Buy If I Can Afford It? Or Would I be Trying to Time the Market if not?

Question

I have enough money saved up to put 20% down on the average home where I live in San Diego. I am currently living with parents so it'd be nice to purchase a home and move out. Ideally, I would rent out all the other rooms while living in one to reduce mortgage expenses. I would be happy as long as I am not paying more than the comparable rents for where ever I may be living, or maybe just a little more. My brother is a homeowner who purchased his forever home around 2010 so he has been able to reap the benefits of appreciation. He suggested however that maybe I should consider renting for a year or so because home prices are so expensive and rates are also so high. I understand he also isn't a Real Estate Investor so I'm not sure if i should just take his suggestion with a grain of salt. Would his suggestion generally be speculating that the housing market is due for a price correction and can be very well wrong? If for any reason I were not able to find tenants I could still afford to pay the entire mortgage using my 1099 income but I would just have to be more frugal with my expenses which I wouldn't mind doing. Should I just take the plunge and jump in to the market now since I could actually afford to? The ultimate worse case scenario would obviously be if i purchased a home then the housing market crashes and I lose hundreds of thousands in equity value in a short period of time? Not likely?

Hac T. · Answer

Isn't the general consensus right now that homes that meet the 1% rule are basically non-existent in the current market in California though?

Dan H. · Answer

no one has a crystal ball to know the future.  I have some comments that you can use to make the best decission for you.

- Financed RE has never been more expensive than now.  The rates have more than doubled and San Diego RE is up slightly YOY.  This implies a significantly higher P&I payment than at the beginning of 2022.  This P&I could be double what you would have paid 1.25 years ago.

- Many of the top syndicators have reduced offerings or taken a break all together.  These are some of the better RE investors that exist anywhere.  I have not purchased since Dec 2021 (I purchased $4M that month).

- There are still people making money in RE investing.  There are so many options with RE investing.  Sophisticated value adds can still do well.  Alternate rent models to LTR (rent by room, STR, MTR) can achieve higher cash flow than LTR.

- Your goal of not paying more than the associated rent by house hacking in San Diego is unlikely if you accurately forecast for all expenses and are using a high LTV loan.  The reality is that I am unsure 1% rent ratio would cash flow at the current interest rates and a 1% rent ratio is an unicorn find in San Diego (but I purchased one fairly recently).

- The commercial market including the commercial residential market seems to be at significant risk of falling RE prices.  This is because commercial loans have shorter fixed periods than noncommercial residential loans.  These commercial loans have a significant percentage that hit their term every year.  When they refinance these loans, the payments will go up significantly and many of these properties will no longer be profitable.  Will commercial RE issues affect noncommercial residential RE?  That is the million dollar question that smart people differ on their answer.  I take the I do not have a crystal ball and do not know, but the risk to noncomnercial RE is greater than typical.

- In the long run RE has always appreciated in San Diego.  I have little doubt regardless of what happens in the next few years, in 10 years the RE will be worth more than it is worth today.

- Rents continue to rise significantly.  San Diego city recently passed the tenant protection act.  This bill is supposed to help tenants, but it raises risk to LL and will result in higher rents.  I suspect rent increases in 2023 to rival the rent increases in 2022 that was the highest that I am aware of.

Is it a good time to buy?  I think if you find a property that the numbers work well than it is a good time to buy.  If you are going to purchase a non-value add property off the MLS paying full retail price, you may be better off waiting.

Good luck

Hac T. · Answer

Thanks for the feedback!! Can you clarify why someone told me that the bank would require 20% down? Is this simply not tru or only in specific situations?

Twana Rasoul · Answer

If you decide you want to be a long term investor then timing shouldn't matter much as long as the deal makes sense for you and you are in a financial position to be able to pull the trigger....you will never find a "good" time to buy.  Many people that have purchased previously and have done well and feel like geniuses a few years later but most of those people didn't think they were "buying at a good time" when they were purchasing.

When interest rates were 2% in 2021 or so there were those that were saying its a terrible time to buy because rates are so low and causing everything to get bid up, it doesn't make sense....when rates when to 7%+ with little to no competition and you could purchase below value some of those similar folks were saying rates are too high it doesn't make sense...There were always be reasons to buy and not buy.

I've never purchased in San Diego over the past decade and thought it was an amazing time to buy...but always 6 months, 1 year, 2 years, and so on later I became more and more glad that I purchased....most recent purchase for me was about 4 months ago

I purchase real estate that I feel I can hold on to in the long term and even the ones I purchase that start off as negative cashflow I make sure I can handle that and I have a plan and timeline to get it to breakeven and ideally cash flow positive

Ryan Thomson · Answer

@Hac T. I applaud you for recognizing that some advice you should take with a grain of salt. People with good intentions who you love, do not always know best.

People who cost average into the market by purchasing one a year or one every couple years drastically outperform those who wait and "HOPE" that it goes down. You can't time the market. Reach out to me and I'll send you a video of a presentation I did that explains really well how timing the market isn't going to outperform cost averaging.

Let's say you are paying 2k/month in rent then now is a great time to get into house hacking. Instead of throwing that money away every month you can pay down your mortgage and own and asset that will appreciate over the long term. Not to mention if you rent out the bedrooms you’ll get all of the benefits of owning a home AND pay less towards your monthly mortgage than your rent of 2k.

Thinking about the market… I wouldn’t be too concerned with a house hack for two reasons.

• 1. If your plan is to scale and buy a property every year or two then you will cost average into the market. Eventually, you will buy a property when it is near the bottom for prices. Since you (and no one else who talks like they do) actually knows what’s going to happen this is the best strategy for buying an investment if you continue to buy over the long run. You can’t time the market.
• 2. If you wait 12 months and get lucky and the house is worth 20k less now, you will have spent 24k in rent over that time period.

Carlos Ptriawan · Answer

Folk is funny sometimes, this is house for heaven sake. People always buy it. With inventory is below 15 units in many markets, price is no longer a factor.

Rick Albert · Answer

When I bought my condo in 2015, people questioned me because we were still in a quasi recession and it was a condo. I sold it last year and almost doubled my money.

When I bought my second house hack in 2018, people said I was crazy and the market was going to crash. My property is worth about 30% more that what I put into it and my house hack will cash flow beautifully once I move out.

No one can time the market. Inventory is so low right now that the only way for prices to dip is if buyers leave the market.

Here is the part no one talks about: If the market dips, WHO CARES?! Just don't sell and keep living your life. It is a paper loss. The people who bought at the height of the market in 2008 who kept their homes are in better shape than if we buy today. Not only have values jumped back past those prices, but are halfway done with their mortgage.

The phrase is Don't Wait and Buy, it's Buy and Wait.

Ryan Thomson · Answer

Bad advice and wrong information. Sometimes it may be true. Cases it would be true:

1. If trying to buy a triplex or fourplex and it doesn't meet the self sufficiency test

2. If you can't qualify for the purchase price with only 5% down so you have to come with more cash.

More than likely its just false advice. Who told you that? Lender? Friend?

Ryan Thomson · Answer

@Twana Rasoul really well said!

Carlos Ptriawan · Answer

with 20% you have to pay PMI. There're CU outthere that could accept 3% nationwide.

Buy If I Can Afford It? Or Would I be Trying to Time the Market if not?

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