Looking for some advice on buying a primary home or do I invest

[Gerald Magtibay]

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.

[Paul Choi]

Originally posted by @Lane Kawaoka:

@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.)