Is Bay Area market crazier than normal?

10 Replies

New to the forum, but not a total newbie. I wanted to hear people's opinion about housing market around Bay. 

I've been looking into Brentwood, CA which seems to be last area with house prices that make some sense. 

Math:

- 4 bed, ~2000 sq ft, ~5000+ sq ft lot, good schools 6+, 1990+

- 630-670k asking price

- property tax 1.3-1.6%, mortgage 3.2%

- after running some numbers, it gives me 3.3k-3.6k per month to own (mortgage, insurance, property tax, sometimes HOA, not counting utilities and maintenance)

- rents in the area are closer to 3k tho, but everything goes within a week or two, so I bet if you are patient, you could rent it with cashflow (saw couple houses that went on Zillow for rent 3d after closing and were rented out with cashflow after 7d)

So there is this upper limit of ~700k above which owning costs are way higher than avg rent (for same reason locations inside Bay do not make sense, I think). The case would be to buy to live in, and I know you should not mix investment with home to live in, but still, knowing that you can move somewhere else and rent this one out without loosing too much money is much more compelling. So then you can stick to 30y fixed and treat it as free money as some Youtubers say:D

However, there seems to be like 10 buyers per house, making it very competitive and final sales going for 30-100k above asking price (especially when it seems a trend to artificially lower asking price to get more people into the race).

I've only been looking at this since beginning of March and real estate agents told me that this crazy thing is going on for over a year and it is just getting worse, that you had to bid more and more, essentially driving prices up and up. 

I do realize this is worse scenario to buy RE if you even remotely think about it as investment but I want to stop paying someone's else mortgage:D

What are others thoughts about that market? Was it always that crazy? Would you stay away and buy 5 SFH with cashflow in other states?

Adam 

When I read anything related to San Francisco, the Bay Area, or anything near that I shake my head. Business Insider had a good article discussing the craziness of what San Francisco has become. I really believe it's why so many people are moving to Texas, Florida, and other mid west cities. We're nearly through a GLOBAL PANDEMIC and the highest real estate market in the US never even dipped. Prices are continuing to go sky high. 

(rant over) 

With that said I'd encourage you start with the basics. Running numbers on properties and better market research are paramount as an investor. As a rental property the numbers you described are TERRIBLE. I ran them in my spreadsheet in about 6 mins. Unless you're comfortable with cash-flow of about -$820 per month, nearly -$10K per year, and an ROI of -29% I'd avoid purchasing a $600K property for a rental. I used conservative expenses and $3200 per month rent which that property may not command. Keep learning and keep up the hunt. Cheers.

I was just out in Oakley and Antioch this past weekend showing properties and this very subject came up. In a nutshell the other poster is right. Those numbers from a cashflow perspective are terrible when you consider other states. If you want cashflow here in the Bay Area you need to consider a multifamily 2-4 unit. 

Yeah, I do realize from investing perspective they are terrible. My thinking is more like, I will live there for 2-5 years and then rent out to keep good loan instead of selling. Brentwood,CA seems the best from the worse. Other places like Livermore, San Jose have even worse numbers. I feel like picking home that does have some sense in renting vs the one that you are force to sell when moving out is better option (don't want to bet on prices going up + closing costs will hurt when living <10y). 

Jaron, may I ask if you used 1% home price as maintenance costs per year? I am not sure if we could use the home sale price for it, given that prices are artificially higher. Like if you buy home there for 600k, maybe for the maintenance cost we should use 300-400k. I dunno, it is tricky to pick the best from terrible...

@Adam Kuszczak Your real estate market is quite challenging no doubt. It's different to where I grew up and at my level of income I could never afford it. With that being said...

"I will live there for 2-5 years and then rent out to keep good loan" - This statement is full of risk. As soon as you move out and tenant moves in it becomes a bad investment. I'd approach REI from a different angle or look out of state like @Brian Garlington said. 

If I wanted a bag of quarters for the laundromat every month, I would buy in other states with "cash flow."  Since I want to build wealth, I buy in California.

@Adam Kuszczak

If you're firm on moving out of the property in 2-5 years you could run into issues if the market takes a turn.Timing is everything and flexibility will save you. If that isn't a firm time-frame and you could extend it if needed then you're in a better position. Or at least if you could afford to hang on to it longer if the market turned. Of course it depends on your long-term goals. I had a property that was cash flow negative when I moved out of it. It remained that way for years. I hung onto it for a lot of different reasons, but the last few years I owned it there was a small amount of cash flow. The thing is it was in the Silicon Valley and hanging onto it ended up paying off in the end. 1031'd into a 4 unit I was able to pay cash for. It just depends on what your goal is. Do you want cashflow now or wealth later?

Also, buying an investment in the Bay Area can be tricky. Not a lot of them cashflow when you run the numbers. You need to get really creative in your thinking and how you look at properties. Can you see a value add? How much space do you really need for yourself? More challenging if you have a family with kids, but I'll tell you if I were single with no kids my strategy would be different. I'd be looking for a single family fixer with a floor plan that lended itself well to creating two separate living spaces within the existing space. It's something I have a knack for seeing and visualizing when looking at floor plans. I have another single family that has a perfect layout to be a 2 unit property with very little construction costs. I have great tenants so I'm leaving it alone for now, but if they ever move out I have a plan for that property. 

Just my 2 cents.  

Or do both like I did........Have multiple in the Bay Area that appreictae in value.....do cash out refi and buy more out of state and in the Bay Area.   Make the sacrifice. If it's just you and a spouse, set your ego aside and buy a house with an in law unit or buy one and put an in law unit in it. The smart move at that point is to move into the in law unit. You'll only be there 2 to 5 years. Rent out the main house and you live (almost?) for free.   Then when you move out of the inlaw unit rent that out to someone else. 

Or buy a duplex/triplex in an up and coming neighborHOOD. You're only there a couple of years right? 

Or buy a 2/2 Condo....you and the spouse live there and you rent out the other bedroom to a traveling nurse. There are specific websites deidcated to rentals for traveling nurses.

These are just SOME of the strategies I have advised my clients to do.

@Brian Garlington

yeah that is what I plan, to buy out of state anyway. 

There is almost no duplexes or triplexes in nice neighborhoods in Brentwood, especially after 1990, that is the problem. All the house hacking, I read about it, so know the topic but at this stage of my life it is not an option. The question then becomes if it is worth overpaying around Bay vs spending that money (loan) out of state. And I know the answer is always: it is better out of state in this situation, unless you want to live in your own house and not rent. That is question for me to answer.

The main opinion I am seeking here is if this crazy market was always there in Bay, or is it extra crazy now. MeetKevin and Grapham have some videos showing stats that house inventory is super low, so I am already 6 months late to the party....

@Adam Kuszczak getting to the party late is usually better than not getting there at all... it just depends on when you think the party will end. The BA market has been crazy for over 30 years. People have always said that appreciation cannot continue, this is a massive debate on this forum. The question you need to ask yourself is how long will you stay in this particular market. If you plan to be in this market for 30 years, then the downside is minimal. If you want to play the swings in the market, then I would advise you to be extremely cautious. 

Keep in mind that we have gone/going through 3 rounds of government stimulus. All that has done is kicked the can down the road. We have not had serious correction in a long time, it will come, it is just a matter of when. So the bigger question you should ask yourself is "when" do you think the party will end and if you can deal with the hangover until the next party. If you think the party will end soon, or you don't think you can deal with the hangover then your time might be better spent getting ready for the next party or better yet be ready to take advantage of all of partiers that passed out after the party.

Sorry to the long party analogy, but I think you get my point. Hahaha

Good luck to you!