If you want to get rich, it's probably wise to buy real estate as young as you can. Inflation is too powerful of a force to combat. The earlier you buy real estate, the more you can let your returns compound. In addition, buying real estate keeps you disciplined as a forced savings mechanism as you pay down your mortgage.
Think about all the times you've heard your grandparents buy property for so cheap. It was time that gave them the greatest gift to wealth creation! Now you can wisely buy real estate today and have your children and grandchildren in 20-40 years marvel at what a great opportunity you had.
My biggest real estate regret was not buying a two bedroom, two bathroom, double balcony condo with a view of Manhattan's Chrysler Building in 2001. I was 24 and could have put down 10% on the $760,000 property that is worth over $2,000,000 today.
Now I'm 46 and no longer have a desire to “grow into my debt” through aggressive hustle. Instead, I'm all about paying down debt and simplifying life. Raising two kids is exhausting!
Why I Love Real Estate
I'm a huge fan of real estate because you only need to do four things to grow your wealth:
1) Come up with a downpayment using my 30/30/3 home buying rule
2) Pay your mortgage on time
3) Try not to buy at the top of the market
4) Own your property forever.
If you do these four things, I'm confident that thanks to inflation, at the very least, your net worth will be healthier than if you just rented. After decades of renting, you will have no equity. At least with real estate, you have a chance to get richer.
A while ago, I decided to put together a “progress chart” to see where I stand with one of my rental properties. I had just refinance the property and was feeling good about it.
A couple folks mentioned $850,000 was still quite a large mortgage. I agreed. That's why I came up with an accelerated pay down plan. I'm all about creating goals, making charts, consulting with others, and tracking my finances to make sure I'm on target. You should do the same. It's very enlightening.
What I realized from this exercise was that perhaps I was spending too much time trying to build wealth with too many different asset classes. If I just focused on optimizing this one rental property in my portfolio, there's a good chance it alone could make me a multi-millionaire!
Why You Should Buy Real Estate Young
When it comes to building wealth, simple is better. Understanding real estate as an investment is about as simple as it gets.
1) Real estate prices move in 7 – 10 year cycles.
2) There's a natural tailwind due to inflation.
3) You want to own real assets because money is only a medium of exchange that loses value every day due to inflation.
4) With inflation, rents naturally rise. If you stay a renter, your costs will always go up quicker than a homeowner's costs, making retirement a little more difficult to manage.
5) Humans are undisciplined savers and spenders. Having a mortgage forces you to save because each month you are paying down principal.
6) After you've finished paying off your property, if you wish you can add the full value of the property to your net worth. Everybody should make this calculation to see what their minimum net worth will be.
7) Living in your house doesn't require investment work. Living is just life. Hence, consider buying real estate for lifestyle first, capital appreciation second.
Real Estate Wealth Building Chart
Here's my progress chart for a property I bought at the end of 2004 for $1,525,000. I bought real estate young, first at 26 and then this property at 28.
For years prior, I saved and invested 50-75% of my after tax income in order to one day break free from an unsustainable career. The numbers are estimates within 10% of true value/cost.
Housing Chart Analysis
In 2005, I've already been an adult for 10 years. I missed my opportunity to buy a place in Manhattan at age 24. At 26, I finally bought my first property in SF, a 2/2 condo. The place was nice, but I regretted not buying to my maximum potential because I was afraid.
Therefore, at age 28, I went all-in and bought a single family home for $1,525,000 by taking out a $1,220,000 mortgage. It was kind of nuts to have over $1,600,000 in debt at such a young age. But I felt bullish about my future, having just received a promotion at my firm. No risk, no reward.
The total cost to own after deductions was about $4,800 including property taxes, insurance and maintenance. Given you can only deduct $1,000,000 in mortgage indebtedness, my goal was to get the mortgage down to $1,000,000 sooner.
However, after the $305,000 downpayment, I had practically nothing in the bank so I didn't make extra principal payments the first five years. Instead, my immediate goals were to work hard at my job so I wouldn’t get fired and to replenish by savings account by saving 70%+ of my after-tax income.
