Buy first home in Bay area or invest and wait
sunnyvale, CA · Member since 2018 · 4 posts · 3 votes
Buy first home in Bay area or invest and wait
Most Popular Reply
Realtor · Mountain View, CA · Member since 2017 · 120 posts · 108 votes
8yNaina,
If I understand this correctly you qualify for a 1.5 mil loan, and have 750K for a down payment for a total purchase price of 2.25 million dollar property. At the moment the market is appreciating so homes are selling 20% or more over list. This happens frequently at this time of year. By the summer most of the yearly appreciation has happened and it is easy to determine what a home will actually sell for which make home buying far easier. Not cheaper, just easier to deal with.
There is nothing on the horizon which leads me to believe we are in for a market correction in the immediate future. The change in interest write off from 1 mil down to 750K and the lack of deductibility of more than 10K in State and property taxes did not put a damper on the demand and tick up in home prices this year. As long as the tech companies are hiring the home prices are going to expensive.
So waiting for a drop in prices is not a great idea in my opinion.
You have several choices:
1. You can buy a home for 2.2 million or less. In Sunnyvale or Mountain View that will get you a 3 bedroom nice town home but a single family home west of central expressway is no longer an option. I am sure you saw the press about the 800 sq foot home that sold for 2 mil in the Cherry Chase neighborhood. The average price in West San Jose is currently 2.2 million so that is an option. You could afford a nice home in the west part of Santa Clara, including in the Cupertino School Distract area.
2. You can continue to rent and buy an investment property in the bay area in a place where you may not want to live. With your down payment you should be able to be cash flow neutral at a purchase price of about 1.75 mil to 2 mil. The advantage to that is that you would be able to take advantage of the still available deduction of of the full interest on the mortgage and the property taxes and the appreciation can be added to your equity when you do buy a home to live in. You would not fall behind in down payment with the appreciation that we historically have here.
3. You can buy an out of state investment. You would have better cash flow but not likely to get anywhere near the same appreciation. You will have to pay taxes on the cash flow that you do get.
4. You could buy a multifamily home and live in one of the units. There are few places in Silicon Valley where multi family homes are in neighborhoods that are as well kept as in single family home neighborhoods. These duplexes are often above 2.2 million.
5. You can buy a single family home and reserve 100-150K of your capital. Then you can convert an existing structure or add a new Accessory dwelling unit on the property which can be rented for additional cash.
All the choices have their pros and cons. Nothing is simple, but in the long run owning property is a great way to expand your wealth.
25 Replies
- Lender · PA · Member since 2016 · 214 posts · 140 votes8y
@Naina Tara welcome to the community!
CA is a tough state right now so if you're seeing a lot of hesitancy on here, it's likely warranted.
With that amount of capital, I would continue to rent for now. While this continues though, I would learn more and more about other "up and coming" markets. Research these markets (i.e. why these are up and coming) and then apply those city characteristics to different cities that you and your significant other are more familiar with. Where did you grow up? How is that city doing? How are surrounding cities doing? Certainly, you can invest in what others are calling the best housing markets but acquiring the knowledge first to do so is vital.Once you feel you have a city (market) in mind, that is either already growing or you feel will grow soon - start investing there! You will get more bang for your buck and potentially beat us all to the next big city. That's how I would play it, that is! Learn the industry, study markets, analyze deals, invest wisely, repeat.
- Rental Property Investor · San Diego, CA · Member since 2015 · 107 posts · 37 votes8y
A good question to ask yourself is if you plan on staying in the Bay Area long term. If the answer is yes then begin the shopping in an area/neighborhood which has yet to see the full brunt of the bullish upturn.
Happy to discuss with you in further detail anytime.
- 8yLawrence LeungBusiness MemberProperty Manager · San Francisco, CA · Member since 2018 · 97 posts · 80 votes
@Naina Tara, congratulations on taking the first step towards RE investing and financial freedom. A great strategy that would be perfect for you given what you describe is a house hack (Buying a multi-family and living there too). Not only will you get yourself started with RE Investing regardless of whether we are at a peak or not (no one can predict when the market will turn) you can also get some home ownership tax deductions. For example, if you had a duplex and lived in one side and rented out the other, you can use any positive cash from the rental to pay towards your loan. The $4k in rent can instead go towards your loan as well and you get mortgage interest deductions for both the home ownership and rental portions. This is just scratching the surface of using leverage, gaining appreciation, taking advantage of depreciation while building equity and getting passive incone.
