier this year we got loan approval with the intention of buying a condo in Kakaako. I had been following the market there closely and I noticed that as long as it’s the right building condos will sell as soon as hitting the market. $3 million no problems. Since the turbulence started in earnest in early March I am noticing there is not a lot selling, those that have been sitting stale on the market for an extended price are not reducing, however I’d say a good 10% of those that were listed have been wtihdrawn from the market.
No harm submitting a lower offer and seeing what happens.
https://www.financialsamurai.com/spray-and-pray-the-cheapest-way-to-invest-in-real-estate/
Sam- appreciate this article. I live in Fairfield County CT and have purchased a new home, and was about to list mine last month. Then the virus hit and really shut down the brokerage side of things. I am hoping the market bottomed and that you are right with real estate and that in the next couple months what would have been the spring market picks back up again. I’m a bit worried though about getting what I thought we would. Was going to list for 1.45 and still may- its the median home price or maybe 50K above in my town.
I also have been noticing and when I read some of your other articles over time that the renatl market might not be a bad idea. Rent for a year and then list next spring. Or who knows if we get enough for it keep renting – however there may be better opportunities in the heartland or areas where I could buy for a much lower price point and have a much higher cap rate.
Any thoughts on delaying the sale and renting for 1-2 years?
You purchased a new home and now want to list it? Or you want to list your old home?
Don’t know your finances, so unsure what to say. I don’t think 2Q2020 is the time to list since the market is frozen and there will be vultures trying to get a great deal.
I purchased a new home, larger space for growing family, in same town that we will be moving to in June. I have my old (current) home that I was looking to list and sell. Still may list at the end of April / early May to sell but also just thinking about listing it to rent.
I do think there is a chance that the suburbs get more of a bid from folks leaving the city. But … not super confident in that short term.
Single family houses are an emotional purchase and hence the price would be disconnected from reality at the start. I’m quite bearish with this pandemic and wrote a post on how bad it can get and why.
I’ll be happy if my prediction does not come true cause it means we have weathered this better than I anticipated; and that’s a win for all.
Yep, the vast majority are bearish, so that is the default assumption. But the interesting thing is, not many people seem to be hurting, yet. Are you?
I’m looking for the positives and what might come out of it.
Sam, anyone who says they are not hurting would be lying. It’s only a question of bearable pain that they prepared for. I’d be ok with maximum 1500 levels on S&P. Lower and would be bleeding.
I was waiting for everything to cash, I am making dough now.. I serve the poor. High and middle class will come down for the next year or two… time to make some money.
We put our house on the market in Atlanta 9 days ago – only two showings last week and nothing in a week. We live in Buckhead, in a great school district, and normally our house would have sold quickly (although Atlanta is never a crazy real estate market). We’re under stay at home orders and although real estate is exempt, I don’t think people are wanting to go into houses right now.
Makes sense. Thanks for the color. I’d pull it and relist once stay at home is lifted.
Tulsa, OK
Listed our primary residence last week, and within 4 days we had 10 showings and 2 offers. Median in this area is around $250k, ours sold for $375k (under contract this past weekend). Very desirable neighborhood with large lots, and walking distance to nice country club.
About to list our previous residence, which has been rented now for 7 years. Area median is $215k and we will list for $245k. Newer neighborhood with neighborhood park and swimming pool. Similar homes have been selling in 2-3 days max over the past 2-3 weeks. We expect to have a contract on it quickly.
With rates low and inventory fairly low, most things seem to be moving quickly. Houses over $500k seem to be moving a bit slower.
Thanks for the datapoint out of the Tiger King’s state!
So is it a good idea to buy REITs now to hedge against the traditional S&P?
Publicly traded REITS are not a good hedge against stock market volatility/downturn. Publicly traded REITs are often even more volatile.
Private eREITS are a much better hedge. But doesn’t have the same liquidity.
See: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/
Sam,
Your definitely correct about the utility of real estate. My wife has been on me for the last couple years to upgrade from our current house. She wanted a bigger kitchen, nicer bathrooms, and more space. I, on the other hand, am more than comfortable in our paid off average house simply because its paid for. No matter how much shit hits the fan we got a place to live. Over the last few days she has remarked how grateful she is to have our “average” house.