If you take on huge debt, your motivation to work hard will shoot through the roof!
Opportunity Cost To A Down Payment
There is an opportunity cost to sinking $305,000 into a down payment. In my case, I would have only invested this downpayment money in more conservative asset classes like CDs, treasuries, or muni bonds yielding ~4% at the time.
So yes, I could have made about $1,000 a month risk free, but I wanted to swing for the fences while I was still young. I was either going to blow myself up or get rich sooner, rather than later.
Related: Invest In My 401k Or Save For A Downpayment?
A Scary Decline
I had two good years of property price appreciation until the financial meltdown chopped off ~22% from the 2007 high. I estimated my property's value declined to $1,400,000 – $1,450,000 in 2010 because that's the value I was able to convince the city to agree on to lower my property tax bill for several years.
The downturn didn't feel good, but it didn't hurt my lifestyle. I still enjoyed living in my place with a fixed payment. I just locked down all superfluous spending. My $6,000 vehicle named Moose was good enough!
When you never plan on selling, devaluations don't hurt as bad. Financial Samurai was born during this time of turmoil.
The Property Market Recovery
By mid-2011 things started to recover. The S&P 500 bounced off its lows and people were interested in buying property again. Interest rates declined, and I refinanced my property before I left my day job in 2012.
2012 was the time I seriously thought about selling my house given I didn't have a steady W2 income anymore and Facebook had just gone public. Having $1,075,000 in debt just from this house without having a day job was concerning. Still, all I thought about was simplifying life!
Thankfully, I didn't sell because a nice five year bull run ensued. In retrospect, I should have bought more property in 2012.
The Going Gets Better
In 2015, despite having over $1,000,000 in equity in a property that I valued at $2,300,000 compared to online estimates of $2,800,000, I still couldn't refinance my 5/1 ARM 2.625% mortgage because I didn't have two years of freelance income under my belt. I was disappointed, but felt strongly that another opportunity would arise before the fixed rated adjusted in June 2017.
In 2016, I finally refinanced my mortgage to 2.375%. The cost to own dropped to only around $3,000 a month after deductions (mortgage interest cost of $1,682, property tax of $1,600, $200 for insurance, and $200 for maintenance). Meanwhile, estimated rent for the house now ranges from $8,800 – $10,000. It is a blessing to be able to lower costs through a refinance and raise rents.
From 2017 – 2019, the real estate market declined as global growth softened, private tech/internet company valuations declined, layoffs increased, more new condo inventory filled the market, and poor performing IPOs.
The housing market was strong during the pandemic and rents rose aggressively. As a result, buying real estate as young as you possibly can has turned out to be a wise choice. Now prices have cooled given rising mortgage rates, which means there's another lull in activity to give buyers a chance again.
In 25 years, your children will likely marvel at how cheap real estate prices are today.
Future Plans For Real Estate
By 2025, I plan to completely pay off one rental property mortgage and buy another forever home to live in for 10 years. As our net worth grows I'd like to continue living well based on my Primary Residence As A Percentage Of Net Worth guide.
If I do nothing else, this property alone will make me a small fortune. I'll need it, because in 10 years, $4 million might be the new $1 million.
Sure, there might be a massive earthquake, a fire, or another huge economic collapse between now and 2025 that will destroy my plans. Thank goodness for homeowners insurance and risk-free assets.
But if I stick to the program, there's a real possibility that the scenario I've created in this chart will come true. Now it's your turn to create your own scenario.
What Actually Happened To This Property
When I first wrote this post in 2015, I estimated the value of the house was about $2,300,000. I modeled out the property would be worth roughly $2,500,000 in 2025. Thanks to a raging bull market, I was able to sell the house for $2,740,000 in 2017.
It was a fortuitous situation because I only had one buyer. I wasn't excited to sell, but with a newborn, I needed to focus. I was happy to sell the house for $2,500,000. But when I got him up to $2,740,00, $240,000 more and eight years earlier than my forecasts, I just had to sell.
