buy and hold and the power of Bay Area appreciation

24 Replies

I personally believe that any strategy for REI must match the particular market and the resources a person has available. There have been some recent discussions about the buy and hold strategy and of course there is always a debate about appreciation. As my market is the SF Bay Area, I strongly believe in both.

A large part of my strategy is to purchase properties, force appreciation and pull out dollars as values and rents go up.  I then invest those new dollars into additional properties.  For many markets outside of the BA, this might not seem sustainable nor prudent.  However, for me this has worked for a fairly long period of time. The single example I give today spans 13 years:

  • 2002 Purchased single story 3/2 ranch style home in Los Altos (my primary residence).  approximate price $1.1MM
  • 2003 Approximately $600k of additions/improvements.  Nearly doubled the size, now a 4/2.5 two story home.  For those outside of the Bay Area, a $600k improvement budget is fairly modest in this area.
  • Current market rental price is approximately $6k (source Craigslist)
  • 2015 Appraisal received today $3.2MM

Keep in mind that this takes into account any appreciation slow down that hit the property during the "crash".

Was buying a $1.1MM house in 2002 scary?  Sh#t straight it was!  Was spending an additional $600k to upgrade scary?  F*&k yeah it was! Am i glad I jumped in and did it? Hell yes I am!

I am looking forward to getting my cash out refi check and to go shopping for a multi-family residential.

The point of this post is to shed a little light on some recent history in the Bay Area market. Hopefully it will give some people who are on the fence about investing in the area something to think about.

I wish you all good luck.

-Arlen

    Sorry Arlen.  Cash-flow is king.  Appreciation is only icing on the cake.  

    Wait, are you telling me that your property appreciated $1.5MM in 13 years?  That's equivalent to owning 96 doors and making $100/door for 13 years.  What's the likelihood of your property going to be worth $6.4MM in 2028?  

    I have always been told that you can't eat appreciation.  What's up with this cash-out refinance?  You mean you can tap the equity from your appreciation tax-free?  Nooooo, that sounds too good to be true.  Appreciation is supposed to be icing on the cake.  Repeat after me.

    Appreciation is only icing on the cake.

    Appreciation is only icing on the cake.

    Appreciation is only icing on the cake.

    If you repeat a lie enough times, people will believe it's the truth.  I have also benefited from appreciation in the seven figures so I can't argue with you unfortunately.  Sigh........ Enough with my sarcasm.  I have to get back to work and try to make more appreciation money because I like the fact that I get to use it TAX-FREE!!!

    I think @Bob Bowling and @Jay Hinrichs might get a kick out of this post.  

    I totally agree!!!! It is why I argue till I'm blue in the face that high cost of living isn't a bad thing! I always giggle because I would kill to live in a metropolis! 

    Congratulations!! That's awesome!

    @Minh Le I know, I know.. I totally did it wrong.  It would have been so much more fun to deal with 96 doors over that 13 year period!  I only got to call the plumber 2 times during my time of ownership!  I feel so cheated :-(

    @Jay Hinrichs nothing wrong with chasing rainbows... I know the rainbow ends right here in the BA.  Picked up two 4-plexes in Mountain View in 2013 and recently closed on a 5-plex this past February in Oakland.

    @Arlen Chou

       Portland is not a bad place either.. but there are few places on earth that the RE moves like silicon valley... I grew up in Cupertino.. so I saw it from its beginnings.. Hwy 280 was not built yet.. and Stevens Creek at Hwy 9  ( deanza blvd) was still gravel road.. LOL

    and homes in Cupertino were 19 to 35k.

    @Jay Hinrichs I agree Portland is great.  I fly into PDX a few times a year to visit customers in Hillsboro for my W2 job.  Also my sister and her husband lived in Portland for a few years.  My brother in-law used to work for Nike in Beaverton.  Got to love the perks that Nike employees get!  I was looking into getting some properties up there, but then my sister and her husband moved back to Palo Alto and I did not want to pull the trigger without some local support.

    I think the Bay Area lottery hubris is confusing luck with skill. Cycles can be long but, unfortunately, they are still cycles and you don't want to get caught upside down when the trend is no longer your friend. It's ok to speculate and leverage but if you believe in the famous BB postulate of "perpetual appreciation" combined with no exit strategy and leverage then your going to be in for a rude awakening, the only question is when. Pride commeth before the fall

    @Steve B. "Pride commeth before the fall"... Really? 

