Should I invest in SF/Bay area
San Francisco, CA · Member since 2017 · 35 posts · 42 votes
Mike.
I started investing in SF a few years back and it was impossible unless you've got a large amount of capital. Since then I've been investing out of state in a couple of cities and its been going amazing! I'd recommend it for you. Have you looked at any cities OOS?
A lot of this depends...what kind of investing are you wanting to do? SF in general has no cash flow (if you're in it for monthly cash flow) and will require high capital no matter what strategy you're trying.
I live in LA and have always invested out-of-state. Lots of Californians do it.
What are you wanting to buy or invest in? Rentals?
Wow! Thank you everyone, I didn't expect such a fast response. I have not done any serious research in OOS, I will from time to time go on Zillow or Redfin, and look at properties in big cities. But as I keep hearing on the BP podcast, I don't know those markets. I would like to buy rentals, and have monthly cash flow.
If you want no cash flow but enormous appreciation, proposition tax benefit, and tax shelter, go SF. If you want 100/mo cash flow where a change in water heater or a roof fail can wipe out a year's income, especially if you need to go there because of something that you need to get your hands on, go OOS.
I see this kind of response often and it makes almost no sense. SF is an OLD city, plenty of OLD properties where something could easily go wrong and you're not even making any money on the property. You will also have what some would consider significant money already into the property and likely little to no equity at first (I get that appreciation happens quickly which is why I mentioned at first).
If you took what would be just your down payment you could likely get multiple properties that could be completely paid off and would likely cash flow 1% or maybe better. Taxes and insurance would be cheap. If you went this route you could still use the equity in the house if Bay Area markets cooled down in the future and enter at a later time. Unless you're really unlucky and a major downturn strikes everywhere at once you missed the signals...
OR
If you used the money you'd go into SF with you could likely either get a portfolio of properties or an apartment complex...
Try looking into areas that are within driving distance but still in CA if you want something a little closer then OOS. Places like Vallejo, Antioch or the Sacramento areas have potential and lower price points.
Vallejo and Antioch are also likely going to see prices drop significantly if the housing market cools off... when the major allure of the area is "affordable" things could get interesting (like they did last time).
@Matt K. If 1% is only the goal, I would need to be a multi millionaire for me to live off the way I am spending right now, 5k net (after taxes) per month is my monthly expenses. So I need a net cash flow of 500k each period if 1% is achieved. I've seen x2 in 5 years for a 400k PP + 100k rehab and sold at 1M, or a 500k PP with 3.5% DP then 100k rehab, 120k out the door sold 750k in 2 years. You don't lose/gain anything until you sell. If you don't know how to evaluate what's going to happen on a SF property, not accounting how old things are, then you are not doing your DD enough, it is easy to bring a 20k down from the price to account for that if you are buying a 600k property but it's impossible to get that much down on a 100k property. A property tax (500-700k) in CA has about 2-4k a year with the proposition, whereas a 250-300k property in TX is 8-10k a year. The management of a portfolio takes much more time/stress than that of just managing 1.
@Matt K. If 1% is only the goal, I would need to be a multi millionaire for me to live off the way I am spending right now, 5k net (after taxes) per month is my monthly expenses. So I need a net cash flow of 500k each period if 1% is achieved. I've seen x2 in 5 years for a 400k PP + 100k rehab and sold at 1M, or a 500k PP with 3.5% DP then 100k rehab, 120k out the door sold 750k in 2 years. You don't lose/gain anything until you sell. If you don't know how to evaluate what's going to happen on a SF property, not accounting how old things are, then you are not doing your DD enough, it is easy to bring a 20k down from the price to account for that if you are buying a 600k property but it's impossible to get that much down on a 100k property. A property tax (500-700k) in CA has about 2-4k a year with the proposition, whereas a 250-300k property in TX is 8-10k a year. The management of a portfolio takes much more time/stress than that of just managing 1.
I think we're talking different things here....
1) the 1% was about owning\ properties outright for what would of been a down payment on a place in SF.... I wasn't implying that it was a good use of capital, rather it was simply you'd actually own the properties. No loans, just takes and insurance.
2) No where did I suggest midwest for a place to invest to make money by appreciation, everyone knows it doesn't appreciate much if at all. That's not the allure of investing out there, it's the monthly cash flow. It'll be the exception rather the norm to cashflow in the bay area with only 20% down...
3) If we're talking buy and hold you're going to need 20-25% down.... if it was a primary residence you can do the 3.5, but most the time primary residence isn't investing (exception being househacking). I don't really know what's out there for flips/new construction but I'd imagine it's probably similar (more than 3.5 down) to buy and hold. It's nice too to have the 250/500k tax exemption on primary residence after 2 years, but you can 1031/cash out refi a rental so similar...
4) CA prop taxes are low, but things like income tax are higher... Texas has no state income tax (hence the higher property taxes).
