Investment Property vs. Own House – SF Bay Area

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Investment Property vs. Own House – SF Bay Area

Bastian Kneuse
Rental Property Investor · San Francisco, CA · Member since 2017 · 132 posts · 56 votes

Hi everybody,

I recently discovered the Bigger Pockets podcast and became an instant fan. I am new to BP and real estate investing in particular. I have done some research as well as read some books to familiarize myself with this subject and concluded that I would like to get involved in real estate investing. As I am getting more knowledgeable about the “ins” and “outs”, I am struggling with the following question: Should I purchase my own house first and then engage in investment properties? Or is there a scenario where it makes sense to continue being a renter, while investing in out-of-state properties?

Let’s back-up for a second…. I am currently living in the San Francisco Bay area (very expensive!!) and live in a rental property with my wife and baby boy. Our monthly rent pushes $4,000 (...did I say I live in the SF Bay area?). We moved to the SF Bay area about 2 years ago for job reasons (…you guessed it – technology) and currently rent a 2 bedroom house. Both, my wife and I have a comfortable 6-figure income as well as savings stacked away, which enables us to “swing” the rent. Most of our savings are nicely invested in the stock market; however I would like to implement a system that provides additional passive income on a regular basis, which led me to real estate investing as a viable option. I considered purchasing a home in the SF Bay area, but some arguments deter me: 1) I am unsure on how long my family will stay in the Bay area – there is a distinct possibility that we will move to a new location within the next 5 years. 2) Houses here are pushing the million dollar mark tying up a lot of capital, which could be used differently (season tickets for the Warriors, anyone?). 3) The SF Bay area housing market is extremely hot – I am very fearful about a mild to severe bust in the near term. 4) Buying a house in the SF Bay area would not leave enough ammo to pursue other investment properties.

I am currently looking into single family investment properties in Jacksonville, FL. (Seeing the words “investment properties” and “Florida” in the same sentence may give some people the chills, but I can back that up.) A) The Jacksonville economy seems to be very promising over the medium term – a lot of growth happening. B) My sister-in-law and brother-in-law are real estate agents in Jacksonville and can hook me up with good deals, excellent contractors and property management companies. C) I used to live in Florida and am familiar with how things are being done there. D) I have eyes and feet on the ground given parts of my family live there. If I would take a portion of my current savings, I could probably invest in 2-3 properties in the Jacksonville area for a buy-->fix-up-->rent-out strategy.

Long story short, I am very interested in some expert opinions on how to proceed in my real estate investment endeavor. I would appreciate any feedback…if good or bad.

…you made it! Thanks for sticking with me to the end. :-)

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Account Closed
Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
9y

@Bastian Kneuse I understand your frustration and pain. Buying a property in the Bay Area is great if you're looking to acquire an appreciating asset, but if you can't sustain many years of negative cash flow, then you'll be out of the investing game very soon. @Arlen Chou is definitely someone you should talk to if you have the ability to invest here.

Unfortunately for me and many others, I'm still young in my career, and the handicap of putting all of my eggs in one basket would significantly impact my standard of living while also making me pay a huge opportunity cost.

I have talked to a lot of investors here in the Bay Area, and concluded that if you want cashflow, go out of state, if you want appreciation, stay in the Bay. For newer investors, or those who don't have that much capital, you should start with properties that cashflow well. Once you don't need the cashflow anymore, you can purchase some properties in the Bay. The more expensive properties will give you negative cash flow and lots of depreciation, which will help with your taxes.

I actually bought 2 houses in Jax last year and so far, they've been great! The main strategy you should always focus on is to 'buy right'. You also need to trust your property manager.

I wouldn't worry about house prices in the Bay going down anytime soon. All of the investors that I've talked to say that the bust will be in the 5-10% range. At the end of the day, you have to look at the long term growth of the asset. What are prices going to be 20 years from now? From what I see, the Bay Area is still the place that all of the smartest kids are moving to. We have all of the top dogs in tech and we're still hiring! When I asked my dad if we're going to have a recession soon, he said, 'Don't ask me, I'll ask you. Is your company hiring people or laying them off? Are they starting or shutting down their programs?' Most people are bullish about the Bay.

Good luck!

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    I am a big supporter of continuing to rent when starting to invest. A personal home is a lifestyle decision and can be a albatross when wanting to invest. In your case it makes perfect scenes to be a renter.

    As for your investment plans I suggest you rethink the SFH route. Like buying a personal home SFHs tie up cash and do not cash flow well having high expenses and only one tenant per roof. Economy of scale is the key to income property investing unless the rental income is not your primary interest. If appreciation is most important be carful as there are no guarantees and a adjustment in the market will come.

    Dollar for dollar the best income investments are in multi units for cash flow.

    1Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    9y

    @Bastian Kneuse I am a big proponent of "think globally but buy locally" and a big fan of the BA market.  Normally I would say invest in the place you will live for a ton of reasons.  I also really like CA because of prop 13.  I have no idea what the property tax situation is in Florida, but prop 13 really benefits long term buy and hold investors in California.

