The following real estate transfers were recorded recently in the Hancock County Recorder’s Office: Dec. 20. Helen F. Burnine to Helen F. Burnine, 603 S. Oak

Will SF Bay Area home prices just keep increasing forever? Or will they go eventually go down and if so when?

Of course they won’t just keep increasing forever. There will eventually be a slowdown or pause, which is happening right now. House prices are determined by rents and rents have softened due to the large construction of luxury condos. I know this first hand because I’ve been a SF landlord since 2005, and most recently tried to find renters in May 2017 and December 2017.

For my 4 bedroom, 3 bathroom rental house in May 2017, I was receiving $9,000 a month. After 45 days on the market, the best two offers I got were for $7,500 a month = 16.7% decline. Instead of trying to rent it out for much less, I sold the house for $2,740,000 = 30X annual gross rent. I wanted to hold it forever, so my kids would have something to manage or somewhere to live just in case, but I just couldn’t take being a landlord anymore.

For my 2 bedroom, 2 bathroom condo rental, my previous tenants found the new tenants and I kept the rent flat at $4,200/month. In retrospect, I should have tried to raise the rent to $4,300 or $4,400 to cover the rising HOA and property taxes, but I didn’t want to risk losing them (landlord mentality now). The only “benefit” I got was not losing a month or more worth of rent looking for another tenant.

Here’s a more detailed chart highlighting the rents. They are down from the highs, but they have stabilized in SF.

I ended up reinvesting $500,000 of my SF rental house sale proceeds in June 2017 in much cheaper real estate in the heartland through RealtyShares, a leading real estate crowdfunding platform based in SF. The prices are closer to 10X – 15X annual gross rent (versus 30X annual gross rent), and yields/potential returns are 8% – 15% vs. -5% to +2.5% in SF.

Buyers of SF real estate and coastal real estate should be pickier now. But knowing how people lose their heads bidding on properties, I suspect there will continue to be huge overbids at peak prices. When San Francisco real estate corrects, it only corrects by about 10% – 15%. But we did see about a 27% correction during the worst financial crisis of our lifetime! I know, because I tried to sell this same rental house I sold for $2,740,000 in 2017, for $1,700,000 in 2012 and NOBODY wanted to buy it. In fact, I got a couple low ball $1,600,000 offers which I thankfully ignored.

Please do not listen to real estate agents who say you “must buy or be priced out forever.” We are in the late innings of this SF real estate bull run. If you buy property at this stage in the cycle, buy a property to ENJOY!

I wouldn’t be buying investment properties now in the SF Bay Area with cap rates under 3.5%, unless you see some golden expansion opportunity or hidden gem that somehow the madding crowd missed.

Finally, see the 10% stock market correction in February, and the continued malaise into May? It’s telling real estate investors to be careful.

Related: The Real Estate Investing Rule To Follow: Rent Luxury, Buy Utility

Regards,

Sam