Bay Area investing. Anything for under market value?
Physician · Oakland, CA · Member since 2017 · 60 posts · 28 votes
I'm going to chime in with advice I give a lot, including on my own podcast and to coaching clients. I don't know if this necessarily applies to you, since I do not know you, but I see this type of question a lot from an affluent new investor who lives in an expensive part of the country. My investment clients often fall into this category.
Beware the temptation to invest for appreciation. Generally, when new investors come into the market looking for an appreciation play, they come in at the top of the market. This is because they are seeing people around them who have captured a lot of appreciation, and this looks very attractive from the outside looking in.
The problem is this: the people who are now capturing that appreciation got into the market early. They probably were not even investors, but bought their property to live in and were not strategic in any way. The market went up around them, and they got lucky. Unfortunately, you cannot replicate this luck. New investors lured in at this point by the profits they see others taking are coming in at the top of the market and stand a good chance of getting burned.
Often times, they will pay out of pocket monthly for these properties, because the purchase price is so high that the rents do not cover the carrying costs (interest payments, insurance, taxes, maintenance, etc.) They justify this because they believe they will get appreciation out of the property, but if they buy at the top of the market, once the market turns, they will be under water and have to wait a long time for the appreciation. But, on top of it, they may be paying out of pocket while they are waiting. This makes no sense.
I remember, in 2007, before I became a full time investor, and was practicing law in New York City, one of my colleagues told me she and her husband owned an investment property in the city. My ears perked up. I asked her how much they were making per month. She said, "Oh, we're not making money right now, but we only have to pay $2,000/month for the mortgage because our tenant pays the rest. And we will make a lot of money when we sell." I was incredulous at this answer. I had too much pity to go back and ask her what she did when the market crashed shortly thereafter.
There is a way to protect yourself in this market, but it's nearly impossible in the high-value markets. Forget about appreciation, and invest solely for cash flow. Preferably, you have set a relatively high hurdle for cash on cash returns to equity as a guide for when you will invest, but at the very least, make sure that you are cash flow positive after accounting for all expenses, including interest, taxes, insurance, maintenance and a vacancy allowance. If you do this, it imposes discipline on you so you do not buy a bad deal, and it also means that, when the nominal value of the property decreases during the coming downturn in the market, you are still collecting cash from the property and can afford to hold it while you are waiting for the market to trend up again.
You don't need to worry about appreciation because cash-flowing assets will always appreciate along with the others.
I take issue with the person who advised you to buy in wealthy areas in a state like CA, as those are the ones least likely to provide you with positive cash flow. However, if you go out of state into lower-density, less affluent areas, you cannot go wrong by looking for the best school districts. The best renters are the ones who know where the best school districts are, and are determined to get their children into those schools, even if they cannot afford to purchase a home there. They will move mountains to pay the rent, to make sure that their children can stay in those good schools.
My two cents.
Jonathan
I'd say the Bay Area, including Oakland, is much more of a flipping market than buy-and-hold with "decent cash flow" these days. Are you open to Sacramento?
@Anita Ahuja I think it's going to be a tough road for you. The last thing that I saw was the average Bay Area home (expanding beyond higher priced areas like San Francisco and Santa Clara County) was $700K. That's basically your entire $200K if you put 25% down and want to keep $25K in reserves. When you hit "average" you're competing with everyone else who wants to become an owner-occupant, who doesn't want to pay $__K for rent, etc. Unless you're doing direct marketing I don't know how a home is going to go under-the-radar and sell for below-market. There are simply too many people that have money to invest in the Bay Area and also would list it as their preferred geography. By the time you extend out areas like Sacramento and Modesto you're pretty much in the absentee landlord boat.
With you as a physician and a husband in tech I'd imagine you do well financially. What you should think about is how long it will take you to "reload" for the next investment. If you're saving $200K per year you can buy low-cash-flow properties and make gains through appreciation over the long-term. If you can't save quickly you'll want cash-flow for the properties (likely tax-free after mortgage interest and depreciation) to help speed up that reloading process. Looking out of state would likely be a more viable option for you.
But you know your numbers better than I do, so I'd ask you to think about this:
1.) What would a median home cash-flow in the Bay Area?
2.) How long will it take you (without cash-flow) to reload for the 2nd purchase?
3.) You'll get a rough guess as to cash-flow per property and a timeline to acquire subsequent properties.
4.) How much cash-flow do you need to hit your goals? I'm guessing it's not $50K a year given your solid earning power today and a desire to live in the Bay Area.
5.) Does that "cash-flow need" and "number of properties" and "cash-flow per property" equation give you enough cash-flow in 17 years to hit your goals? I'm just guessing early retirement is after you put your kids through Stanford ;-) 22 years old at graduation - 5 years old today = 17 years.