    However, if you already have solid boots on the ground in Florida AND there is a strong possibility that you will be moving out of the BA in the near future, then I would say look at the Jacksonville market closely.  The only reason I say this is that once you move out of California, you automatically become an "out of state" investor, and all the headaches that come with that title land on you.  So why not start off in a city that you will have a stable team and then buy your "forever home" where ever you and your family decide to grow roots.

    Good luck!

    -Arlen

    1Reply
  • Maxwell Lee
    Real Estate Investor · Miami, FL · Member since 2013 · 474 posts · 214 votes
    9y

    $4000 in rent!! My brother-in-law lives in SF and I have seen him deal with that pain haha. Of course he brought it on himself as his office is in Mountain View and he used to literally live next door to work, but being a single guy he decided he'd rather pay $1k more in rent and have to commute from the city lol. 

    Ok, I could see the pros and cons of either route you're considering, but I think Jax is the safer bet for now. Since you quite possibly will be moving within 5 years, the benefits of buying are reduced, not to mention if you are correct and there's a brief correction in RE values, you'd be forced to hold on for awhile renting it out to get through the dip. I think the Bay area will be more or less immune to an overall collapse, but you may be hemorrhaging money as a landlord. 

    Jax on the other hand is a very safe bet for the mid-term. You are right that growth in many sectors is very strong and the rental market is quite healthy. The biggest hurdle most would have is finding a trustworthy team, but you happen to luck out in that department. Many RE investors actually rent themselves, so you would hardly be alone, and typically it's when they live in an A neighborhood of a high priced area, so probably similar to you. 

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    9y

    Well the biggest question about it is whether to buy the house for yourself or an investment property. My argument has always been for the investment property. I thought my dad and grandpa were both nuts when I was younger and trying to convince them that buying myself a house would be a great investment and they kept trying to convince me I was wrong. Now, however, that I'm into REI, I agree with them. Old article but explains why-

    https://www.biggerpockets.com/renewsblog/2014/01/1...

    I'm in LA and have had the same battle overall and I ended up going with all out-of-state stuff. 

    As far as Jacksonville, there are a lot of people buying there. It's not my favorite because it is lower on cash flow than other markets, but it's an options! If you're up for other market ideas, shoot me a message anytime and I can show you what I've been working with.

    0Reply
  • Bastian Kneuse
    OP
    Rental Property Investor · San Francisco, CA · Member since 2017 · 132 posts · 56 votes
    9y

    Thank you very much for the feedback. Everything piece of advice is extremely helpful in deciding what route to go. I tend towards continuing to rent, while building up a property portfolio. Obviously, I still need to more research on the market and type of investment property that I will target. However, since the direction becomes clearer to me now, I can dedicate more time on the investment route.

    I mentioned in my original post that I am fearful about an upcoming market correction. This may not be the correct forum to post, but are there any opinions on holding off investing for now and wait for a potential correction to pass? Also, are there any recommendation about up-and-coming markets that are worth taking a look at?

    Thanks a lot!

    0Reply
  • Account Closed
    Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
    9y

    @Bastian Kneuse I understand your frustration and pain. Buying a property in the Bay Area is great if you're looking to acquire an appreciating asset, but if you can't sustain many years of negative cash flow, then you'll be out of the investing game very soon. @Arlen Chou is definitely someone you should talk to if you have the ability to invest here.

    Unfortunately for me and many others, I'm still young in my career, and the handicap of putting all of my eggs in one basket would significantly impact my standard of living while also making me pay a huge opportunity cost.

    I have talked to a lot of investors here in the Bay Area, and concluded that if you want cashflow, go out of state, if you want appreciation, stay in the Bay. For newer investors, or those who don't have that much capital, you should start with properties that cashflow well. Once you don't need the cashflow anymore, you can purchase some properties in the Bay. The more expensive properties will give you negative cash flow and lots of depreciation, which will help with your taxes.

    I actually bought 2 houses in Jax last year and so far, they've been great! The main strategy you should always focus on is to 'buy right'. You also need to trust your property manager.

    I wouldn't worry about house prices in the Bay going down anytime soon. All of the investors that I've talked to say that the bust will be in the 5-10% range. At the end of the day, you have to look at the long term growth of the asset. What are prices going to be 20 years from now? From what I see, the Bay Area is still the place that all of the smartest kids are moving to. We have all of the top dogs in tech and we're still hiring! When I asked my dad if we're going to have a recession soon, he said, 'Don't ask me, I'll ask you. Is your company hiring people or laying them off? Are they starting or shutting down their programs?' Most people are bullish about the Bay.

    Good luck!

