Hello from San Francisco! Is the Bay Area right for me?
Hi everyone,
I'm hugely impressed with the quality of information I've found here so far, so I wanted to say hi and introduce myself. My name is Max, and I'm a San Francisco native. I'm in my late 20's and a Mechanical Engineer at Apple.
I'm here for 2 reasons: 1) I bought my primary residence in San Francisco in late 2014 and I caught the "bug" of real estate - I just can't stop looking at properties! I find it hugely entertaining. 2) All of the successful folks I've known in life have owned several rental properties, and really enjoyed the rental incomes as a retirement cashflow later in their lives.
So, I'm interested in learning more about purchasing rental properties.
I have a little over $325k in the stock market right now and I'd like to diversify my overall investments by moving a hefty portion of this into a rental property downpayment. My struggle is this: Ideally I would like to buy my first rental property within driving distance so that I can manage it myself - but as we all know, the Bay Area is quite expensive. Is the Bay Area really only a good deal if you're looking to make money on raising property values? Is it not a good cash flow environment? Would I gain a better cash return if I look in other markets, possibly out of state?
Or, if investing in a place in the Bay Area is possible for someone with my amount of free cash, what sorts of properties / areas do you recommend looking in?
Another question is: If I look in a cheaper out-of-state market where I would have enough for all-cash (or at least much more than 20% down), is this even an option you would recommend? It seems to me that with interest rates so low, I'd be a fool to put more than 20% down on a place no matter where it is. Am I missing something? Why DO people make all-cash offers? Related to this question is - would it be a better overall investment to pay down my current mortgage in big chunks over the next few years so that I can own my home outright within the next ~7years, and THEN start looking at rental properties? (I realize that this is more of a question for a financial advisor, but just curious if anyone else has been in the same boat!)
I realize these questions are a bit broad, and I'll look forward to narrowing my focus (and my questions) as I learn more.
Thanks!
-Max
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#2 All Forums Contributor
- Real Estate Broker
- Lake Oswego OR Summerlin, NV
having grown up in the Silicon valley.. and have done very well on bay area properties over the years.. It is IMHO you buy a primary in SF at all cost.. which you did.
you may want to look out in the central valley as Joe suggests.. there are also rental markets up in Wine country specifically Ukiah area that could be good.
Also you may want to consider the Oregon Market.. its a tweener vis a vi CA and mid west or deep south.. Out of state being mid west and other markets can work well you just need to choose very carefully and make sure you get hooked up with the best people possible.
The primary problem in the Bay Area is that the math is going to kill you.
If you keep your cash down to a minimum, you're going to end up with a big mortgage payment. On a quick scan of Morgan Hill, the cheapest property I found was a 2BR town home for $480K. If you do 20% down, your loan would be about $396K. Assuming a 4% interest rate, that's $1890/mo. Your property tax (assume 1.25%) will add another $500/mo. Ignoring utilities, insurance, and anything else, you'd have to rent it for $2400 just to break even. Putting down a large (or all) cash payment is the way to adjust the mortgage down and the income up.
You might buy cheaper in an area like Oakland, but you will gain the headaches and costs that come along with it.
We went out of state, and bought rentals in Vegas. The problem then is that you're completely dependent on other people for everything. I won't rant, but after going through 3 property managers, and doing a dry run with a 4th, I'm working towards getting them sold.
Hi Max -
Re location, just what everyone else said ^.
I believe CA has almost every REI opportunity class, and better weather than a lot of other states... there are some good threads on BP about Antioch (Lemontree/Peppertree) and perhaps Pittsburg as well. I drove around those areas a few weeks ago, and it's surprisingly not bad. If you're in soma that's only ~50 minutes away...
I think someone on BP bought 1/4 of a 4plex in Lemontree for 65k a few months ago. I see these units on CL a lot, sometimes with pretty lux interiors.
Best of luck!
Welcome to BP.
Sounds like you are doing great financial for your age. Congrats on purchasing a home in the SF area . If you are looking for cash flow it will probably be difficult to find in SF...but as others have mentioned there are likely nearby areas where you could do a lot better cash flow wise...Central Valley ,etc.
I would also look for an area that has current cash flow...but also a good chance for appreciation. Places with development going on, etc. I know a lot of people getting priced out of SF are looking to Oakland, but I know properties there these days aren't too cheap either these days..but I'm sure still cheaper than SF.
Another big issue with owning in SF iis rental control too, similar to cities like Los Angeles..the tenant generally has more rights than the landlord. Things are different in other parts of CA though.
Of course there are some great opportunities out of state , but management can be an issue for sure.