    Nothing is perpetual, expect for time and nothing is guaranteed but death and taxes. I don't believe that I said the Bay Area market was perpetual. I am pointing to a FACT that I bought PRIOR to the bubble bursting, lived through the crash, and where my value is CURRENTLY. If anything, my post is acknowledging the existence of cycles.

    If you want to call 6 figures of TAX FREE cash in my pocket luck, I will be happy to take that luck all the way to the bank. 

    The fact is that EVERYBODY gets lucky and skill is nothing but the preparations for that luck. Prepare for luck and you will be successful... Don't prepare, and just whine that others are lucky.

    -Arlen

    Yep...I sure am glad I got on the rocket ship as the first bubble was blowing up here.  We bought our 1/1 650 sq ft. bungalow in 2004.  It burned in 2005, and we rebuilt a 2 story 3/2.  I'm sure it's doubled in value.  

    I don't want to cash out of my primary residence, but having that nest egg of appreciation under me still makes me more credit worthy when I want to pull  cash out of other property or originate new loans, and the $1500 monthly mortgage helps with the rest of cashflow.

    The thing is, it's hard to know when you're getting on that rocket and just how far it's going to go.  I just bid on an amazing 1 BR in E. Oakland that was painted like the American flag and all the colors of the rainbow inside.  It got 25 offers.  Mine was a conservative longshot at 16% over asking, and I came in 14th.  Too hot for me to buy right now, but it is a fun time to hold.

    @Steve B.

     Certainly there are many thousands of unintentional millionaires with Cali RE. However to come up with 1.1 mil in 2002 and another 600k to force appreciation probably took a lot of good old fashion hard work combined with many wise past decisions. I am sure there were some who decided it was better to invest 1.7 mil in other lessor areas instead.

    I see many miss the point to the number one rule for REI - location. It seems simple right, well it is all too easy to overlook apparently. We see many on BP invest thousands miles away to try their "luck" in various locations that truthfully they have no business investing in. In addition, I don't know how many posts I have read from self appointed experts who say you can not do anything with equity. What planet is that on?

    Currently, I invested in an area that has had a 400k population increase since 2000 - 10. That is like adding Cleveland and a 1/4 in 10 years. They built virtually zero new houses in that same time period. Rents are up 10% this year alone. I hope to get lucky like our friend @Arlen Chou ;)

    To invest in Bay area RE with 1.7 mil in 2002 is not luck, it is brilliant. Again I hear many say they are betting on appreciation...really? Did the Bay area long term appreciation already exist before the bet? Some might say that is like betting the sun will come up.

    @Matt R.

      the reasons folks say things like I can't do anything with equity.. is because in much of the US and especially in the quote cash flow markets.. those properties have no liquidity unless your a marketing company or TK company.   An individual Is hard pressed to sell a TK home for what they paid for them on the open market.. so the quote un quote equity that is in them is phantom at best... Its only the top tier markets that are not over run with rentals were homes will sell for true value.. and it can happen in each of the cash flow cities as well.. but its the top teir homes not the rental homes. once a rental unfortuantly always a rental in those markets.. Its not like CA or even Oregon were you can take a home that was a rental and then turn around and sell it to a home owner... Not going to happen in most markets there is of course exceptions but that is generally the rule and one I learned the hard way... So if you want cash flow your in it for the long haul if you buyer lower end cash flow.. If you want to exit.. then you need to buy in markets that have robust retail sales.

    and of course you can hit city pockets were there are turn arounds.. but those will generally be higher priced and not cash flow like the other rental stock

    Overleveraging of overstated equity in part caused the 1929 crash and the 2007 crash. There's nothing wrong with investing for appreciation (if you're in the stock market, chances are good that it's your strategy), you just need to recognize when to get out and go to cash. If too many people believe that the Bay Area appreciation bet is like "betting on the sun coming up," you ought to recognize that as a sign of the market overheating. Your house is only worth as much as what someone else will pay for it.

