Looking for some advice on buying a primary home or do I invest
SF Bay Area · Member since 2018 · 6 posts · 5 votes
Hi everyone, I'm fairly new to BP and would like to start investing in RE. However, my current situation is that I live in an expensive market (SF Bay Area) and I am currently renting a SFR. I have some cash saved up but I don't know if I should use that for a down payment to purchase a primary residence or do I use it to invest in RE and continue renting? Ideally I would like to house hack but since I live in an expensive market, I don't know if it would be worth it. Any advice would be greatly appreciated.
@Gerald Magtibay you are in a primary market and I suggest investing in a secondary market out of state.
San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.
It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work).
Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.
Great post but for me, I would not consider appreciation gambling, given the blanket statement. Yes, if you buy a property, don't do anything and bet you can sell a year later at a higher price is a form of gambling.
On the other side, you can buy a value-add 20 unit multifamily, rehab units as you go, bring rents to market, thereby increasing income and with efficiencies reducing expenses, appreciation will happen.
We have models to manage risk and all possible outcomes of future income and values. We stay away from "middle America" as macro data in job growth and population migration tends to favor the coasts and the south/southwest. Great sources of data are Yardi Matrix, Costar, broker quarterly and annual reports (Marcus and Millichap, CBRE, Colliers, etc.)
Hey Gerald Nice to meet you. You are in a situation I am all but too familiar with. I was at the phase where i had enough for a down payment on a home but lived in such an expensive market(Los Angeles). Just like you i wanted to "house hack" but buying something with enough units to offset my rent was just too much for me to afford. So I began to research ways I could invest my down payment and grow it till I am ready to do my first house hack.
BP had a wealth of information on syndications, REITS, and other forums of passive income but what really caught my attention was becoming a cash provider. After reading Matt Faircloth's book "Building Your Real Estate Empire using OPM" I was motivated to participate as a passive investor in these bigger projects by gaining equity in the upside of the operation. Large multi-family homes that were once out of my reach are now in the realm of possibility because of my role as a cash provider.
If you decide you want to embark on a similar path there are many Pro and Plus members here who offer their services as a deal provider and have opportunities waiting for people looking to invest. I would encourage you to look around and talk to many sources so you can use them as a base of comparison. A couple smart years of investing and you could more than enough to start house hacking in SF!
Also want any help or advice on the subject feel free to contact me Via PM.
@Account Closed - Thanks for your response, I'll DM you if I have any questions.
@Brian Garlington - Thanks for the article.
I rent in SF and invest remotely. Overall I'd recommend this as it forces you to build systems whereas if you live in a house you will become the property manager and contractor for it.
I did a live in flip while I was living in Denver to convert a 3bd into a 5bd + fi it up floor to ceiling. I'm glad I did it to learn more about what goes into a rehab but if I could do it over I would've just continued to invest in my cashflow markets instead. I had bought two properties remotely before I did this.
It's a much safer to learn buying for $35k/unit in the south or midwest than $350k/unit in the bay area. I need to go to a David Greene meetup to see some of the numbers house hackers are putting up locally but for now I'm perfectly happy getting a 20%+ cash on cash return in the midwest on 2-4 units.
@Gerald Magtibay - Congrats on getting involved in real estate investing and welcome to BP! It really is a great resource and everyone in the community is super helpful.
House Hacking in the Bay Area IS possible despite what a lot of people say. It is simply a matter if identifying the property in ways that others can't. Basically squeezing the highest and best use out of it. Sure you can go out of state and that's a great strategy for cash flow. You simply won't get the appreciation you will here in the Bay Area.
As @Brian Garlington showed, Oakland and the East Bay are some great areas to focus on as well as others around here we are confident will be lucrative in the next few years
We (The David Greene Team) have meetups pretty regularly and think it'd be beneficial for you to not only see what's possible, but meet others of the same mindset of all experience levels.
@Jim S.- Come through anytime!
This is a very situation specific question IMO. I think that if you live in a place like LA or the Bay Area, buying a primary has a lot of benefits as the promise of appreciation is an almost certainty. With that said, your personal life will dictate a lot... for example someone with kids may want the stability of home with a backyard in a good school district while avoiding the fear of rent hikes or having to move frequently. On the other hand, someone who is single or simply without kids may be ok renting and building wealth through investments.... 1,000 ways to skin this cat. Best of luck!