Another bay area hommey? Welcome home brother. I live in San Jose and I work for a tech company.
I invest in Sacramento, it's a 2 hour drive from San Jose. The best part is im not investing out of state so I still have control over the property. I would suggest look instate first before going out of state.
@Max Maloneypeople do cash offers because sellers will sometimes take a lower price because they prefer the ease and timeliness of cash transactions, another reason may be that they want to avoid the risk of debt or they are simply maxed out on debt. One nice option is to buy with cash and then refi later to get most of your cash out and put it in the next one. Then you get good prices and leverage.
Lots of people buy out of state primarily for cash flow. It is doable but you will see lots of discussion on BP about the risks. Like all real estate investing you need to do due diligence on the neighborhoods you are investing in, the people you are working with, and the numbers on the deals themselves. Done well, you can lower risks and improve your chances of making a good investment.
Good Luck!
Welcome to BP! good luck in your journey.
You should at least make a solid effort of trying to find a good deal near you. Contact wholesalers maybe? out of state should be your last resort at least in my opinion. I mean im not knocking it one bit, my last 3 rentals were out of state but only because I can no longer find good deals where I live. Keep digging there are some good suggestions on here.
Unlike the majority of people faced with this dilemma, you currently have the capital available to actually buy in the Bay Area with 20% or more down.
If you want to build long-term wealth, then invest in the Bay Area, there are plenty of opportunities for duplexes-fourplexes in middle class to upper middle class locations in the $500k - $1M range. The great thing about the current market conditions is that right now you can lock into a 4% or better 30 year fixed loan, which will allow you to achieve some solid day 1 cash flow in the Bay Area. Also you'll have the ability to add easy value to the property create equity. Additionally, in the long term (15+ years) the power of Bay Area appreciation and rent growth will undoubtedly add a large amount of money to your net worth.
If you're in need of short term cash flow or only want to own real estate for the next 3-5 years, then go the turnkey out of state route. You'll get some nice cash flow and the price of your home may not be as volatile as the Bay Area in the short term. You may gain a little appreciation, but nothing that will greatly affect your net worth. Also you wont need to do any work (except manage from afar) and you wont be able to add equity to the property via simple repairs/upgrades because the turnkey company has already done that and reaped the profits. Any capex hits will also affect your returns much greater than in a higher priced asset. Capex costs, although they vary slightly by region, are basically the same for any similar sized house. The problem with lower priced turnkey properties is that the proportion of the capex costs to the price of the house is much larger and if you buy multiple turnkey properties rather than 1 higher priced property, you're adding multiple roofs, HVAC systems, driveways etc to your portfolio that will eventually need to be replaced.
I also forgot to mention that as a high earning Mechanical Engineer at Apple, you'll be able to write down the mortgage interest expense on your properties if you get a loan rather than buy all cash.
Additionally, equity (wealth) grows tax free via 1031 exchanges whereas cash flow is taxed each year.
San Francisco has the worst price-to-rent ratio nationally...yes, dead last. I invest for cash flow, which explains why I focus on out-of-state investing.
I'm also live in San Francisco and I've invested nationally for over 12 years. If you want to meet up for coffee to further discuss let me know.
I generate 12%+ Cash on Cash and 20%+ Internal Rates of Return on every out-of-state investment. Investing locally means you will likely loose money for several years, before you're able to raise rents sufficiently to cash flow.
My belief is that investing for appreciation is speculation. You cannot predict appreciation.
I invest to generate cash flow and can predict cash flow on every deal to a 95% certainty.
Conservative use of debt is your friend. Leverage the bank's money to make more money. Someone at your age should never pay off your mortgage. Usage of debt is a risk, but you should rarely put more than 25% down on a single family rental purchase, doing so would be detrimental to your investment return.
That said, there are exceptions.
As you learn more about how to invest in real estate, you will have to learn how to leverage Other People's Money (OPM), this also includes the bank's money. Taking on the right amount of leverage (an appropriate amount of risk for yourself) is critical to the generation of attractive returns in real estate. And the ease with which you can obtain bank financing is one reason why real estate is usually a better investment than the stock market.
With $325k, I could invest out of state in 9 properties and generate $3,600 per month, $43,000 per year in cash flow. In addition, the appreciation would likely be more than 10% per year.
in addition, rents would rise each year and the risk associated with this cash flow would be quite low as they would all be newer homes in great neighborhoods.
Originally posted by @Account Closed:
I generate 12%+ Cash on Cash and 20%+ Internal Rates of Return on every out-of-state investment. Investing locally means you will likely loose money for several years, before you're able to raise rents sufficiently to cash flow.