    @Christian Carson I understand the generalities that you are basing your reply.  You bring up 1929 and 2007 as anchor points to your statement.  Although history has a place and I do agree that if we do not learn from it we are doomed to repeat it... However, 1929 was a totally different world, both Geo-politically and economically.  As for your reference to 2007, my post specifically addresses that point in time.  I purchased in 2002 when real estate was starting to falter, economy was slowing, 9/11, etc. contributed to what would turn out to be a bubble bursting in 2007.  I am also presenting a fact about where the value of that same property is today.  There are no generalities here, I am giving specific points in time and dollar values.

    What you appear to be glossing over is the fact that I bought when prices were high, the bubble burst and the value of my property is even higher today.  The fact is the Bay Area market did not burn to the ground.

    Is the Bay Area RE market over heating like in the late 2000's... maybe.  But my, admittedly statically insignificant example would point to the "sun coming up tomorrow" if the market does crash today.

    This post was NOT intended to be a blanket strategy to be applied blind folded across all markets.  It was just a simple and honest example of what has happened in 1 simple case.  The intent was to give LOCAL investors who are starting up in the Bay Area one additional data point before they decide, based on generalities, that "the sky is falling" and that they cannot succeed in this hot market.  Although there are many people who are extremely successful in investing "out of state", I am certain for every successful out of state investor we hear about there are at least 10 who got burned and stay quiet.

    It is easy to get sucked into the idea that people have to get into REI as soon as possible, and the fact is that many people believe the cheapest and fastest way for Bay Area investors to do it is to go out of state. But cheapest and fastest are not always the best ways... Sometimes it pays to wait; save your cash, study a market until you know each street by heart and then make a decisive move.

    Again, I am not saying that this is a strategy that applies to all markets nor all investors.  It is just one strategy and one example of what has happened to one investor during a single cycle in the Bay Area.

    -Arlen

    @Arlen Chou

    Congrats on the appreciation. You've done well on that property - but I could hardly call it a buy and hold investment. It's your personal residence. You may have now received cash on your refi, but unless you are paying yourself rent, you do not have a cashflowing asset, and until you sell it you haven't made any real money. If you paid cash then you're only out taxes and insurance which I'm sure is not insignificant. But if you have a mortgage you're also out the interest paid. Your house is more akin to buying raw land with your profits coming from the sale. Only thing is you get the benefit of using the place to live in the meantime - and it sounds like a nice place!

    @Dan B. I would agree with you if you only look at a single primary residence, by definition the property would not "cash flow" as it does not generate income.  However, it is important to understand that "cash flow" and "investment" are not the same nor interchangeable as terms.  A simple example would be purchasing stocks or getting an eduction... there is no cash flow in either, but both are investments.

    To the regular civilian buying a home, they think it is an investment and they put money into it waiting for the day they sell to get their money out.  In this scenario I would agree with your analysis.  However, I believe that most people here on BP are past that point and understand the concept of leverage in an overall business plan.  My original post was for those folks, who want to make their money work for them and not just park it in their own home.

    In my case, I prefer to look at a broad picture and see my primary residence as part of an overall business strategy that contributes to "corporate cash flow". On a monthly cash flow basis, the residence does not contribute in a positive manner. However, when used as a tool for leverage, it has powered my ability to purchase 13 doors in the Bay Area within 2 years and build a "cash flow" positive REI company. The check that I receive from the cash out refi will go toward more property in the Bay Area, which will further add to my "corporate cash flow".

    From what I have seen, a lot of BA investors who own class A residental made a killing during the down turn around 2010 period. Investors from class A areas like Cupertino, Palo Altos, Los Altos were still able to take out big HELOC from their equity and paid cash for properties in east bay & central valley at fire sale price. Having cash helped them knock out the financing buyers. Once the market recovered, they were able to refi cash out, take out the original capital invested or draw additional funds out, since rent kept increasing, they can still cash flow with the bigger mortgages, so no money tie up & still cash flowing.

    Some of them pull cash out to do flips or do private lending, if you can take a 500K Heloc out at 3% and lend it out at 10%, that's 35K of cash flow for doing nothing, not a bad position to be in.