I ended up reinvesting the ~$1,800,000 in proceeds in real estate crowdfunding, the S&P 500, and municipal bonds in 34/33/33 increments.
So far, so good. I've been able to generate a much higher return in my reinvested asset classes. Further, the income has been generated 100% passively.
My favorite real estate crowdfunding platform is Fundrise. You can invest in a diversified portfolio of private real estate investments that generates a steady income stream. It's free to sign up and explore.
Automatic Wealth Building
Buy real estate young. When we are young, time is on our side. But once we hit middle age, time starts becoming our enemy. We lose our enthusiasm and energy the older we get. No longer are we willing to commit the sweat equity to remodel or expand a fixer upper for profits.
When you buy real estate young, you can more easily ride out the cycles. It takes time to build equity and take advantage of refinancing opportunities.
All I want to do as a 46-year-old fella is relax! Once we're past 55, it becomes harder to justify buying a property because we might die before we pay it off.
Save as much as you can, figure out where you want to live for the next 10+ years, and get long inflation by buying at least one property as young as you possibly can. After the National Association Price fixing settlement, residential real estate prices should also get a boost higher because commission rates will go down.
If you don't invest a single dollar in any other asset class, at least you'll end up with a fully paid off property within 30 years to provide some financial security. If you can build a diversified net worth, all the better!
Invest In Private Real Estate More Strategically
If you don't have the downpayment to buy a property, didn't buy real estate young, don't want to deal with the hassle of managing real estate, take a look at Fundrise, one of the best private real estate companies today with over $3.3 billion under management.
Fundrise focuses on residential and industrial real state in the Sunbelt region, where valuations are lower and yields are higher. The spreading out of America is a multi-decade trend. For most investors, investing in a diversified real estate fund is the way to go.
CrowdStreet is another way to invest in real estate for accredited investors. The platform screens the best opportunities across hundreds of sponsors for investors to choose from. CrowdStreet also has its C-REIT fund to choose from as well.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. You can start investing in a Fundrise fund with as little as $10.
Both platforms are sponsors of Financial Samurai and Financial Samurai is a six-figure investor in Fundrise funds.
For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience because our finances are too important to be left up to pontification.
It’s good to know that you should invest in real estate when interest rates are low for your mortgage. My sister has been telling me about how she came into some extra money recently, and she wants to invest in property. I’ll share this information with her so that she can look into her options for real estate brokers who can help her with this.
Wow, I had never considered the fact that rents will rise naturally due to inflation, and that means that your rent will go up faster than if you were to buy a home. My partner and I recently became engaged and have decided to buy a home together, which is something that I have wanted to do my entire life. Hopefully, we will be able to find something that will fit both our styles and that will help us feel comfortable and luxurious, while not being affected by inflation.
It makes a lot of sense how you said that if you don’t buy the property you live on then your expenses will increase at a much quicker rate. Finding an agent who can help you to find some property that would be good to build on is a great idea. That way you don’t have to worry about costs increasing the longer you live there.
I like how you advised people to buy property when they are young so they can have long inflation and build equity. My youngest brother is twenty-two years old and doesn’t know what he wants to do with his life. I think he should follow your advice and invest while he’s young and try to buy a property so in the future he is financially stable.
I’ve been planning to purchase a house near the lake. Surprisingly, my decision isn’t all that bad because according to your statement, a real estate’s price moves in 7 – 10-year cycles. Well, just in case I push through with the plan, I do hope to find a reliable real estate company that’ll lead me to my dream home.
My husband and I are planning to purchase a home near the lake, but we’re not sure if buying a property is worth it. That’s why we’re glad that we’ve stumbled upon this article; it’s great to know that real estate prices move in a 7-10 year cycle. Also, after the property is fully paid, its full value can be added to our net worth.
I did not know that real estate prices move in 7 to 10-year cycles. My dad told me that he would like to buy a new house so he can invest some of his money instead of spending it on other stuff. I will share this article with him so he is aware of the benefits of buying a house and how his money can grow by doing that.
