How do investors even cash flow in NYC or SF Bay Area, CA?

18 Replies

We know that HCOL cities have high rent, high property taxes, and high prices for everything. This year, my Slack acquaintance couple purchased a $2.6 million 3bedroom condo apartment in Greenwich Village, Manhattan with intention to rent it out in a few years to pay off their $4k/month mortgage. I'm skeptical if this HCOL apartment will even cash flow. If you're an investor in a HCOL major city, are you seeing any cap rates at today's prices in the HCOL cities where your properties are located?

They cash flow by making very large down payments (at least 50%) or paying all-cash. My clients that spend +$2 million for investment condos don't really care about cash flow. As @Collin Placke said it's typically about capital preservation, or just because they feel like owning properties in NYC.

4K is a tiny mortgage. It sounds more like they don't have a mortgage and the combined monthly HOA and taxes are 4K (which is what I would expect for a 2.6 condo). That condo would probably rent for around 9K a month and so not accounting for vacancy, etc, they would be cash flow positive.

Susan,

We cash flow all day, everyday just like other investments. My group of friends, about 10 of us, own investment properties from San Jose to Mountain View, Redwood City, San Mateo, San Francisco and all the way to the East Bay like Hayward, San Leandro and Oakland. Some of them actually post on BP, but they don't raise their hand and say "here I am."

Investing in high COLA is a competitive sport. It's not for the weak. My neighbor, a hi-tech couple, accidentally found out I invest in real estate here at home. They own a handful rentals in AZ before they know this. They hung out with me to learn the rope. I do volunteer work with the husband. Shortly after, they bought two buildings, totaling 16 units. Within a couple years, they're looking at a minimum of $1M in equity. $1M in equity at a 4 cap rate = $40k/year in income, not including their ROI. The deals they did were just slightly below market value. In fact, I passed one of the deals to them. Within a year, their cash flow has more than doubled. After 3 years of ownership, their cash flow has tripled. Lol! So much for no cash flow in the Bay Area and speculation, blah blah blah.

Another friend bought an 8-unit building in Oakland for $1.25M late last year. Appraisal came in at $1.6M. When he's done stabilizing it, we're looking at a $2.3-$2.4M value. How many rentals do we have to buy OOS and cash flow to get this kind of equity? The kicker is he will cash flow it massively. I used to invest OOS too and learned it the hard way. Then he sold all of his OOS rentals. 

Don't listen to the people who haven't done it, or don't know how to do it. If you want to be part of the 1%, start to think like the 1%. 

Have fun figuring it all out. It's a rewarding journey.

Best of luck. 

@Susan Tan

These are appreciation markets and appreciation is the name of the game. How (your entry point) and where you buy is everything. I know many investors in both SF and NYC who cash flow by scouting for good deals. It takes a capital, lot of work and patience.

But let’s say you don’t cash flow, Say o buys a unit for $1m, puts 30% down. His monthly cash flow tolerance might be $0 or even negative -$300.

In 3 years the property is worth 1.3m. That’s a pre tax gain of $300k on the $300k cash invested less $11k in negative cash flow in the worse case. So john D has “made” $289k over 36 months, that is almost 100% return or put differently 8k per month gain on one unit.

Contrast this to John’s other holdings in smaller cities “cash flow” cities where he makes $300 per door. He needs 27 doors to make that kind of “cash flow”.

If you look at past 5 - 7 year trends the numbers I am stating are simplified and very conservative. I know of properties that have doubted in value etc.

To add to Minh. The game is to force appreciation through renovations or out of the box thinking to increase the income on a property. I have zero faith in single family or condo's cash flowing in an appreciating market (which I believe was your original question). If you meant multifamily, I'd say dont listen to the naysayers, there's plenty of people making money even in today's market, check my profile if you want to see details.

Others have provided great input already.

Something that goes unsaid: 

The homes are expensive because they have historically appreciated. History does not always "repeat itself," but it's not a bad predictor. Trends are trends for a reason. Something else that tends to appreciate right alongside real estate values is rents. 

Between the following 2 links, you can chart if an area has had it's income go up faster than baseline inflation, or slower. Rents come from incomes. So if incomes go up faster than inflation, rents will tend to follow - also faster than inflation. Unless of course people come to their senses and we start building residential units in the Bay Area fast enough to keep up with demand -- seems unlikely any time soon.