Happy to share more details and experience anytime.
KeyOpp Property Management4.6287 Reviews - Investor · Tacoma, WA · Member since 2015 · 84 posts · 42 votes8y
You didn’t say what you wanted to do with your life. If you plan on staying in the Bay Area you might as well buy something now. Are you going to be there for 1, 5, 25 more years?
You could take 750k/30k to get 25 $100kish rentals. If you could manage $300 a door that’s $90k a year in cash flow. Could travel the world pretty easy on that.
You could put $750k into a $2.5mil apartment complex and again, go travel the world, or be a bum, or just keep working, pay your 4K rent in SF and get rich faster.
- Realtor · Mountain View, CA · Member since 2017 · 120 posts · 108 votes8y
Naina,
If I understand this correctly you qualify for a 1.5 mil loan, and have 750K for a down payment for a total purchase price of 2.25 million dollar property. At the moment the market is appreciating so homes are selling 20% or more over list. This happens frequently at this time of year. By the summer most of the yearly appreciation has happened and it is easy to determine what a home will actually sell for which make home buying far easier. Not cheaper, just easier to deal with.
There is nothing on the horizon which leads me to believe we are in for a market correction in the immediate future. The change in interest write off from 1 mil down to 750K and the lack of deductibility of more than 10K in State and property taxes did not put a damper on the demand and tick up in home prices this year. As long as the tech companies are hiring the home prices are going to expensive.
So waiting for a drop in prices is not a great idea in my opinion.
You have several choices:
1. You can buy a home for 2.2 million or less. In Sunnyvale or Mountain View that will get you a 3 bedroom nice town home but a single family home west of central expressway is no longer an option. I am sure you saw the press about the 800 sq foot home that sold for 2 mil in the Cherry Chase neighborhood. The average price in West San Jose is currently 2.2 million so that is an option. You could afford a nice home in the west part of Santa Clara, including in the Cupertino School Distract area.
2. You can continue to rent and buy an investment property in the bay area in a place where you may not want to live. With your down payment you should be able to be cash flow neutral at a purchase price of about 1.75 mil to 2 mil. The advantage to that is that you would be able to take advantage of the still available deduction of of the full interest on the mortgage and the property taxes and the appreciation can be added to your equity when you do buy a home to live in. You would not fall behind in down payment with the appreciation that we historically have here.
3. You can buy an out of state investment. You would have better cash flow but not likely to get anywhere near the same appreciation. You will have to pay taxes on the cash flow that you do get.
4. You could buy a multifamily home and live in one of the units. There are few places in Silicon Valley where multi family homes are in neighborhoods that are as well kept as in single family home neighborhoods. These duplexes are often above 2.2 million.
5. You can buy a single family home and reserve 100-150K of your capital. Then you can convert an existing structure or add a new Accessory dwelling unit on the property which can be rented for additional cash.
All the choices have their pros and cons. Nothing is simple, but in the long run owning property is a great way to expand your wealth.
I don't know about out that way, but over here I can rent all day long for much cheaper than a mortage would be. We're talking nearly 600+k home rents for 2,500ish mo. Granted I lose out on appreciation, but at same time I won't be impacted by depreciation.
You have enough capital to exceed your rents, but it'll never come close to the up or down swing you'll see here. Also with no kids, you might want to consider renting untill you figure that part out, lifestyle, space, daycare/schools take on a different meaning then they do now.
- sunnyvale, CA · Member since 2018 · 4 posts · 3 votes8y
Thank you everyone for the great responses. We love California but are not sure for how long we want to be here. But that was the dilemma 4 years ago too. So there is no clear answer.
We are in out late forties so need to factor that in while investing .
The multifamily option does sound interesting. What cities would you recommend?
Marcy, thank you for the detailed options. Your option2 - to be clear we will still need to pay taxes on the rent we collect but can claim deduction on mortgage interest and taxes (even though we do not occupy the first home purchased)?
Tyler - "750k/30k to get 25 $100kish rentals" Sorry I am a newbie to these terms. Do you mean buying 25 rental properties and put 750K down -what is the 30k towards?