6.) If you don't hit your cash-flow goals in 17 years then what is your plan to pull liquidity out of the (hopefully) appreciated assets at that time? Will that capital be enough to let you retire early?
With a husband in tech I'm sure one of you has already done the quick back-of-the-napkin math. So what does it show?
I'd say if you're going for cash flow, the bay isn't your market. If I were you, I'd take that 200k and partner up with an experienced multifamily investor in the midwest on a 15+ unit building. If you for sure want to stay in CA, then a smaller multifamily in Sacramento, Stockton, Modesto etc would be your best option.
Sacremento, Elk Grove , Stockton and Modesto with a good location . I believe these could be good starts.
$200k is an excellent start in my opinion! I would definitely love to invest in multi as well and I'm currently looking in to Sacramento, Fresno, Merced, and Stockton. I think these area have the best investment return if you like to invest in northern california. These area are close by and you can travel round trip in a day if needed. Depending on your criteria, I would definitely recommend you look for properties in a more affluent neighborhood (look on Trulia and choose the schools that are higher in rating).
Cheers!
I'm going to chime in with advice I give a lot, including on my own podcast and to coaching clients. I don't know if this necessarily applies to you, since I do not know you, but I see this type of question a lot from an affluent new investor who lives in an expensive part of the country. My investment clients often fall into this category.
Beware the temptation to invest for appreciation. Generally, when new investors come into the market looking for an appreciation play, they come in at the top of the market. This is because they are seeing people around them who have captured a lot of appreciation, and this looks very attractive from the outside looking in.
The problem is this: the people who are now capturing that appreciation got into the market early. They probably were not even investors, but bought their property to live in and were not strategic in any way. The market went up around them, and they got lucky. Unfortunately, you cannot replicate this luck. New investors lured in at this point by the profits they see others taking are coming in at the top of the market and stand a good chance of getting burned.
Often times, they will pay out of pocket monthly for these properties, because the purchase price is so high that the rents do not cover the carrying costs (interest payments, insurance, taxes, maintenance, etc.) They justify this because they believe they will get appreciation out of the property, but if they buy at the top of the market, once the market turns, they will be under water and have to wait a long time for the appreciation. But, on top of it, they may be paying out of pocket while they are waiting. This makes no sense.
I remember, in 2007, before I became a full time investor, and was practicing law in New York City, one of my colleagues told me she and her husband owned an investment property in the city. My ears perked up. I asked her how much they were making per month. She said, "Oh, we're not making money right now, but we only have to pay $2,000/month for the mortgage because our tenant pays the rest. And we will make a lot of money when we sell." I was incredulous at this answer. I had too much pity to go back and ask her what she did when the market crashed shortly thereafter.
There is a way to protect yourself in this market, but it's nearly impossible in the high-value markets. Forget about appreciation, and invest solely for cash flow. Preferably, you have set a relatively high hurdle for cash on cash returns to equity as a guide for when you will invest, but at the very least, make sure that you are cash flow positive after accounting for all expenses, including interest, taxes, insurance, maintenance and a vacancy allowance. If you do this, it imposes discipline on you so you do not buy a bad deal, and it also means that, when the nominal value of the property decreases during the coming downturn in the market, you are still collecting cash from the property and can afford to hold it while you are waiting for the market to trend up again.
You don't need to worry about appreciation because cash-flowing assets will always appreciate along with the others.
I take issue with the person who advised you to buy in wealthy areas in a state like CA, as those are the ones least likely to provide you with positive cash flow. However, if you go out of state into lower-density, less affluent areas, you cannot go wrong by looking for the best school districts. The best renters are the ones who know where the best school districts are, and are determined to get their children into those schools, even if they cannot afford to purchase a home there. They will move mountains to pay the rent, to make sure that their children can stay in those good schools.
My two cents.
Jonathan
I'd have to agree with @Jonathan Twombly and he has stated his answer more eloquently than I usually do to folks asking the same question. Investing in a single family home is how most people get started, but doing so today in a market like the Bay Area is a "low-upside, high-downside" potential investment, which you would never want to do. In fact, for investors that are stubborn and insist on doing so, I tell them to only consider it if they are breakeven on their monthly cash flow with the property AND they plan to hold for 20+ years. Even then, the investment is likely to perform mediocre at best.
The problem is that until folks learn how to invest, buying a multifamily property in another location in the state or out of state for cash flow may be just as (or more) dangerous for a new investor. My advice would be to find friends who have done investing in both and ask them to coach you. You will spend time learning, but the information will be invaluable. Alternatively, if you and your husband are accredited (earn a combined $300k or more/year or have $1M in net worth outside of your residence) you may want to look into investing with a syndication group to learn while having a professional be responsible for investment management.