Great question and I bet alot of folks in expensive markets are struggling with this decision. Like @Matt Ward mentioned, there are many ways to skin this cat and it depends on personal preferences, family dynamics, funds available, time and experience available to invest, manage, rehab in REI, etc.
For me, I drank the Grant Cardone/Kiyosaki cool aid a few years ago and followed their model and thinking. Never went to their "courses" but just read up on their books and podcasts. With a wife and little kid, I decided to rent a SFH wherever we wanted to live in the Bay Area and pushed my savings and down payment money to multifamily and retail commercial real estate that produce income and returns, all located in the Bay Area or within 2 hours drive. I didn't want to househack because we did not want to live in or near construction nor near our tenants.
In a little over a year and with great partnerships, we have almost a 8 figure real estate portfolio that produce returns and essentially pay for some of my expenses, including rent. And we are still acquiring more value-add multifamily as we come across some great deals, all within that 2 hour drive. I'm glad I didn't buy a personal residence or else it would have been difficult to push capital towards income producing investments. Sure, I may buy a personal residence down the road but I would want my investments to pay for it. Also, I may want to live in multiple places throughout the year - hawaii, NY, other countries, etc. Freedom of time and choice is powerful!
2 quotes that may be controversial to some but helped me guide my decisions:
"Rent Where you Live - Own What You Can Rent" - Grant Cardone
“An asset brings cashflow into your pocket. A liability takes money from your pocket.” - Robert Kiyosaki
Just a few things to consider, coming from someone who did this.
If it's your home, then you may not want to sell it. That makes accessing the capital a little tougher -- you can't just sell and roll over the profits; you'll be doing a HELOC or cash-out refinance. I suppose the interest rates there are competitive compared to the fees on a sale, but sometimes I wish I had my investments more spread out such that I could just give up (sell) one asset of several in exchange for having some cash free and clear.
Consider earthquakes. It weighs on my mind that my situation isn't more diversified and subject to such a potentially catastrophic risk. There's earthquake insurance, and we pay for it, but everyone I know who has studied it has come back with questions.
Look into the landlord-tenant rules. It's worth thinking about how it might impact you. E.g., I believe Oakland just changed the rules on Just Cause Evictions to remove the exemption for small owner occupied properties. We screen tenants carefully and have had great experiences with 19 out of 20, but once we did have someone whose issues gradually worsened to the point that she was talking about buying a gun and eventually making threats toward us. We took our baby and moved out. Two different attorneys I talked to warned that we might be facing a long (like 3+ month) eviction timeline given the need for certain kinds of documentation, until they realized it was an owner occupied place (before the rule change). Ultimately this tenant actually moved out on her own as previously scheduled for completely separate reasons, thank goodness, so we never had to go through that and were only out of our house for a little over a week. But it's worth being aware that this can happen even when you are careful. I'll be honest, we enjoy single-family living now -- house hacking multi unit properties is a great way to get started, but for me it's been nice to have a little more space to ourselves.
Overall, it has worked out great for us and could be a good strategy for you, but those are just a few things to consider.
Good luck!
@Gerald Magtibay you are in a primary market and I suggest investing in a secondary market out of state.
San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.
It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work).
Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.
@Gerald Magtibay you are in a primary market and I suggest investing in a secondary market out of state.
San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.
It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work).
Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%.
Great post but for me, I would not consider appreciation gambling, given the blanket statement. Yes, if you buy a property, don't do anything and bet you can sell a year later at a higher price is a form of gambling.
On the other side, you can buy a value-add 20 unit multifamily, rehab units as you go, bring rents to market, thereby increasing income and with efficiencies reducing expenses, appreciation will happen.
We have models to manage risk and all possible outcomes of future income and values. We stay away from "middle America" as macro data in job growth and population migration tends to favor the coasts and the south/southwest. Great sources of data are Yardi Matrix, Costar, broker quarterly and annual reports (Marcus and Millichap, CBRE, Colliers, etc.)
@Gerald Magtibay even though a house hack isn't likely going to cover 100% of your mortgage in the Bay area it's going to be by far the easiest way to produce $1,000+ per month in passive income!
I'm a huge proponent of house hacking and would strongly recommend it!
depending on the area / price range you are considering - down payment might be your deciding factor .....what amount will you have saved and what price range are you considering ......house hacking at the higher end might not pencil out but you never know
Thanks everyone for all your replies. I really appreciate it and look forward to giving back to the BP community. You all helped me realize that there are other things I need to consider.