- Lexington, KY · Member since 2018 · 169 posts · 77 votes8y
Think of it this way,
You could buy a home for 2.2 mil today
Or wait for a downturn to reduce the price by lets say a modest 10% of 2.2 mil
That's 220,000 in savings
Divided by your "wasted" 4,000 a month in rent
55 months.
You could keep renting for 55 months or 4.6 years waiting for a downturn and break even if prices fall 10%
I would keep renting.
- Realtor · Mountain View, CA · Member since 2017 · 120 posts · 108 votes8y
@Naina Tara all property taxes and all interest on a mortgage are considered an expense in a rental property. You subtract all your expenses including depreciation from the rent and that is the amount you pay taxes on. There is no 750K mortgage limit or the 10K for state and property tax limitation on an investment property. The fact that you do not live in the property allows that. If you did live in the property you would have limitations. You should verify that with an accountant.
- Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes8yBad time to buy now. Just a guess. Time will tell.
- Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes8yWhat is the situation with your career? Do you have to live in the Bay Area or could you get away with going into the office a few times a month?
- Investor · San Jose, CA · Member since 2017 · 53 posts · 28 votes8y
The answer is yes and no:-) As my own circumstances have changed, my thought process has changed as well.
For the yes answer, when I first started working and decided to buy a home in the San Jose area, my goal was to buy as much house as my money would allow. Historically, this area has had a supply demand imbalance and with the continued tech concentration, I don't see that diminishing anytime soon. Over the past decade or so, as I have been able to move up to buy a larger house to support the growing family and then buy a house at the right school district, I continued to hold on to my older houses and renting them out. The name of the game here is capital appreciation.
That brings me to the No part of the answer. If I am looking for cash flow, buying a multi-family is far superior to the rents I get on my single family homes. The name of the game in this approach is cash flow. In the past 4 years, I have bought multi-family apartments and find that the cash flow there is great, and in this environment (not typical), the appreciation was good too.
And now to do both (Yes and No); If I was in your shoes trying to decide what to do, I would focus on finding myself a place to live in that I could call my own. I would pick as much house as possible in the best school district (even with no kids), to ensure that demand for my house would stay high if I sold. If the market continues to grow in the next year or so, I would either refi or take a line of credit from that house and buy investment property.
Hope this helps. Good luck on your decision.
Originally posted by @Account Closed:
Think of it this way,
You could buy a home for 2.2 mil today
Or wait for a downturn to reduce the price by lets say a modest 10% of 2.2 mil
That's 220,000 in savings
Divided by your "wasted" 4,000 a month in rent
55 months.
You could keep renting for 55 months or 4.6 years waiting for a downturn and break even if prices fall 10%
I would keep renting.
Except it's not that straightforward for the bay area market coz it could be 3mil before you get that 10% reduction.
My 5 cents is there's really no real "good" time to buy here. It's just a matter of what one can afford to pay the price. Yes there's always a price to pay no matter what. Even if one can find a cash flow property, there's a price in one's time in maintaining and minimizing vacancies.
I come from Singapore which is a similar market and was I glad to buy there what I could afford coz I've netted some significant appreciation before there's a slight adjustment. Those who own property always come out ahead in due time.
Originally posted by @Account Closed:
Think of it this way,
You could buy a home for 2.2 mil today
Or wait for a downturn to reduce the price by lets say a modest 10% of 2.2 mil
That's 220,000 in savings
Divided by your "wasted" 4,000 a month in rent
55 months.
You could keep renting for 55 months or 4.6 years waiting for a downturn and break even if prices fall 10%
I would keep renting.
You forgot to factor in the price appreciation before the downturn hit. Let's say 5% per year, 15% after 3 years, then the downturn and 15% price drop ...
Originally posted by @Matt K.:
I don't know about out that way, but over here I can rent all day long for much cheaper than a mortage would be. We're talking nearly 600+k home rents for 2,500ish mo. Granted I lose out on appreciation, but at same time I won't be impacted by depreciation.
You have enough capital to exceed your rents, but it'll never come close to the up or down swing you'll see here. Also with no kids, you might want to consider renting untill you figure that part out, lifestyle, space, daycare/schools take on a different meaning then they do now.
Don't forget the principle payment amount, part of the monthly mortgage payment. Even when a property is not cash flow, some of us small timer rely on equity building to build wealth.
- sunnyvale, CA · Member since 2018 · 4 posts · 3 votes8y
Thank you once again everyone for the great responses.