So, sure, maybe that rental in the bay area on day zero does not have that crazy midwest cap rate. And since cap rate is traditionally calculated on CURRENT value, maybe it NEVER has that cap rate (since both value and rents just keep going up.... $10/$200 is $5%, $20/$400 is... also 5%). If that's the metric you swear by. On a pragmatic basis, assuming you don't do a cash out refi every 6 months, you will tend to see cashflow in real (or inflation adjusted) dollar terms increase over time, since your mortgage balance (and thus payment) is not going up (the $175 mortgage on the $200 property stayed $175 when the value went to $400). That's part of why so little of the stuff trades hands, current owners aren't in a big rush to sell, retirement and divorces and deaths (with heirs who do not want to be landlords) excluded. 

http://www.city-data.com/

https://data.bls.gov/cgi-bin/cpicalc.pl

The same logic cuts both ways. There are places where a SFR goes for $50k. Why does it go for $50k? Because the area hasn't appreciated in decades (in inflation adjusted terms), $50k is what 'normal' homes sold for in the 1970s! Guess what that tells you about the rents. And, indeed, you can pop open those same two links and confirm for yourself that incomes are not tracking with inflation. Those people are actually getting poorer and poorer each year, and like we just said -- rents come from incomes (where else could rent checks come from?). Often times you will also find a declining population. In 3 or 5 or 15 years when you want to sell, who are you going to sell it to? No one wants to live there, there aren't economic opportunities, that's why incomes are going down and people are leaving, the only reason such places aren't ALREADY abandoned ghost towns is that grandma's social security check still shows up, keeping some minimal baseline economic activity around, since grandma also needs her gin.

A recent change to California is tri-plexing. Or adding an ADU that can force appreciation on a SFR. We currently have one house in San Diego that cashflowed well. We moved back to San Diego and currently reside in the home, I have been running numbers on our property and other local properties on the MLS that would work if we would tri-plex. With the right General Contractor you can convert your garage into a one bdrm or studio, which rent for 1100-1400, and add a ADU (Acessory Dwelling Unit) aka. granny flat. if you add an ADU for $175-200 SF and add another 700-1000 SF to your over all property can generate a rate of return of $350-425 SF of value to the over all property, plus you can rent a two bdrm ADU for $1900-2200/month, plus the primary house is a 3/2 which can rent for $2100-2500. on the high end you can generate upwards of $6100 a month, on the low end $5100/month. If you can locate a house with a decent size lot 7000square ft or more and within a mile of public transportation you can forgo adding more public parking per unit. If you finance the whole project for 600k you can have a 30/yr fixed around $3600-3800  and a propety of this size of square ft selling for $800k or more locally on the MLS. This imagery property would have a hefty cashflow, they are out there they dont last very long on the MLS. Im not sure about it working in SF or LA, but it can work in SD. if that make any sense.

Originally posted by @Adrian Alfaro :
A recent change to California is tri-plexing. Or adding an ADU that can force appreciation on a SFR. We currently have one house in San Diego that cashflowed well. We moved back to San Diego and currently reside in the home, I have been running numbers on our property and other local properties on the MLS that would work if we would tri-plex. With the right General Contractor you can convert your garage into a one bdrm or studio, which rent for 1100-1400, and add a ADU (Acessory Dwelling Unit) aka. granny flat. if you add an ADU for $175-200 SF and add another 700-1000 SF to your over all property can generate a rate of return of $350-425 SF of value to the over all property, plus you can rent a two bdrm ADU for $1900-2200/month, plus the primary house is a 3/2 which can rent for $2100-2500. on the high end you can generate upwards of $6100 a month, on the low end $5100/month. If you can locate a house with a decent size lot 7000square ft or more and within a mile of public transportation you can forgo adding more public parking per unit. If you finance the whole project for 600k you can have a 30/yr fixed around $3600-3800  and a propety of this size of square ft selling for $800k or more locally on the MLS. This imagery property would have a hefty cashflow, they are out there they dont last very long on the MLS. Im not sure about it working in SF or LA, but it can work in SD. if that make any sense.

 Hi Adrian -

Thank you for your contribution to this post! I really liked what you said about creating/adding ADUs into existing Single Family Homes in order to "force appreciation" for these properties in expense housing markets, and potentially being able to cash flow that way - by possibly "house-hacking" by living in the ADU/converted garage, and renting out the main home.

