BiggerPockets

Can you tell me, in this economy, why would people buy at such low cap rates and bet on appreciation? I don't get it.

One of three reasons:

1. They are not very good investors; and/or

2. They have so much cash and such a long investing time-horizon that they are confident that the investment will pay off long-term; and/or

3. They've determined that 6-7% purely passive income (assuming they do their numbers correctly and treat it passively) is not such a bad passive return in this market, and they are happy to accept those returns for the foreseeable future.

Btw, those in the #2 category are sometimes in the #1 category as well, as real estate tends to appreciate at around the same rate as inflation (historically), so if they don't have good reason to believe that their specific area is likely to see greater-than-average appreciation, they are basically just creating a cash-preservation strategy.

Now, that said, a lot of the investors in the #2 category buy in locations where they have good reason to believe that long-term appreciation will outpace inflation (due to changing demographics, lack of supply, etc).

Also, let me throw out there that a lot of investors believe the Bay Area will see appreciation that outpaces inflation strictly due to the geography of the location -- there isn't a whole lot of space for expansion on several directions, which means supply in the heart of Silicon Valley is limited.

The quick summary of the above is: If you don't have a good reason for investing in 6-7% cap rate investments, you probably shouldn't be...

There are three main "buy and hold" investing strategies we all consider on when looking at a property:
1) You are either looking for great cashflow (10% cap rate or higher)

2) Decent cashflow and equity play (any positive cap rate with the intent to sell within 2 to 3 years for equity profit)

3) Pure quity play - (could even be negative from a cash flow perspective) , but it is a hot emerging market and you hold onto the property for maximum of 6 months (or no longer than a year) with the intent to flip for profits.

Having been born and raised in San Jose, and still work here (at Realtor.com), I can tell you to get any cash flow at all for the Silicon Valley is remarkable.
When I first started looking at investments here, any property would automatically be underwater on your rent to mortgage ratio.

You were lucky if you could have someone cover most of your mortgage.
So to see a 6 to 7% cashflow is pretty amazing here.

Personally I would never invest in this area for cashflow. (If you wanted great cash flow you would have invested here 10 - 20 years ago).

The only investing strategy I would recommend for Silicon Valley (as also called out by JScott in #2), is to invest for an equity play. But you will have to hold to this property for 2 or 3 years for a real pay off.

If you want good/great cashflow - you will have to look outside the bay area and more than likely out of state.

San Jose California. Silicone Valley. A very affluent area. Lots of people paying in excess of $1000 a month for studio and one bedroom apartments. So if you can get a cash flow out of a property there you are in pretty good shape IMHO. 1) You have geographic barriers to growth The Bay the Ocean 2) There are lots of people who want to live there so they can become the next e miliionaire. 3)You have extremely high costs to build new buildings. I worked for a company that developed affordable housing and their costs were in excess of $200k per unit. 4) Average housing costs are such that not many people can afford to buy a house. and 5) There are lots of jobs in San Jose.