I did not know the fact that real estate prices move in 7 – 10-year cycles. My parents are planning to buy another house but they haven{t decided what area to choose from. did a great job of explaining how having a mortgage forces you to save because each month you are paying down the principal.
I like what you’ve said here about owning real estate. I love how you said that as long as you have a down payment, pay your mortgage, buy lower on the market, and own the property for a long time, it’s a good choice to buy. My wife and I want to buy our forever-house this year, so we can do all of that!
Hi Sam – any updated thoughts about Bay Area real estate? I’m in the peninsula looking at low end condos. Prices definitely seem to be on the decline for now, Fed keeps raising rates, SALT tax changes may not fully hit until people file next year, and overdue for a recession. Still, a lot of IPOs seem to on the books for next year and you’ve convinced me renting is equivalent to shorting housing (which I don’t want to do). Any thoughts?
My thoughts are that the housing market will continue to soften around the SF Bay Area. Inventory is up 40% YoY and at multi level highs. Stock market is crapping out as well. I’d be patient and really bargain hard.
Winter is the best time to buy real estate.
Also:
Time To Worry About The Housing Market Again
But I have to imagine the IPO of Airbnb and Uber will reignite the market here in 2H2019 or 1H2020 after 6-12 more months of softening. But let’s see what the entire US economy does.
Stories about people making big profits in real estate always amuse me, because they are by far the exception not the norm. Most people are shocked to learn that over the past 100 years, average U.S. home values have barely kept pace with inflation, increasing 3.1% annually. The stock market, on the other hand, has returned an average of over 10% annually during the same time period. On average, real estate doesn’t even come close as an investment.
True, there are pockets where real estate prices get distorted due to large shifts in population due to companies moving in or out of the area, or the region suddenly becoming “trendy” for one nonsensical reason or another. But these are the exceptions, not the norm. They are also the places where real estate bubbles form and pop, often wiping people out. The 2008-2009 real estate crisis was a very localized phenomenon, as most areas of the country were completely unaffected.
I live in one such area, and we watched the 2008-2009 housing crisis unfold with complete bewilderment, much like we watch a natural disaster on the news and think to ourselves, “Good thing we don’t live in an area that experiences (hurricanes / tornados / earthquakes / floods / wildfires / mudslides / etc.)”
Home owners also tend to conveniently “forget” the enormous costs involved in owning a house: Property taxes, maintenance, repairs, mortgage interest, buying & selling costs, remodeling, etc. Plus homes can go out of style over time and thus become out of favor in the market, forcing sellers to unload at bargain prices in order to attract buyers. In many areas of the country you actually LOSE money as a home owner (although typically not as much as you would lose by paying rent).
Owning a home is a lifestyle choice, and a home should be viewed as a consumption item, not an investment. At least that’s true in the rational 90% of the country that isn’t forced to ride the real estate price rollercoaster.
Does this mean you’ve been renting? After the huge rally in the property market, I sold my SF rental in 2017 for $2.74M after buying it for $1.52M in 2005. I couldn’t believe it. I’ve got a new post about the property market now for 2018: It’s Time To Worry About The Property Market Again
The cost of ownership is often the same or cheaper than renting over time. Hence, that cost is cancelled out. Remember, the return on rent is always -100%. You get a place to live, but same with ownership, so that cancels that benefit out as well.
Don’t forget, you can own and invest in stocks at the same time. Not sure why so many against homeownership don’t believe this to be true.
Sam
I was a lifelong renter until 2011, when my wife and I bought a house together. We moved in a month before my 46th birthday. Prior to that my wife owned her own home. I should add that during my 18 years of renting, only once did a landlord ever raise my rent. This included 5 apartments: 4 in L.A. over a 13-year time-span and one in upstate NY over a 5-year time-span.
I should clarify I’m not against home ownership by any means; I just wanted to point out that it is not the automatic money-making venture that so many make it out to be. SF is a bizarro-world when it comes to real estate, as is most of California (I should know, having lived in the L.A. area for over 13 years.)