I am based in Sacramento - where it seems like there isn't much of a market for Small, Multi-Family Properties (and when they do come into market, they're often in C class neighborhoods), but there seem to be a lot more deals in the Single Family Home space. Perhaps it might be a good idea to look into single family homes that have the potential to convert garage spaces into ADUs?

Before I delve too deeply into this rabbit hole, I wanted to go ahead and ask you of any potential risks or considerations I should think about, before jumping into crafting a strategy of targeting single family homes with the potentiality of turning spaces within them into ADUs?

Thanks again!! 


@Emil Pinlac Things to keep in mind

1. The cost of building the ADU can wipe out the gains from what you think is excess cash flow. ADU's cost 150-200K to build from ground up. Much better to convert a garage or basement to an ADU (depends on the city if thats allowed or not)

2. When the property is refinanced, you may not get the value you are anticipating i.e. A single family with a ADU maybe ok, but the moment you put 3 ADU's and use up all the backyard space it appeals to an "investor" and no longer appeals to the larger market of homeowners

3. If you plan to keep the property forever, then its a strategy that can work. 

4. ADU's can also be added to multifamily, which is what I am doing. It also appraises as an investment property and there's no debate as to how the property will be valued by the bank's appraiser.

@Sri L.

Hi Sri - Thank you for jumping in! 

Thank you for those quick tips on ADUs - they all seem very favorable in both the way they add value to the existing property, as well as in helping the owner further create cash flow opportunities by renting out the main property in addition to the unit (unless the owner decides on just occupying the ADU itself, haha)

I wanted to follow up with these questions - 
1) If a standalone ADU can cost between 150-200k estimated, do you have a rough idea of how much it would cost to convert a garage or existing backyard shed space into an ADU? Maybe somewhere in the neighborhood of $20-$30k? 

2) Additionally - do renovated garage ADUs come with both bathrooms and kitchen spaces? I would imagine the inclusion of the correct pipes and etc is what would make these things much costlier...?

3) I see you are based in the San Jose area - and are adding ADUs to Multi-family units (I'm assuming small multi-family like duplexes, tri's, and quads). If you own a quad, and add an ADU, does it change the financing of the property from residential to a commercial property? 

Thank you so much in advance. Glad to have heard from you! 

Originally posted by @Emil Pinlac :

@Sri L.

Hi Sri - Thank you for jumping in! 

Thank you for those quick tips on ADUs - they all seem very favorable in both the way they add value to the existing property, as well as in helping the owner further create cash flow opportunities by renting out the main property in addition to the unit (unless the owner decides on just occupying the ADU itself, haha)

I wanted to follow up with these questions - 
1) If a standalone ADU can cost between 150-200k estimated, do you have a rough idea of how much it would cost to convert a garage or existing backyard shed space into an ADU? Maybe somewhere in the neighborhood of $20-$30k? 

2) Additionally - do renovated garage ADUs come with both bathrooms and kitchen spaces? I would imagine the inclusion of the correct pipes and etc is what would make these things much costlier...?

3) I see you are based in the San Jose area - and are adding ADUs to Multi-family units (I'm assuming small multi-family like duplexes, tri's, and quads). If you own a quad, and add an ADU, does it change the financing of the property from residential to a commercial property? 

Thank you so much in advance. Glad to have heard from you! 

I wish $20k to $30k. In San Diego a 2 car, 400' hands off ADU conversion starts about $90k. If you take an active role, and know what you are doing, you can reduce the costs. If you do not know what you are doing you may pay more or get a poorly designed, built ADU.

Good luck

@Dan Heuschele Ahhhh, geez. And that's a ADU conversion on a TWO-car garage, right? Starting at $90k in SD....

I'm hoping that the costs to convert a two car are cheaper in Northern California - maybe @Sri L. could provide some insight on what San Jose costs look like for these types of projects. 

As a current novice in this whole thing, I would be looking to find a specialized contractor that has experience and has converted ADUs before. Hopefully I don't have to break the bank to make that happen. 

Originally posted by @Emil Pinlac :

@Dan Heuschele Ahhhh, geez. And that's a ADU conversion on a TWO-car garage, right? Starting at $90k in SD....

I'm hoping that the costs to convert a two car are cheaper in Northern California - maybe @Sri L. could provide some insight on what San Jose costs look like for these types of projects. 