Joe, my husband's tech job could allow him to come in a few days every week. Not sure that is the ideal situation for us.
There are so many articles mentioning that the jobs are leaving the valley to the centre of the country. We were also looking at the option of moving to Austin (till a friend told us it would be a career killer to move out of the bay area)
- Investor · Tacoma, WA · Member since 2015 · 84 posts · 42 votes8y
Tyler - "750k/30k to get 25 $100kish rentals" Sorry I am a newbie to these terms. Do you mean buying 25 rental properties and put 750K down -what is the 30k towards?
Just throwing out an example. $30K down payment on a single $100k house.
I'm not saying the bay area isn't real life but reality is different in other areas of the country. You basically have enough money if you decided to do real estate investing full time to do that. Or a lot of other things if you felt so inclined. Or just go buy that home and keep on with what you're doing.
- sunnyvale, CA · Member since 2018 · 4 posts · 3 votes8y
Thanks Tyler. 300$ on a 100K property is around 3.5% per year. With a 10 year timeframe, can I assume there will be a 100% appreciation on these properties?
Or is it CA only which has historically seen that appreciation?
- Newark, CA · Member since 2017 · 22 posts · 7 votes8y300 cash flow per month 12 months 300x12=$3600 cash flow per year 3600/30000=12% cash on cash return
- Flipper · Napa, CA · Member since 2017 · 8 posts · 3 votes8y
Markets in SF and Eastbay have been appreciating around 11% -14% depending upon the neighborhood. At those rates, the value of your home would double in roughly 5 to 6.5 years. Let us say there is a dip for about 1 - 2 years since we are likely at the end of the cycle. Leaving your investment in place for 8 years you still double your money minus of course expenditures.
As mentioned above how do you want to use your time and money? Are you interested in cash flow or appreciation? Most rental markets do not DOUBLE in 8 years or less!
There are some multi-units in Oakland and Hayward for 1M-1.5M Million that is a thin budget.
Regards,
- San Francisco, CA · Member since 2015 · 5 posts · 5 votes8y
Greetings, OP and BP community!
I'm a long-time lurker, first-time poster.
Had to chime in here because this is very similar to my own situation -- buy in the Bay Area, or keep renting and invest elsewhere.
Lately, I've been leaning much more toward the "keep renting and invest elsewhere" option; I'm originally from the Midwest and, even after 2+ years in California, can't get past how expensive real estate is here. I also seem to have a mental block around being far away from a rental property if anything goes sideways or otherwise requires some hands-on intervention. That, and househacking would have been my first preference, but it doesn't seem like there are many options for that here in the Bay Area.
For folks that have experience owning property remotely, did you just opt to use a management company? If so, any tips on identifying a good property management company, particularly for remote property owners?
Thanks, and best wishes to all!-Randall
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes8y
If you are going to buy a house to live in you will need to have a min time horizon of 6-8yrs. This will allow you to recoup any closing costs you had to pay on the purchase. The time will also allow you to sit through whatever real estate cycle we are in. As for price. Buying something below your means at a comfortable price is best. You can live your normal life without making sacrifices on everyday things. When prices start to stall or fall the high-end market goes first. If you need to sell and its a buyer's market. The high end is the hardest to sell.
In the long term, Bay Area real estate is very resilient. There is a lack of land to develop new homes which create scarcity. History has shown that prices appreciate over the long hall. Regardless of how strong each market is, all markets go through different cycles. They go up, down, and sideways. Depending on your timing and perspective. This may or may not hurt you. Holding power is key.
As for out of state investing. I think if you are going this route you want to scale and buy multiple homes. This way its worth your time. The out of state properties I have I self-manage. I have my family to help me. If I didn't it would be very difficult. Ideally buying a rental property locally is the way to go.
Well more than any opinions about the market or the time to buy, etc....just run the numbers. If you're spending $4,000 in rent per month, how much would you be spending if you buy something? Which option is the cheapest?
My guess is the cheaper version will be to keep renting. If that's true, and you instead use the money you'd use to buy a house and put it into cash-flowing investment rental properties (likely not in the Bay Area), you could start a pretty serious flow of profit.
https://www.biggerpockets.com/renewsblog/2014/01/1...
I rent in LA and invest in rental properties. So obviously you know where my opinion lies on it, but it should really all come down to the numbers.
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