There’s nothing like a pandemic to make us realize how fortunate some of us are.
Thanks, Bill
Cool. I definitely hear you on the joy of living in a nice house. I’m frugal on many things, but not when it comes to upgrading where I live.
Sam,
Here is a recent closing example. Just closed this morning on my house in Columbia S.C. I live outside Seattle and everything is still rocking here, rentals and sales. I have 5 houses here, 4 rentals and 2 just rented yesterday.
Tim
Did you sell or buy in SC? Is Seattle rocking or Columbia rocking?
News came out this morning that mortgages on new homes are down significantly. Most of the new mortgages are refinances. You should redo this analysis (and pick a few different geographic locations) in three months when the impact form the COVID-19 economic downturn has reached real estate sales.
I love real estate as an investment class but every asset class is likely to get impacted with this one.
The one thing you have to realize is that by the time financial information hits the news, it’s old news. The markets have already reflected what has been reported.
But I’ll certainly be tracking the various types of real estate over the coming months. Just like I always do since 2003. And yes, most lenders are doing refinances now. They are getting crushed with demand, which is good for American cash flow.
How’s it going in your area? My hope was that more readers would share some anecdotes about what they are seeing in their markets.
Northern Virginia top school district here – Market was absolutely CRAZY from Jan to early March. Now it’s almost frozen. Sellers are still shooting for peak price, but buyers are not making offers. A couple of houses I’ve been eyeing for, which normally go contingent on the first week, have been on market for more than two weeks. Seller’s agents keep calling for feedback after viewing, which seldom happen during peak market.
All real estate agents will tell you the market is still very hot, but the volume has def slowed down here. Again, just my personal observation.
Not sure if the price will come down much? Federal governments are expanding hiring here, so maybe the demand will sustain despite the slowdown in the short term.
What do you think Sam (I’m in your hometown!)?
I say now is the time to submit some low ball offers and see what happens!
https://www.financialsamurai.com/how-to-make-a-low-ball-real-estate-offer-and-get-it-accepted/
Sam, I think those transactions got in before the mortgage lending turmoil. I read some reddit posts talking about how jumbo cash out refi’s are no longer available and underwriting has tightened up even with buyers locked in. We will see with tougher lending standards how Bay Area real estate shakes out. As a Sunset native, I agree with you the area provides a lot of value. West Portal and Forest Hill are wonderful areas with Lakeshore and Merced Manor being hidden gems if you don’t need public transportation to downtown close by.
Yep. Cash out refi rates are getting slammed, if you can get them. ARMS, either. Froze week before last before fed pumped. Sourcers are fine but lenders and mbs folks are all freaking out about the lack of liquidity right now.
Feds and states telling people not to work, and oh yeah you don’t have to pay your rent or mortgage, maybe. April? Did we say that? Now it’s May. Chances for default or late pay through the roof and no one wants the risk.
So says my superstar team of Chicago mortgage brokers 30 minutes ago.
The mortgage market is so nuts right now. In stable times, everyone had pretty similar rates. Now its a wide spread of rates for the same product. Many hard money lenders have pulled back their product or now have a high rate, low LTV basically taking themselves out of the market.
I am invested in the mREIT space and the haircuts on nonagency and agency paper has caused margin calls and 25-30% haircuts on book values so far. It does the MBS market is broken right now.
How fascinating! Great examples. Personally I cannot imagine making a purchase as big as a house in this environment but it’s encouraging to see there are people out there who can and who are paying up. SF is a special place to live and I feel lucky to live here. It’s also encouraging that since SF started shelter in place so early that the case numbers here are low and SF hospitals are managing ok so far.
Our property in Vancouver proper was assessed at 1.365M this year. Single residence, 1200sq foot house, 6300 sq. foot lot. Another property a few houses down was recently listed for 1.56M (similar lot and property size) and it was gobbled up within a week of listing- can’t recall exact date but I think this went down in the second week of March. This property also suffered a major fire inside the upstairs living room last year and was not renovated afterwards. The listing pictures were horrendous and revealed the house was pretty much still in 1960s condition.
The governments – both provincial and federal have not signalled any back off on any of the fairly newly introduced speculation, foreign buyers, or empty home taxes.