    Originally posted by @David C. :

    From what I have seen, a lot of BA investors who own class A residental made a killing during the down turn around 2010 period. Investors from class A areas like Cupertino, Palo Altos, Los Altos were still able to take out big HELOC from their equity and paid cash for properties in east bay & central valley at fire sale price. Having cash helped them knock out the financing buyers. Once the market recovered, they were able to refi cash out, take out the original capital invested or draw additional funds out, since rent kept increasing, they can still cash flow with the bigger mortgages, so no money tie up & still cash flowing.

    Some of them pull cash out to do flips or do private lending, if you can take a 500K Heloc out at 3% and lend it out at 10%, that's 35K of cash flow for doing nothing, not a bad position to be in.

     Wainaminnit, waitaminnit yer typing too fast!   OK, Wheeeeeee!

    Originally posted by @Minh Le :

    Sorry Arlen.  Cash-flow is king.  Appreciation is only icing on the cake.  

    Wait, are you telling me that your property appreciated $1.5MM in 13 years?  That's equivalent to owning 96 doors and making $100/door for 13 years.  What's the likelihood of your property going to be worth $6.4MM in 2028?  

    I have always been told that you can't eat appreciation.  What's up with this cash-out refinance?  You mean you can tap the equity from your appreciation tax-free?  Nooooo, that sounds too good to be true.  Appreciation is supposed to be icing on the cake.  Repeat after me.

    Appreciation is only icing on the cake.

    Appreciation is only icing on the cake.

    Appreciation is only icing on the cake.

    If you repeat a lie enough times, people will believe it's the truth.  I have also benefited from appreciation in the seven figures so I can't argue with you unfortunately.  Sigh........ Enough with my sarcasm.  I have to get back to work and try to make more appreciation money because I like the fact that I get to use it TAX-FREE!!!

    I think @Bob Bowling and @Jay Hinrichs might get a kick out of this post.  

    THERE'S NO PLACE LIKE HOME.

    THERE'S NO PLACE LIKE HOME.

    THERE'S NO PLACE LIKE HOME. :)

    "That's equivalent to owning 96 doors and making $100/door for 13 years" LOL

    I would have no issue calling a plumber 100+ times in 13 years with 96 doors.  96 doors clicking along would be a nice machine of activities creating wealth.


    Frank

    Frank Romine, Real Estate Agent in CA (#01957844)

    @Frank Romine really? That is 100+ x the cost and100+ x the time spent for the same money in your pocket...

    They say it takes an average of 4 hours per month per door to manage. This seems high but I assume this factors paperwork, turnover, maintenance etc...

    96 doors x 4 hours = 384 hours a month = 3 full time employees plus the rest of the services you would typically need. This is a business more than a single door investment perhaps. 

    It would hard to compare to one multi million door factoring the above management required.

    When you listen to podcast 113 with the author of the millionaire investment book, co written by Gary Keller...their philosophy is more like appreciation is the "cake" and cash flow initially is the icing as long as it's positive. 

    Maybe most of this is what the location can give in returns. If you live in a cash flow market you go that route. If you live in an appreciation market you go that route. With that said I will take all your doors in any big city coastal type market you got and where you can do 100% owner financing zero down style:)

    @Matt R.

      I think your about right on man power if your DIY.. a couple of my guys have right at 200 mid west doors C and B class. and its 2 partners working full time and full time maintenance... now they rent their own out and give referrals to lease bird dogs.

    If you buy in the right areas of the bay area, when the cycle dips, the drop will seem like a pebble under a mack truck. For instance, similar to @Arlen Chou 's Los Altos home, check out the article below on San Mateo County's rise and current lack of inventory.

    "Average sales price in San Mateo County has climbed to $1.4 million in February 2015, up nearly $500,000 from that same month in 2012, according to SAMCAR."

    36% in 3 years. Makes the next cycle dip a whole lot easier to digest. The reality is that the dips are smaller and the jumps larger than in most other places.

    Anyone who bought in San Mateo County in 2012 for $900k, worth $1.4MM today, nearly $700k in equity, can go get a cheap 3% HELOC and as @David C. said, do some flips or HML.

    http://www.smdailyjournal.com/articles/lnews/2015-...

    It may be a personal residence, but it is appreciation and access to cheap capital, opening doors to future projects. No hassle, cheap HELOC $ makes future deals easier to get done.

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