5) For what you'd pay for a house in SF currently you could likely get a apartment complex midwest if you needed 5k mo to live off of. You could also see better appreciation on that by forcing it since it's commercial not residential (by no means an expert on this..) Refi and get you're money back out.
6) CA (bay area) is notorious for boom and bust, it's not like houses go up for ever, they come down at some point in time. I'm not suggesting to try and time the market but if you are banking on appreciation only what happens when the market goes down? Depending on your leverage/exit strategy it could create significant problems... more so depending on your loan terms.
7) I agree with you on the due diligence... but it's the same really most places. A place that is cash flowing you a 100 dollars really shouldn't be in bad shape where stuff is going to break (should likely be rehabbed) OR you have almost none of your own money (refi out) in it.
@Mike Schelske If you do forum search for "bay area vs out of state" or similar keywords , you'll find a plethora of posts on this subject from veterans. Take your time to read them. Also talk to other investors at local meetups. Form your own strategy based on your constraints. Hope that helps!
Hi @Mike Schelske, as a real estate broker, I would take my money to a different market. There plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.
A very good source of local analysis is rereport.com.
Hi Mike,
I have a lot of investors from the bay area specifically, CA and west coast in general that are looking for more of a total return play meaning cash flow and opportunities for appreciation. Playing the appreciation only angle is more risky not to say it can't play out over the long haul but in dips it may be harder to keep those properties if you can't pay the mortgage or when renter's have the upper hand and want concessions.
Texas gets a lot of that money for a variety of reasons as the cost of living is lower obviously, a pro business environment, center of the country for logistics hubs (like around Dallas area) hence, companies are moving HQs here or have very significant regional operations that are expanding. I was in Dallas yesterday as we recently acquired a 300+ unit in the area. The growth never seizes to amaze me. It's a company / job migration play that has been going on for some time and seems to have solid legs. I tell investors, if you look at the data and understand that these company announcements are 2-3 year plans before all the folks are in place that even if it slows down a bit it won't be a light switch.
How to play it? You can do it yourself through developing a team (more control but more time intensive); you can seek out good turnkey providers (less control but less time intensive); or work w/experts as a passive investor through syndication (little to no control and least time intensive).
Lots of folks face this same dilemma. It seems as though SF is a great place to make a lot of money if you are capitalized enough. Many investors choose to go out of state because they are simply priced out of their home market. Sometimes you have to walk before you can run.
If you can invest in the Bay area for the long haul 10+ years , historically this has proven to be the 2nd most profitable ( total returns) market in the nation since 2000. LA is #1 and San Diego is #3.
For example there are apts in SF that were $500 a month that are now $3000. Overtime this could have much more cash flow than other places that had more initial cash flow due to rent appreciation.
Lastly, initial price to rent is not always a good predictor for future profits. There are other factors that will determine total profits. If one chooses to ignore those other factors for the sake of initial cash flow it might be a good idea to learn more about the basic location fundamentals of real estate investing.
God luck!
It all depends on your personal financial position. Just staring out closer to home is always the best.
@Al D. you mentioned buying in the Bay Area in 2010, but you didn't say what city. Also, was it SFH's, 2-4's, etc?
Indeed it was a good time to buy, but finanacing didn't exist so mostly cash. But if your rents went up from 2010-now, as well as appreciation, you could refi, pull cash out, and reinvest locally. That's what I did, and I started in 2014.
Hello again everyone,
I just had a chance to read all the posts, there is a lot of information here for me read and study. What I have gotten from this is no matter what I decide to do, I have to do my due diligence. I have a basic idea that may be the easiest route to go, is if I use my VA loan and purchase a house. I could then rent out the rooms, and from there go to turnkeys in other states. I would like to have a LLC of my own in the future, how that will look is still in the planning phase.
1. So, I think my next question, is do I buy a house using my VA loan, then rent out the rooms?
2. If so, how long do I say in that property?
I know there are a lot of variables and I have been reading some blogs about the subject, so if anyone has done something like that I would love to hear about it.
@Mike Schelske Those questions are best answered by yourself as only you know your limits/constraints with regards to your near term finances and work situation.
That said, let me provide an anecdote to the VA loan...
One of my favourite AirBnB host has a nice 4 bedroom newer house in Vacaville. He works in Travis Airforce so has access to the zero percent down VA loan with no PMI. Think he only paid $10k in total for the closing costs.
He gets housing stipend and I think it pays for the mortgage. On top of that, he rents out the extra bedrooms on AirBnB, raking in a nice sweet side income. All these while living in a nice house in a nice part of town that's still appreciating. Not a bad deal at all.
I asked him why aren't there more of his colleagues capitalizing on this clearly unfair advantage. His reply was most of them just suck at managing their lives...
Thank you Jason, that is something that I didn't even consider.
@Mike Schelske No problem. Helps me clarify my thoughts on the topic anyways. If I may summarize,
- Identify your unfair advantages and capitalize on them.
- Identify your constraints and work out a strategy around them.