    3Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y

    What about flipping? Hard money loans? More than a few ways to skin a cat in local REI. Personally, I'd be more worried about stock valuations (where you are currently) than real estate (look at how much the stock market dropped vs how much BA RE dropped last downturn, and stocks are arguably more overvalued today than they were then, PE 10 = 16 mean, 27 in 2007, 29 today), and more concerned about investing out of state than either. If the above alternatives don't sound appealing, maybe buy some REITs and call it a day.

    0Reply
  • Account Closed
    Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes
    9y
    Sean Pan why can't he have both appreciation and cash flow in the Bay Area?
    0Reply
  • Jeff Keller
    Palo Alto, CA · Member since 2017 · 226 posts · 95 votes
    9y

    Five years is about the breaking point where owning comes out ahead of renting. Of course if you keep the property and rent it out, then that rent vs. buy is a meaningless comparison.

    If you compare actual sales price to list price you will see that high demand areas near Google and Facebook such as Palo Alto, Mountain View, and Los Altos flattened out in 2016. (They were some of the first to take off after the 2008 downturn). We have it plotted.

    Home prices in Silicon Valley have grown faster than inflation for decades. We've dealt with a number of people who moved out of the area and could not afford to buy a home when they wanted to come back.

    In 2008 home prices everywhere in the U.S. were hit. In 2001 the insane dot come bubble affected Silicon Valley home prices more than other areas. Neither of these imply there is a cycle to Silicon Valley home prices. There has been a change away from the 20% yearly appreciation some cities have seen but I don't think prices are going to drop.

    Jobs and the economy drive home prices. Both look stable or positive.

    I believe in investing locally. If you are going to be in the Bay Area, invest here. If you are going to be in the Florida area invest there.

    2Reply
  • Account Closed
    Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
    9y

    @Account Closed, if he can find a property at a low enough price point that can support positive cash flow then he should go for it ASAP! If not, let me know and I'll go for it :)

    0Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    9y

    @Account Closed thanks for the shout out and congrats on the JAX properties.  I hope to hear more about your deals at the next meetup!

    1Reply
  • Bill Henley
    Investor · Berkeley, CA · Member since 2016 · 45 posts · 43 votes
    9y

    Personally I am placing a bet on a big downturn in Bay Area single family residential. I moved here nearly 40 years ago. My wife and I bought a 2 + 1 in the East Bay in 1995. Offered $225 -- $5K under asking -- and got a new furnace and ducting, and a water heater, out of the pre-close inspection process. Those were different times! We are fixing to sell within the next 8 weeks. Comps are mid-900K, and $1M is in sight. About 400% appreciation in 22 years. Ironically, the decision to sell and get out arose from this same equity gain. My wife took out a HELOC about 2.5 years ago and has bought 7 properties, 21 units, in her hometown of St. Louis. The cash flow is now enough to replace my income so, at age 63, it's back to the slush belt for me. I'm sharing this ramble as a data point for how things can play out for a young family in a steadily-appreciating real estate market like the SF Bay Area. Also as one person's prediction that the time is right to take profits and get out at the top of the market.

    0Reply
  • Bastian Kneuse
    OP
    Rental Property Investor · San Francisco, CA · Member since 2017 · 132 posts · 56 votes
    9y

    Thanks for all the really really good and helpful feedback.

    Here are my take-aways:

    1. SF Bay area is more a play on value appreciation as opposed to immediate cash flow, which requires a longer holding period (e.g. > 5 years)

    2. Buy a home in the Bay area now and convert to rental property down the road (once moving out of state) could make sense, however this again requires a longer time horizon as well as dealing with the headaches of being an "out-of-state" investor

    3. Cash Flow is key when starting out in real estate investing, which supports out-of-state investing

    4. Investing in Bay area would tie up a lot of capital with no immediate return

    For me, I think, it boils down to two aspects: 1) time horizon and 2) capital. Hence, I am leaning more towards exploring out of state investment opportunities while continue to rent a home in the SF Bay area.

    @Account Closed I am very interested in learning more about your experience in the Jacksonville market. Please let me know if you are open to chat.

    0Reply
  • Harjeet BhattiPro Member
    Lender · Glenview IL- CDLP NMLS#230554 · Member since 2015 · 2k+ posts · 747 votes
    9y

    If you buy PR and you sell after 5 years (lets say you move out in 5 years). In your area calculate the rate of appreciation on yearly basis.  If the current value and after the appreciation value has added good value than go for PR.  You don't pay taxes on capital gain on PR. If you want to keep property as  an investment calculate all the expenses and income and see how much is net cash flow on that property+appreciation rate of that property. If all the figures make sense go for investment property. Compare both property outcome  which will give you right direction to choose the type of property and type of ownership. 

    0Reply
  • Account Closed
    Lender · Milpitas, CA · Member since 2016 · 376 posts · 248 votes
    9y

    @Bastian Kneuse absolutely! I love sharing information.

    0Reply
  • Bastian Kneuse
    OP
    Rental Property Investor · San Francisco, CA · Member since 2017 · 132 posts · 56 votes
    9y

    @Account Closed great! Let me know what's the most convenient way to connect.

    0Reply
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