Just another data point for everyone;)
Thanks for the Vancouver update!
I think money stops flowing into real estate even with the SPY dropping 20%
Most SFR investments in the Bay Area should outperform national SFR returns.
The biggest risk to Bay Area and SF real estate are earthquakes.
And yet, the S&P 500 was down 30% during the time when these three real estate transactions were in contract, with two of them selling for way above asking.
Real estate is local for sure. I would like to see more specific examples from around America.
Perhaps you can share what you are seeing in your area.
I’m contacted constantly about selling my properties in the Boise area. My tenants have all paid their April rents. A friend of mine who is a realtor in the area said people continue to pour into the area and buy homes. I think this area is very stable due to the Mormon prepper ethic. I’m not LDS but I would guess half the people here are. Lots of neighbors with solid bank accounts and garages half full of shelf stable goods can’t be a bad thing. Things have certainly gotten different.
Very interesting and good to know. April, for the most part, should be fine. And once millions get their stimulus checks by end of April, that will provide a nice boost too.
If we can flatten the curve by June, I strongly believe real estate and stock market will do well. There is pent up demand building right now. Yes, millions are out of work.. but this is temporary. I’m keeping the faith.
I’ll see your faith and raise it. I think once this is over, there’s going to be such an exuberant attitude towards life that people will live it like never before. Grateful people are happy people. A good attitude in rough going is almost a nonnegotiable.
I’ve been keeping an eye on the local real estate in our small FL city since we are looking to buy an investment property this year. I haven’t noticed any difference in pricing. It could be that it’s too early to see any impact since the city was conducting business as usual up until March 12th, when the first local case of a COVID-19 individual was announced. The county issued a shelter in place directive shortly after that so I imagine that most people aren’t carrying on with their usual activities, such as selling a house. I could see how those that pulled money out of stocks for safer real estate would bring up pricing. These folks have the money so they’re probably just itching to get their money deployed and creating income/value again.
Thanks, for the article. It shines a light on the primary residence and I agree with some of your comments. It is based on the area I believe. If it is Colorado, then the prices didn’t go down that much on bigger houses 750k and above.
Ok, I need some guidance/opinion from the Financial samurai and audience.
I am looking at a rental investment property and my offer has been accepted and now I am having cold feet if I should go through it or wait for few more months to invest back again in real estate investment properties. I will be cash flowing if I can rent the condo for $1800(which is what the previous owner rented it for). My mortgage is $1450. It’s usually not that easy to cash flow in colorado nowadays.
1. I will be closing the last week of April and I am wondering if I can rent the condo starting from May considering the COVID situation. if not I will lose $1450 every month.
2. Will the prices come down, I think this condo might come down another 5k but not much based on the area. But will I get bargain deals on other properties at different locations with the same rental potential?
Should I just go with the deal and hope that I can rent it or think twice? I will be losing money ($1000) that I put in for inspection (came out good) and appraisal and maybe the earnest money of $3000.
I appreciate your response at the earliest as I am in the midst of it.
Couple of big things you left out. First, price of property. Second, Mortgage interest, p/I insurance taxes, etc is the $1450 number? Assume a 30yr note? No condo fees? Not counting vacancies, repairs etc you’re cash flowing $350/mo? Why would you do this for $350/mo? Google a readily-available sfh rental calculator and plug your numbers in.
My guess is you’re playing the “appreciation” game, not the “rental cashflow” game. Better be clear on your purpose and exit strategy before you buy, $4k be damned. If you’re looking for rental properties on MLS you’ll rarely find them.
You asked! Big smiles.
Hi Matt,
Thanks for responding. $1450 includes P/I, insurance, HOA and all. The property was negotiated for 271k. 3 bed, 1.5 bath. 3rd bed is non conforming(has egress window but not according to county rules) but got a quote for 6k to make it confirming. Rent is going between $1800 to $1900 for similar houses. Inspection completed with very minimal repairs that I can do it in few days. If I do it conservatively wth vacancies, repairs e.t.c. I’m cash flowing $241. That area always need more rental so I didn’t account for vacancies. My biggest fear is house market coming down like 2008 and I’m missing out on discounted prices. Thanks
Got it. With that cashflow, you’re playing the appreciation game. Then, it’s all in the buy, and your planned exit strategy. If you got it at a significant discount, you hold and b/e (essentially what you’re doing, one roof, window, interior water leak job puts you in the red for a year). If only 5-10% off, you essentially are buying retail. If you got it at a short sale, courtyard steps or foreclosure, that’s more likely 15-35% off and in need of repairs. Doesn’t sound like that’s the case.