Houses appreciate much more slowly in most areas of the country. Our house was built by the previous owners in 1992 at a cost of $219K. They sold it to us in 2011 for $246K… after they had a 2-story addition built. So no, they did not realize a profit on the house. And this is a 2,400 sq ft house in a very desirable upper middle-class area with one of the best school districts in the county. But that’s the way it is most areas of the U.S. that aren’t distorted by large population inflows and outflows and the resulting supply and demand imbalances.
Home owners enjoy total control over their living space and a few other perks that renters don’t get, but it has its drawbacks as well. Where I live, renting can be a much cheaper option, assuming you’re renting a smaller apartment as opposed to a house of the same size. My current property taxes (~$9,000/year) are equal to what I used to pay in rent for a decent-sized 1-bedroom apartment (~$750/month).
Anyway, I just wanted to share my experience so that people don’t think they’re making a mistake if they don’t buy a house. Renting can be a very smart way to keep your expenses fixed while also giving you enormous flexibility in case you ever need to move on short notice.
I completely agree with the benefits of renting. I’m a math guy and I look at the total cost of home ownership and total cost of renting. Over time, I’ve saved and invested an enormous amount of money by renting very cheaply. If you are very disciplined, you can become wealthier by renting very cheaply and investing intelligently. By renting cheaply, you’re throwing less money away per month than the total cost of ownership. This difference when invested intelligently over time turns into enormous amount of money. My rent has only increased one time in the last 7 years. It is still extremely low compared to ownership costs. A house is a risk. Anything can break over time. Property taxes will go up. Maintaining a home is a headache. The biggest problem with housing is the COST to own and maintain the property. It’s far better to reduce living costs to save money, than to try to make more money by buying a house to live in and raising your living costs. I’m able to save over 50% of my income because I rent. It’s far better to look at the biggest costs, than to save pennies here and there. Being a landlord is creating work for yourself. If you buy a rental property, you will have a job to keep the rentals occupied and well maintained. Bad renters will sometimes not pay on time. It’s a big headache. Even with the best renters, there is no guarantee of on time payments. If you are not handy, you will get killed financially. I hate real estate, and every person who works in the business of buying and selling real estate or fixing and maintaining houses. This is my personal opinion. I will rent forever by choice, and I will become rich by renting. Buying a house is similar to picking a stock. You can get lucky and you can pick a good location just as you can pick a good stock. Just because you got rich by owning rental properties doesn’t mean that it is the norm. A lot of people got killed financially by the housing crisis.
Whatever is good for you.
The latest Federal Reserve Consumer Survey data shows that homeowners are 11X wealthier than renters. That has to mean something.
See: The Average Net Worth In America Is Huge!
There’s a very simple explanation for why homeowners are on average much wealthier than renters. Young people or first time buyers who own homes (in high cost areas like parts of the east and west coast) on average have higher incomes and are able to qualify for larger mortgages and are able to save much more compared to young people with lower incomes who cannot qualify for a loan and cannot save much money. I’m emphasizing “young” and “first-time buyers” because past performance in certain housing markets like san francisco are not guaranteed to repeat over the next 30 years. Not everyone lives in a location that will turn out to be a great real estate investment. If you look at the family income statistics of those young people who own houses in a good location, and those young people who rent cheaply, you will find that people who own homes in good locations have higher incomes on average compared to people who rent cheaply. You cannot qualify for a mortgage in a good location as a first time homebuyer, if your income is not high enough. The most expensive homes are only affordable for the wealthiest people. A lot of renters are forced to rent because they can’t realistically afford a house with their low income. Think about the young people who graduated college recently. Most of them will rent for many years before coming up with the down payment to buy a house. A higher income allows you to save and invest more money, whether that’s in the form of home equity or stocks. A lower income doesn’t allow you to save much money and often makes it difficult to buy a house. Looking at the average wealth of homeowners can be very misleading because some very wealthy billionaires own homes and many many students and recent college graduates who have very low income are renters. Going forward, I strongly believe that your income has the biggest impact on your wealth potential, not your choice of owning or renting. My net worth is among the highest for my age and income, and I have never bought a house in my life. Doing the math, if I bought an average priced home in a good location at the bottom of the housing market after the financial crisis, my net worth would be lower today.