As a current novice in this whole thing, I would be looking to find a specialized contractor that has experience and has converted ADUs before. Hopefully I don't have to break the bank to make that happen. 

I suspect your total cost will be close to the same.  If your were in Fresno, I suspect it could be less.   However, at $90K, you need only $900/month rent to achieve the elusive 1% rule in coastal CA.  I realize it is not really a apples to apples comparison because 1) you have paid for the land 2) You are giving up a garage.  But if the garage and land are not be used, then you are converting something that has minimal use to you and making it produce positive cash flow.

I think I could never do without a garage.  I currently have 5 cars of garage with 3 of them being extra deep  (deep enough to fit a universal gym and cabinets in front of the cars) and they are full of stuff.  Currently only 1 car fitting in the garages, but I often am able to fit 2 cars (I have 4 vacations planned for this summer, but I also want to get back to fitting 2 cars in the garage).  I am considering adding a storage container in hopes that will make the garages less full (I may be dreaming).  Too many hobbies, too many toys, too much LL tools, appliances, parts.  Basically a lot of stuff, but I use most of it.

Haha, @Dan Heuschele  don't give me ideas... as far as Fresno goes. haha. 

I'm still relatively early in my journey trying to navigate all the ins and outs of RE investing, but I figure keeping ideas like house-hacking SFHs by living in the converted ADUs on the shelf as potential niches could definitely be beneficial to me if the small multi-family path doesn't work out here in Sacramento.

And - haha, hey, a storage container could be a cool home improvement project to work on in your spare time! It'll help reduce clutter.. if that type of thing bothers you. haha. If I were to live in the garage and rent out my main house to a family - that lack of extra storage space as well as lack of privacy are things to definitely consider for the tenant as well, huh? 

Maybe a way I could help recoup some of that storage space, would be to build a sizeable shed in the backyard. That shouldn't cost $90k.... right? haha. 


@Emil Pinlac -  My answers below:

1) If a standalone ADU can cost between 150-200k estimated, do you have a rough idea of how much it would cost to convert a garage or existing backyard shed space into an ADU? Maybe somewhere in the neighborhood of $20-$30k?

I haven't had one quoted but if I had to guess 60K-90K? Mostly because you have to do electrical and plumbing to code and most detached garages/sheds have concrete foundations with no crawl space, so they literally have to break through the concrete to draw plumbing and electrical. After permitting sometimes the house might get a new tax basis too (I have not personally verified it, but I have read through ADU documentation in Oakland that says when final permit is closed, the ADU value (cost of construction) can be added to the property tax basis)

2) Additionally - do renovated garage ADUs come with both bathrooms and kitchen spaces? I would imagine the inclusion of the correct pipes and etc is what would make these things much costlier...?

Yes if you are looking to do work, then you might as well get top dollar by adding bath and kitchen.


3) I see you are based in the San Jose area - and are adding ADUs to Multi-family units (I'm assuming small multi-family like duplexes, tri's, and quads). If you own a quad, and add an ADU, does it change the financing of the property from residential to a commercial property?

It will be treated as a commercial property (if you buy a triplex and add 2 ADU's) as long as you have 5 certificates of occupancy from the city. Lender gave verbal confirmation but I haven't actually completed the refi yet.
 


@Emil Pinlac I have heard of problems such as, if you have a home with unpermitted rooms or garage they have to be torn down or repermitted which can be an unexpected cost. Im am not sure what the cost of ADU are per square foot up in NoCal, but here ive talked to 2 of my General Contactors(GC) that I do work for, ive been quoted between $175-200 square foot. But added expense are architectural design, Soil Engineering, but some communities have pre-approved ADU designs at no addittional cost to $500.00. Some local engineering city depatments have up to 3 designs and stream line these designs. i would recommend looking up Maxablespace.com I am not affiliated, they have good resources for ADU and jADU. Hope this helps.

@Adrian Alfaro

Hey Adrian! Thank you for your insight AND for the link, man. I will definitely check it out. 

As an addendum/follow-up to finding Real Estate deals with unpermitted ADUs in the back lot, or an unpermitted converted garage - would I be able to pass the cost to tear it down or re-permit as a discount on the overall purchase price of the deal? 

Also - would I need to renew a permit every year for ADUs? 

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