Adiel's Corner: Real Estate Q & A

Q: There is a shortage of homes in the market I want to buy in. What should I do?

A: There are shortages of inventory in some markets at the moment, due to very high demand, as written upon in the newsletter. I hear from the field that the shortages are likely to be short-lived and within a few weeks there will likely be more houses available to buy. Personally, I wouldn’t mind waiting a few weeks. These are long-term, multi-year investments. A few weeks shouldn’t make any difference. If you feel like you need to buy right now since the interest rates are low and may go higher, please refer to the article in this newsletter in which we report that the Fed says rates will remain extremely low until 2023: https://icgre.com/wp-content/uploads/2020/10/RCRR-0920.pdf

Q: I would like to buy a multi-unit that has 5 units and higher. Should I?

A: I would vote against it. The main driver for the performance of Single Family Homes over the long-term is the astounding 30-year FIXED rate loan. We talk about it all the time. The 30-year fixed rate loan is only given to “1 to 4 residential units”. That means, single family homes, duplexes, triplexes and fourplexes. The minute you buy “5 and over" you will get commercial loans, which may carry pre-payment penalties in the form of defeasance or yield-maintenance, are likely not to be fixed for 30 years, and may require ongoing information on the property performance by the lender. That is a whole other ball game. I would stick to Single Family homes (or duplexes in GOOD areas).

Q: Now that I bought a home in one of the market, I must buy my next homes in another market, right?

A: Let’s suppose that you bough a $200,000 home in a given market. That, in absolute terms (and likely relative to the area you actually live in), is not very much real estate. For people living in the San Francisco Bay Area, for example, SIX such homes will be a total of $1.2M worth of real estate, equivalent to a modest home in many parts of the Bay Area. I think that buying a few such homes in that same market, still would not amount to too much real estate. The word “HOME” can be misleading, as people in San Francisco, for example, automatically think “A HOME is over a million dollars”. In this example, a home is a mere $200K. In fact, we invest in these markets partly due to the affordable prices.

It’s fine to buy one or more homes in the same market. It is also fine to buy in other markets as well. This point is quite secondary. The main point is: buying good new homes and getting a 30-year fixed rate loans to finance them, which will likely change your future dramatically.