Real estate far and away outperforms stocks and many other investments. You can safely leverage $1 by 3-5x with real estate, you pay less taxes by using depreciation and 1031 exchange, your “dividends” (rent) are almost guaranteed to increase around the price of inflation, you pay down debt increase home value AND rents all while having more control over the investment. Meaning you can choose to repaint walls, who to rent to and how much to charge. If I buy an SPY stock I cant control president trump tweeting something that causes that stock to drop 5% in a day. So honestly no comparison. And the scenarios i just mentioned are not even if you actively invested meaning sought out undervalued deals etc.
You are sadly mistaken my friend. Only in a handful of over-heated markets that are detached from economic reality can real estate outperform stocks, and even then only for brief periods of time. Those are also the markets that crash horribly (see: 2007-2009.) Historically, real estate has only kept pace with inflation, returning on average 3%-4%, whereas stocks have returned 3X more at around 10%. Google it if you don’t believe me.
You are only accounting for price appreciation, I listed at least 2-3 other ways in which real estate outperforms stocks. And your analysis of the 10% annual return of stocks does not factor in taxes, which im sure neither do the 3-4% for real estate but the difference is there is a provision in real estate in which taxes can be deferred indefinitely which stocks do not have. Leverage will always produce greater returns and stocks cannot safely be leveraged the same way as real estate. So without question or confusion, real estate investing (NOT just real estate but the act of buying income
producing properties) will ALWAYS outperform stocks. Stocks build wealth ONLY through dividends and capital gains. Real estate builds wealth through dividends, capital gains, leverage, tax savings AND greater ability to control investment results.
Remember all data comparing real estate and stock performance dont take into consideration those extra advantages real estate has, namely the leverage and tax benefits.
Hi Sam,
I am glad I ran into this article. My husband and I are looking into buying a 2 bedroom 1 bath condo in SF. But we are worried that the market is right at it’s peak and we will need to wait out any upcoming downturn after buying. You predicted 2017/2018 the market would soften. How do you feel now that we are in November 2017? From a “buyer’s” perspective, the market is still pretty competitive but sellers pricing strategies seem to be less effective than before. Should we continue renting, saving and keep our nice cushion every month? Or should we max out our budget and buy now?
Hi, my husband and I trying to decide whether to rent or buy. We live in Orange County, and the most we can afford is a 2 bedroom condo for 440k or under. We have a one year old and another on the way. We have been getting a lot of pressure to buy from many of our family members, who have made a lot of money in the southern CA housing market. However, I am skeptical about paying so much for so little space. If we rent, we’ll probably pay 2000/month. If we buy, with a 10% down payment, we will be paying 2600-2700/month. What would you suggest doing? Thanks!
Kristina
It’s hard for me to get excited about buying California real estate right now. I just sold one of my rental houses in San Francisco because the prices are crazy in terms of annual gross rent.
Graduations on your second kid. How do you think about the cost of housing versus the cost of raising children?
I would stay patient and try and go bargain-hunting for misprice listings or listings that have been on the market for a long time. I would not be overbearing and chasing hot deals.
See:
https://www.financialsamurai.com/why-i-sold-my-rental-home/
https://www.financialsamurai.com/real-estate-investing-rule-rent-luxury-buy-utility/
Hi Sam,
I bought a multifamily in 2010 when prices in South Florida were still very low from the recession. The price of the property has gone up by 130%, and rents are very high in the area. I don’t owe anything on it. It seems like I should just leave it alone, but a part of me wonders if we are approaching a bubble and if I should sell now while prices are high. I have not invested in stocks or anything else and wonder if I should diversify. If I do sell, where should I keep the money until I decide to buy again ( theoretically if prices come down again) . Any suggestions?