So if you’re nervous your housing market is at the top, then you don’t buy. If you think it’s an, “investment” ie it’ll appreciate and you’re holding onto it long-term, that’s fine. But if you’re not sure, you’re essentially using a margin account (the loan) to make a $271k stock purchase (the house). Make sense? Make money on the buy, which you can only do if you know your exit strategy beforehand. If you’re buying $250-300 monthly CF, my guess is your down payment would be better served slapping it into a dividend fun that pays dividends monthly. I never buy anything that doesn’t net $500/mo per door after all expenses and property management fees. And yes, I have one that’s punched me in the face 3x with big bills in the last 18 months. Bad buy (and believe the AGE of the home, not your inspector) for me. Point is, you’ll win some and lose some but your margin for error is too thin if this is your first rental home. Buy a foreclosure pos and fix it. If they’re not out there now, be patient. RE investors sitting on piles of dry powder right now waiting for the next round of 2008/9 foreclosures coming in the next 6 months.
Advice is free and probably only worth that! Nice back and forth. Good luck!
Hi Matt, you sound very knowledgeable about RE investing. However, I have a differing opinion and I’d like to bounce it off of you.
You seemed to base your calculation on numbers only, with nearly zero regard to the time/effort (this to me also equates to money and even more valuable most of the time) needed to get that slightly higher return. If the cashflow for SKINVEST is $250/mo with little effort required on his part, it maybe worth much more to him than a >$500/mo cashflowing property requiring a ton of work.
Let’s calculate ROI another way. For $250/mo x12, that’s $3k/yr in initial return (rents will go up you know and they have been consistently by more than 5% per year in front range area in CO). Assuming SKINVEST pays ~20% down and that’s $54k at $270k, with closing cost and some other costs, the total closing is probably somewhere near $60k. So, at the 1st year, without doing anything, he nets $3k/$60k=5% in ROI. And that’s just your average ROI right off the bat without even start considering appreciation and rent increase year after year.
I would say, if the property will require very little oversight/additional work, then, yeah, why not? The numbers look alright to me.
On another hand, I have to be abrasive to SKINVEST here. If you are so concerned about potential a $5k (2%ish) drop in price tag over a $270k property (assuming the property has this much value in it) that you felt the need to consult people here, then you should reassess your risk tolerance doing RE investment. Just my 2 cents.
Ok. I did the math for everyone. Used a spreadsheet. My numbers came out to $1485 all-in monthly payment. P/I, HOA (assumed) insurance, and tax on a 30 year at 5.25%. 5% vacancy rate, $1200 annual maintenance and “other” cost combined. Plugged in $1800 monthly income. Modeled holding onto the home 30 years.
Annual appreciation rate 3%, assumed annual rent increases of 3%.
Cap Rate is 5.86% and cash on cash return only hits greater than 10% year 11.
Too thin for me.
Hi Matt,
Thanks for the greatly detailed number breakdown, very helpful! A few assumptive numbers you wrote, “tax on a 30 year at 5.25%. 5% vacancy rate, $1200 annual maintenance”, seems reasonable and to give some cushion.
“Annual appreciation rate 3%, assumed annual rent increases of 3%.” Given the population influx to CO, the appreciation rate of 3% seems very low. If assuming 10% per year is too aggressive/optimistic, I’d say at least 6-8%.
This is what a quick search returned, “According to the Federal Housing Association, Colorado ranks 2nd for home appreciation since 1991 (only behind Washington D.C.) with a 380.24 percent house price appreciation from Q1 1991 until Q2 2019. Over a 5 year period, Colorado ranks 4th with a 55.87 percent appreciation.”