My belief is that investing for appreciation is speculation. You cannot predict appreciation.
Jon - You do realize that IRR calculations/forecasts are heavily weighted to the exit price? Therefore you're blatantly contradicting yourself saying that you get 20%+ IRRs, but you think investing appreciation is speculation and you can't predict appreciation.
I find it very hard to believe that you can find a stabilized out of state property (like one Max would hypothetically be investing in) that can generate a 20%+ IRR. The only way you're going to get to a 20%+ IRR, is through value add short term investing or unrealistic assumptions. Any one can throw out claims like you have above, but I'd be very interested to see your financial models and assumptions to see how realistic they really are.
Additionally, you need to realize that no matter how high prices currently are in the Bay Area, they have only just now reached pre-recession levels. There's plenty of room for the Bay Area to continue this upward trend because of land scarcity, much more difficult lending practices than 2005, job growth, income growth, and pent-up demand from the Millennial generation. Many out of state markets have had a huge run up in recent years and have now greatly surpassed their pre-recession levels and that throws up a big red flag for me.
Additionally, there are plenty of properties locally that can cash flow day 1. I purchased an A+ located $1M SFR this year, that generates a 9% cash-on-cash return in the East Bay. Real estate is an industry built upon inefficiency, all it takes is a little digging and work to find a truly good deal.
Over the past 20 years (which includes 10 years of the worst market in recent history), SF home prices have increased 3.5x and SJ homes have increased 4x. Rather than simply saying appreciation is speculation, I challenge you to show me any market in the US that has experienced appreciation anywhere close to that. Additionally, although there's no rental data going back that far in history, I also guarantee that rents have experienced similar (or quite possibly more) exponential growth.
Are you telling me that you'd rather buy something turnkey in the Midwest that will most likely increase in price 2x over the next 30 years and maybe see rents increase 2x, rather than property in the Bay Area that will not only make you a multi-millionaire in 30 years or sooner when the loan's fully paid off, but will also be spitting off more rental cash flow than you know what to do with? Also what do you think is going to happen when turnkey investors eventually start exiting the popular out of state markets en masse?
The majority of out of state investing is shortsighted and built upon unrealistic assumptions and inflated numbers. Invest in solid property that pencils out, in a market with strong fundamentals, lock a loan in for 30 years and you'll kill it in the long run.
Originally posted by @Account Closed:
In addition, the appreciation would likely be more than 10% per year.
This is laughable! How can you predict that in the long run?
Originally posted by @Account Closed:
in addition, rents would rise each year and the risk associated with this cash flow would be quite low as they would all be newer homes in great neighborhoods.
So is this! How can you definitely say rents will rise each year? Also newer homes=new subdivision=plenty of excess land for development. What happens when an even newer subdivision is built next door and the price of your home/your rent decreases because no one wants to live in your subdivision any more?
For various reasons, but mainly strong population and job growth. And you're incorrect about your land argument. Land in desirable areas near city centers is not plentiful. You're assuming I'm buying in subdivisions outside if town. I am not.
If you have experience investing in several different cities across the U.S. you'd know that your assumptions are incorrect.
I would suggest that you don't assume something that you don't know. My IRR calculations assume a 5% appreciation rate. Very conservative. The markets I'm now invested in have experienced 7% appreciation in the last three months.
In re to your comments on the Bay Area, I would suggest you make a study of market cycles because the foremost marketing cycle expert Glenn Mueller has estimated that SF has passed a peak and is on its way down, so though I do plan to invest locally eventually, I don't believe that now is the right time to do that.
Best regards.
@Alex Vidal finally, feel free to take a look at the example investments on my website and you'll see that I am generating the returns communicated.
In addition, I've worked professionally in investment management for over 12 years (BlackRock, Franklin Templeton, etc), and I'm confident I know how to calculate COC and IRR correctly.
In addition, though I won't assume it, it's likely that if you're investing locally that your buying significantly older properties that required extremely high maintenance expense, which negatively impacts your return. Not so, with the properties I acquire.
In addition, your comments about the markets I'm investing in participating in the bubble and having an above market run up of prices is innacurate.
Actually, have you reviewed market charts of San Francisco, Oakland, Dallas, and Austin?
If so, you'd know that it was SF and Oakland that had a huge runup in prices and job loss.
In fact, Dallas and Austin had no runup in prices. The bubble did not affect them. In addition, they were the only cities to experience zero job loss throughout the recession. Some markets in invested in have experienced a runup, albeit a small one compared to SF, SJ, and Oakland.
I don't buy turnkey.
I am a millionaire and investing out of state for the last 10 years has added substantially to my net worth.