Sam, what are the areas similar to GGH you believe offer value in SF? I’ve heard Shipyard and excelsior but wanted your thoughts on upcoming area for 2018 to buy.
Outer Sunset
Parkside
South City
Are good value
20yrs old. 36k salary:20k in expenses. 16k left over each year. Have been with my girlfriend for 7 years now. Wondering your opinion on if it is worth it to buy a 300k townhown in Raleigh, NC to add to my folio and rent it out after 3-5 yrs. Either that or just rent until I’m ready to settle down in 10+ years from now.
Can you explain why you used an ARM ? I feel like that could get you in trouble if interest rates go up.
Sure. See this post: 5/1 ARM Over 30-Year Fixed All Day Long
And
How Much Can My ARM Go Up After The Fixed Rate Period Is Over
What would you recommend for low to moderate income earners? I’m currently 24 yrs old with about 20k in cash and 20k in stock/bonds investment. I earn about 30k a year but would eventually like to purchase a property with the ultimate goal of eventually renting it out. I live in Oakland and have been contemplating possible buying a property in Sacramento, hopefully in the 150k < less range. Any advice is greatly appreciated!
Hi, I have been following your blog for a while. It’s very helpful! I am 23 now and looking for buying a house in South Bay for my primary residence as well as renting it out potentially. I am now debating if I should buy a condo(actual condo, on the 1st floor of a building) in Santa Clara which would cost me $3000/month to operate(including property tax, mortgage, utility, insurance…) or should I buy a townhouse in Sunnyvale which cost me $4500/month. Both would be 3B2B ish and would generate $2600-$3000/month if I rent two rooms out. I am just wondering should I invest for cash flow or appreciation, and there is a concern that condo would not appreciate as much as townhouse.
Hard to say Angela without knowing more specifics. At age 23, have you already saved up for the 20% or more down payment? If so, then you probably can afford to buy a larger place and grow into it with your type of income and savings.
But the market is finally slowing in the bay area, and will probably continue to slow until Uber or Airbnb goes public.
I am a 31 y.o. and would be first time property buyer. I saw you eluded to waiting till end of 2017 early 2018 to buy a property. Do you think it’s a bad time buy right now? I am not in the SF market I am in Las Vegas. Things seem a bit high for here as well. I will probably stay here for another 3-5 years at minimum. Buy soon in next 3-6 months or wait it out for a while?
If you can find a good deal now (still winter) where you can rent it out for a positive cash flow after putting 20% down from the get go, and plan to live it int for 5+ years, then you may be OK. But Vegas is back to peak prices again.
The unknown is how much the 10-year yield goes up and whether Trump’s policies are helpful.
I’m personally waiting for a 10% correction in SF, NYC, Honolulu, and investing in middle America for better returns via RealtyShares. Non-coastal real estate is much more attractive now with higher returns.
See: Should I Buy A Home In A Rising Interest Rate Environment?
Great post Sam. It’s surprising to me that a Facebook IPO changes the market that much. Seems that if you’re not in the club, you’re gonna be left out of the party for quite a while. I really have no option to purchase a property in San Francisco given the savings that I have. I’ve only become really aggressive about saving recently. I started looking at purchasing a rental property somewhere else that I could afford just so I can some skin in the game. I pulled data from Zillow in order to search for properties which could give me the highest yield for my investment. Per your recommendation I created a blog on my own and wrote a post about find the best rental properties using the Zillow Research data. askadatascientist.com/2017/01/10/real-estate-investment-hacks-using-price-to-rent-ratios/
I am 100% with you. However, not only is is smart to buy your own home and use that as a way to build wealth….
…But if you buy rental properties you can see this same thing happen but on a much grander scale. The difference is that you have your tenants pay your mortgage for you! And, if you buy right, you can earn a positive cash flow from your rentals (what is leftover after you pay your mortgage and other expenses). Imagine having 100 rental units, and 100 tenants paying your mortgages for you! It’s like having 100 people putting money into a savings account for you every month. There are so many benefits of real estate… it’s no wonder 90% of millionaires are created through real estate.
I think the above comment is from a spam bot.
