All Forum Posts by: Sam Josh

To me this trend reflects the stage of the economy and investing cycle we are in. The status of the investor has now become a commodity.

Let me state 2 examples.

My 19 yo nephew is looking to raise 75k to invest OOS RE. He says most of his friends are doing it or talking about it. He wants to get in on the action. He came to me for help. I told him I did not have that kind of cash. He said I was not doing it right and should start pulling equity out of the few SF BA properties I own. That's how the money gets created! Cool, young boy does know his stuff. 

Another example, I have a friend who is a chef at a medium sized restaurant, blue collar, hard working and come up the very hard way,  and its always great to attend dinner at his place usually every 2 years. He invites his cohorts from the industry. 2 years back this group, mostly chefs, only spoke of vacations, kids, their business, families, sports. This time, they all behaved like mini Grant Cardone's and Robert Kiyosaki's.

All of them without exception were taking some credit for the appreciation of their primary homes in California and all of them had taken out equity to buy OOS to 'set them up for life'. I bet one of them is very good at it but all of them??

I question that.

Talks of OOS investing are every where. In cafes, parties, gyms etc. To me this is a red flag signaling higher and higher leverage on primary assets, over investment and soon some major investor burn-outs. Scary to me.

So the real investors are being crowded out and pushed into the background. They will only be seen when things normalize.

I personally would tread with caution, research markets and run numbers well. If you were to buy, throw in a good cushion for margin of safety. I say this because this OOS investing is now at “herd” stage. It’s a topic on everyone’s mind esp in the Bay Area. My 19 yo nephew asked me for a 75k loan because a lot of his classmates are talking about it and getting into it.

Fact is since the beginning of June which is supposed to be high sale season, Home sales have slowed, DOMs are up and prices are dropping. On my own properties here in the SF Bay are I have seen Zillow values roll back by 100k. Now keep in mind these prices were going up by nearly $50k per month or more for the last 12 months prior, so we got to come out and say that the market is exhausted after running super fast, the buyer does not want to over pay any more. At the same time lots of new construction has come along. Lots of condo unIts and townhome development. If this situation persists prices have to keep coming down and normalize. Remember this is all just an outcome of demand and supply and not some exogenous event where banks are going belly-up etc which was what happened in 2008 starting with countrywide, Wachovia, WAMU etc.

Cant speak to the bubble but we did see prices roll back in the Bay Area for the first time in 15 months. I’d say it’s buyer fatigue and not a bubble burst. Hopefully we are not in an era where strippers own8 homes all with 0 down payments.

Could be stabilization, a pause, a correction or a crash. For sure the market is taking a breather after going beserk for the past 18 months. Prices have reached very high levels. Mortgage rates have risen by nearly 1% over the past 8 months. So for buyers it’s a double whammy of high prices and higher rates. Unfortunately none of us here know much about the financial situation of the whales who really move the market. By whales I mean big developers, hedge funds, banks etc.

The one day drop in Facebook and some tech shares were enough to offer me a trailer of what a recession might taste like. Strange thing is I had sold most of my short term holdings as they hit their price targets and was planning to sell FB the day after earnings. I know we are talking a different asset class here but if the downturn is coming, I’d stay in cash and not worry about going for max yield. In a down market if returns are -10% or more, your 0% will look rich.

Here is the artIcle on silIcon valley buyer fatIgue. https://www.forbes.com/sites/ellenparis/2018/07/25/buyer-fatigue-setting-into-silicon-valley-real-estate-markets/

We saw buyer fatigue in Nor Cal in June and July. Put this on top of all other articles that include a slowdown in SoCal, London, NYC, Vancouver, Toronto. We might just be hitting the breaks on the euphoric appreciation we saw in housing over the past 5-7 years. No crash yet.

Booms are followed by busts! We are enjoying a massive boom. There is no way to tell when a recession will happen. My theory is to follow Warren Buffet, who preaches to make money when you buy the asset, have the financial wherewithal to hold on to it forever if you could and always keep a margin of safety. I’d personally make sure to buy well. That is a deal or steal vs comps in the area you are buying vs simply buying because you want to buy or because the price looks affordable!! That requires maximum work and then run your numbers assuming a 20% drop in rents or 20% drop in values and see if you can still sustain. Do a stress test at 30% as well. If you pass this test, buy.

My zip is 94086. It’s done well given proximity to downtown and the new Apple buildings. The mobile homes in the area have made way for new single family homes. The rental market is robust so pulling 5k on a 4br home is not out of the realm. Sunnyvale is booming. Just know they are refreshing some condo development work in downtown which was on hold for 5 years because of legal issues. But not anymore. So supply is coming in as well. The downtown development project info is online, so check it out. It’s an interesting project. Overall your fortunes will 100% be tied to the tech companies. Good news is all the biggies play in Sunnyvale. Apple, Google, Microsoft (via LinkedIn) and many others like Amazon, AMD, nVidia, PayPal, Cisco etc are in the vicinity. If there is tech slowdown, it might dampen your returns but long term it’s very hard to bet against this area. I think it’s best to run numbers assuming a drop in value and rents and see if you can still hit the PITI.