But hey, I get your point. Thanks for sharing your insight! :)
Also, though the investor wouldn’t see that money in the bank account for a while, if one counts in the mortgage principle part that the tenants help pay down per month with rents (very insignificant initially, more and more significant as the years go by), that’s even more ROI — since all this hidden ROI will all be recaptured once the property is sold.
Hey Jay – yeah that’s what I said originally. Sounds like an appreciation play. Unless you believe that appreciation level is repeatable and will continue. If not, Colorado is the definition of a housing bubble.
(See Phoenix, Vegas, Florida circa 2008). 3% appreciation averaged out over a 30 year holding point for any r/e investment seems pretty safe. If I had to pick on myself, I’d note I did NOT include the money – cashflow – which came in under $200/mo. by my calcs. And I’d also pick on me for not noting the annual maintenance is just that – maintenance. You’ll have to replace a roof, siding, soffit, tuck pointing, sewage line, waterproof a basement, new windows, etc. across those years. Roof maybe even twice.
Which is why I return to cap rate and cash flow. He’s going to be dumping money into this house, always be in the hole hoping I’m wrong and it’ll be 1991 again and wait for his cash-on-caah return when he’s got grey hair. Seems like an anchor, not an investment. Not trying to be flippant. It’s just a blazing no- go to me.
For $350 a month you will be for a big scare, it’s not worth the $350. Aside from that I think it be easier to lose $350 than you make $350 on this market. I think this answers your doubts. Hold the money properties aren’t going up, down yes for sure down not up!
Plus people will defer rents for a while
INEQUALITY OF WEALTH WILL DESTROY THIS COUNTRY
NO END TO THE GREED
Can you elaborate on your greed comment and how greed has anything to do with the comparison between real estate and equities during a global pandemic?
I don’t think it’s greedy that people want to own a home and not lose money.
What is your situation?
I am mad people can afford property and I cannot.
If I cannot afford property, nobody else should. It is just wrong.
Thanks, Robin Hood!
I take your point on stock market declines leading to increases in real estate, but San Francisco prices are absolutely crazy.
Here on the east coast (where it still is pretty expensive), my friend was able to offer $1.4mm on a $1.7mm home (3K sq ft, 7 bedrooms, pretty new construction) and get the deal done as nobody is buying right now. This is during the same time frame.
Sounds like a great deal! Do you have the listing I can check out? You can e-mail me for privacy as I’m looking for examples and property for myself.
What are your thoughts on the Airbnb market now given that is 100% of your site’s focus? Is it true that some people own multiple properties with multiple mortgages just focused on Airbnb? I never got into Airbnb b/c I found it a hassle to deal with tenant turnover. But Airbnb was the one company I thought would do very well post IPO. Crazy how things change so quickly.
My Airbnb is in the Hudson Valley, which has actually seen an uptick because of city dwellers looking to escape. I had a friend of a friend offer to take an entire month, ka-ching!
I’m not sure how much more work it is compared to a LTR since I don’t do LTRs, but so far it’s been pretty turnkey as I have a few locals who with property management and cleaning.
Which email should I use for you?
Very cool! Sounds like Airbnb owners and the company will be just fine then.
It’s good to always see good examples of people making more money during a downturn. I hardly ever read are people losing money during bear markets.
Makes me believe Americans are financially healthier than people realize.
Majority of Airbnb’s have been decimated – including mine – in Mountain View, CA. All conferences, graduations cancelled – every one of my bookings for the next 3 months have cancelled. We’re applying for unemployment based off the CARES Act.
I would think that would be the temporary case. So I am surprised that a person with an Airbnb who writes about Airbnb hosting and buying etc doesn’t recognize. Guess each case is different.
That’s truly incredible data. The amount of wealth in SF area is staggering. Where does the price appreciation stop? If the market is still that frothy there I were you I’d use this opportunity to cash out on a high note, and hang tight in cash for 12-18 months then purchase that beach front property on Oahu you’ve been talking about for years at a 40% discount.
When the S&P 500 is down 30-35% I think price appreciation stops. My point is that money is flowing into real estate so far and may actually boost certain SFH markets.
I will do a post on Hawaii luxury property bc that market has to really be in a precarious position bc it was already soft before the pandemic and now mainland and foreign buyers are having a tough time buying.
Nobody needs a vacation property in this market.