I agree man! Hopefully Financial Samurai will see my actual post haha:)
Hello Financial Samurai,
My name is Marcel Jara and I am 19 years old. I recently moved out of my parents house to move closer to school NC State. Through seeing the struggle that my mom went through in my earlier years I made it into an inspiration and motivation for myself to insure my financial future so that neither I nor my children in the future would have to go through the same difficult situations that I did. I am a Human Biology student but have always had a focus towards money and financial independence. I made my first investment to my future when I was in 10th grade with money that I worked hard for and had accumulated overtime by putting 1,000 in my first roth IRA account. Ever since that day I have been saving the majority of my minimal income and investing it as efficiently and effectively as possible. I make 11 an hour working at my parents food truck. Seeing my Dad 55, working countless hours on his business made it clear to me that I did not want to spend the rest of my life working especially at his age although I know that 55 if not old at all but I know that i want to reach financial independence sooner. I have been focused on saving and investing as much as my finances allow me to even if it is just 20$. This has allowed me to have now about 5,000 dollars in investments distributed through Acorns, Betterment, Robinhood, Stash Invest, Roth IRA and today for the first time I invested 1,000 into Fund Rise ereit. I have made each deposit with a lot of hard work and I know that almost everyone deters me from investing my money especially at this age and also considering that I have only a couple hundred dollars in my bank account while still having to pay for my rent and all expenses but what I have pushed myself to do is to deposit about 500$ a month with the little money I have. I have been smart with my money by rarely ever eating out or doing other things that almost everyone my age is doing and wasting their money on. I know you are an extremely busy individual and that your time is way more valuable then spending time mentoring me but that is what I would like to ask. I would like more information on what I should be doing with such a low income while investing and what you recommend would be the best way to invest my money in a way that I can truly build that residual income. I have always been focused to start as early as I can investing because I know the power of compounding although I just have 5,000 invested now I know if I stick to it I can reach financial security in the long run but I want to educate myself more on how I can get financial security with a smaller time horizon such as in the next 10 years because I end goal is to reach financial independence by 30 which is a big aspiration but I know with the right tools and mentoring I can reach it and help others do the same as you have been doing:) Thank you very much for your time!
Hi, it sounds like your attitude to saving / learning and investing is strong for a 19 year old. My advice would be to continue reading and learning as much as you can. Knowledge truly is power. You can focus on improving your professional skills which may improve your earning capacity. You would also be wise to improve your financial literacy. Please consider the following two books: Rich Dad Poor Dad (Robert Kiyosaki) & The Richest Man in Babylon (George Samuel Clason). If you haven’t read these books already, they will propel you to the next step. At your age, the most powerful force in the world (compounding) can truly be harnessed. Best of luck on your journey.
My husband and I were thinking about buying our first home in San Francisco this winter. I am 27 and we currently rent an apartment and do not own any properties. I know you mentioned that we are near the top of the cycle right now, but you also mentioned that we should buy as young as possible. What are your thoughts on us buying this winter, or waiting another year or two and betting that prices will come down?
Hi Lindsay,
Winter is always the best time to buy real estate IMO. The reason being is that it’s the holidays and the weather is the worst. You’re really motivated if you can’t wait 3 months to list in Spring.
If you can find a deal where the cost to own is less than the cost to buy after your downpayment, and you plan to own it for at LEAST 5 years, if not 10+ years, if not forever, then buying this winter is probably going to be OK in the long run.
I think there will be more deals to be had in the winter of 2017/2018. But of course, I could be wrong. You should look to buy in the winter BEFORE Uber and/or AirBnb go public. There will be lots of money being converted from stock to cash to real estate 6 months after the lockup period is over. Get ahead of that wave.
Best of luck! And also, check out this article for where I think are the best values and upside in SF today.
Sam
Hello Financial Samurai,
I have thoroughly enjoyed reading your article. My parents own quite a lot number of real estates in Mongolia, an Asian country situated between China and Russia. I myself intend to continue my parents business and I was wondering if you have any advice for me.