Best,
Yousif
@Yousif Abudra - excellent (and eloquent) answer! You are absolutely right about the dangers of investing out of state when you are experienced as well. Syndicators can be a good option, especially if you don't particularly want to deal with the land-lording aspects of ownership and just want to participate in the financial rewards while you focus on your main careers.
Hello @Anita Ahuja
I have to agree with and like @Jonathan Twombly's post as well as what @Yousif Abudra stated. I'm just starting out myself and if there is one common thread I've read, either between the lines if not just stated out right, on more than one occassion, is that buying in any market for appreciation is or should be the last thing on your mind.
You're well educated, intelligent and have the drive to succeed, otherwise you would not be where you're at today. Don't rush into anything without understanding the numbers. Numbers don't lie and emotions will lead you astray.
When looking at investment properties, I look for the following benefits:
The old saying "icing on the cake", that's appreciation. Couple of ways to force appreciation are through expense reduction and rental increase. Improving rental units will attract better tenants, which will allow for higher rents, increasing cash flow, etc. By taking these actions, you're creating value and value in my opinion helps to increase appreciation.
But I believe you have to be cautions when counting on your appreciation. Depending on what's happening in your local market, appreciation could contract if say a major employer moves out or goes out of business. Workers leave the area in search of other opportunities. Vacancy rates increase, cash flow decreases, etc. This and and a whole lot of other factors could ultimately affect the appreciation that you're trying to increase and maintain. It's a cycle that needs to be understood and I understand that in the bay area it is not too likely that major employeers are leaving in droves or going out of business. Nonetheless, it's all about understanding the market area where you're interested in investing.
I feel like I'm starting to ramble on. So, the point I watedd to make was that regardless of what direction you ultimately decide to go, MF syndication or single MF owner, go by the numbers. Build in a buffer into your formulas when looking at and evaluating opportunities and you should be able to stay relatively safe.
Happy Hunting & Good Luck!
Cheers,
Michael
100% agree! If the numbers pencil as described above, you'll practically inoculate yourself from bad buys.
I believe the present tax benefits fade out at $150,000 AGI unless you're a RE professional. Something to throw in the calcs.
Best of luck, TB
@Tom Balch Fortunately, the tax benefits of real estate, like depreciation, are linked to the property and not to the person who owns the property. So even high earners get the benefit of depreciation. But it's only a tax deferment, not an elimination of tax. Your tax basis in the property decreases as you depreciate the property, so you owe more tax on the back end.
@Anita Ahuja Just saw this thread .. Everyone will give you suggestions on where to invest and where not to... its your job to figure out what to do with your money ... I would suggest you to read more and see who from the bay area is buying locally and try to meet up with them and try to understand why they invest in the bay and how they make the deals happen and what kind of returns are they targeting ...
Another option could be talking to coworkers, friends and family to see if they are investing in RE and what works for them ... Make an educated investment
@Anita Ahuja I pretty much agree with most everything the other posters stated. That said, I have been able to buy decently cash-flowing single family and multi-family properties in the "less desirable" areas of the Bay Area (eg: East Oakland and Richmond triangle) over the past 12 months. So, it is doable. The thing is, it took a lot of effort and time for me to find those off-market deals. You probably aren't going to find properties that pencil out on the MLS. So, another option is to find experienced, local investors who are buying Bay Area properties and invest with them.
unlike many others, I do recommend trying to invest locally. As a beginning investor you need to intimately understand your market, and it's easiest to do that near where you live. But understand that RE investing is a long term commitment. It's tough to get started, but once you get a foothold, it becomes easier.
Given that you already live in Oakland, it's a large and varied city for you to explore. As you undoubtedly know, it has gotten a lot of attention lately, and many areas have appreciated. I'd shy away from single family, as it's very hard to get near cash flow, plus you compete with home buyers. 2-4 units could be much more interesting for you to consider. Consider up and coming neighborhoods; Oakland has plenty.
Bottom line, here are you positives and negatives:
Pluses: you live in Oakland and can explore locally. You have $200k for a down payment. You qualify for the best loan rates. You have good income to deal with the first 6-12 months where you will probably need to invest in the property to turn it around and stabilize it financially and with solid tenants.
Negatives: the market is quite expensive now, so you will really need to ferret out a good deal and not over pay. You and your husband have full time jobs, plus 2 kids, so you'll need to be super(wo)man to deal with the real estate too! But maybe you have extended family that can help?
But, if you can persevere and get your first property locally, stabilize it and get good tenants in, aim at least for a break even cash flow initially, you will have a property that will appreciate in the long term. And the cash flow will grow as well. In your case you can handle an initial cash flow break even, provided you can get a decent property in a decent neighborhood, as you make enough with your day jobs for living expenses. Try to avoid the worse areas, as they are a hassle to manage, and are least likely to appreciate.
Worse case you can study this investment model, and it may take you 1-3 years before you pull the trigger. Maybe the market will soften and there will be more lucrative properties available. Right now everything is getting snapped up, but once the market turns, people are scared to buy and sellers come out of the woodwork!
I started investing this way in San Francisco. It took 1.5 decades, but I'm comfortably living off my RE investments and my wife quit her work recently too. You need to have a long term perspective to invest successfully in the Bay Area in my opinion. Good luck! 🍀
Anita, have you ever thought about investing in Southern California? So Cal is a great market and there are ample opportunities down in the scorching hot LA market. Let me know your thoughts on that.
@Ori Skloot, where would one even begin to look for 1) experienced, local investors and 2) off-market/MLS deals? My mom (in Pleasanton) has finally come to her senses and doesn't want to keep all of her hard earned cash in her savings account anymore - time to invest in RE. She has tasked me, her youngest, with the job :). Is there a Bay Area meetup you recommend?
@Anastasia Orth There are a number of meetups, usually they are posted in the meetup section of BP. Networking at meetups is certainly a good idea. As is going to the Bay Area summit @J. Martin hosts.
Like @Ori Skloot was saying, there are still some cashflowing properties in Richmond and East Oakland, where I own some stuff. @Katie P. will be having a meetup soon in Oakland. And as Ori said, we'll be having a big Summit in Oakland if you want to get a broader array of what people are doing out there.. @Leslie Bandy is an agent in Oakland and sent me some stuff that can produce cash flow, although I've been too busy traveling to get back! (I'm sorry Leslie!!) @Ryder Meehan has a fun meetup in SF - but mainly focused out of state (except this next meetup's cannabis RE theme ;) And make it down to Milpitas for @Johnson H.'s meetup. San Jose for @Jeff Pollack 's meetup. And SF & East Bay for @Bobby Sharma. All great people to meet up with. @Anastasia Orth, tagging you also for the meetups..
Sacramento is also an option not too far away. @Al Williamson, @David Oldenburg, and @Tapan Trivedi all have meetups up there, and know the area. Some guys like @Andrew Fingado have some activity in Stockton. .
As @Amit M. said, a lot of us here in the Bay prefer to stay local.
Personally, I'm waiting until the unemployment rate gets high, and starts improving, before I buy more. That tends to be when equity appreciation is most explosive in the Bay, and kind of doesn't kick *** as much for the several years after unemployment rates hit their historical lows. (Tends to be a recession after that..) But that's just my preference. Others are still doing well.
Go meet some folks, find what you need, and get started!
Good luck Anita :)
Nice! Thank you @Ori Skloot and @J. Martin :)
As J mentioned, there are still some cash flowing MFRs in Oakland. They're rarer than they used to be but still out there. I have a lot of clients also looking in Vallejo, Richmond, or Stockton where the cap rates are a bit higher.
Investing in Stockton in a good idea because of the low housing cost and high CAP rates however it's important to know which areas to invest in to get what you want.
You could do what everybody in the Bay Area typically do to get started in the rental market. Buy another house to live in and rent out your existing place. You will likely have bought it at least a few years ago and will have appreciation built in, with the commensurate lower property tax.
The alternative if you want to go it alone and not with a group of people or an existing syndicate is to wait until you get sufficient capital accumulated to purchase a larger multi family property.
I've been an investor in the San Jose area in multi families since 2014, and adopted the philosophy of purchasing properties that were no more than a 30 minute drive from my house. Having been a multi family owner for 3 years, I now feel like I have sufficient experience to venture out a bit further, although I still am looking within California.
Hope that helps.
Great advise from many others above- @Jonathan Twombly and @Yousif Abudra and many others! We have a daughter who lives in the Oakland area who is currently renting (only going to be there for for 3-5 years) and based on housing prices not even thinking of purchasing unless something amazing came along.
There are so many different ways to invest as have been mentioned- you can be completely passive and just collect a return monthly by investing with someone else more experienced in the area and not even have to deal with being the Landlord to taking on a multi unit and getting all the experience you want managing the property and learning all about acquisition, and everything in between.
We know a pretty good sized and amazing group of people in your area through our private lending group that we could connect you with if you would like. I know some of them have meetup groups and attend rei clubs as well as provide opportunities for people to invest passively with them short term 6-12 months on fix and flips. This is sometimes a more comfortable way for new investors to get started. Let us know if you would like references please. Happy to help.
You know, A lot of people took time and effort to post great advice here. It would be nice if the OP @Anita Ahuja would take the time to respond, or at least acknowledge that...