I understand we've discussed the same topic again and again. But, is it still good to buy an investment SFH in bay area (south bay, specifically) today for appreciation purpose?
The reason I'm asking is because of bay area's appreciation% record. Even the cash flow will stay negative for a long time, but ROI may beat the cash flow properties in the long run.
For example, assume that we have 500k cash today:
Case 1: buy a 1.5M SFH in south bay. Based on the appreciation% record in the past 5 yrs. The property will profit 1.5M (~100%) after 5 yrs, minus the loss from negative cash flow.
Case 2: buy cash flow properties in the other locations. The cash flow is ~40K/yr (CCR=8%). They only profit 200K after 5 yrs, it's far less than a SFH in south bay.
I am a stronger believer in the wealth accumulation from buying a home in the Bay Area. Doing so has provided my family with a great return on investment and long term wealth. For example, I purchased a town home in Santa Cruz in 2002 for $325,000. I put $65,000 down. It went through the increase in appreciation, then the crash, and then i sold it in 2016 for $525,000. Even with the negative cash flow I made $140,000 profit plus $250,000 of the mortgage was paid off during that time period. I walked away with $390K in my pocket. 10K a year profit on a 65K investment is not bad. Plus, today the town home is worth about 650K. I invested in another property instead so I did not lose that additional 125K profit. There are not too many other places where you can make that much money in such a short period of time. My primary residence in Palo Alto went quadrupled in 20 years, again going through several cycles of ups and downs. No one can tell me that these were bad investments.
my suggestion: search for “cashflow vs appreciation” on the forms here. You will get a lot of detailed info of basically the Cali guys vs cashflow investors.
The question I have is do you believe that appreciation will continue at the same pace over the next 5 years? Do you believe that a home that costs 1.5 million will double in value?
In order for appreciation to continue at that rate there have to be a corresponding increase in wages and wealth in that area that will enable people to be able to afford those prices.
Interest rates are going up. This alone could make affording a more expensive home more difficult and negatively impact appreciation.
@Anthony Gayden at those price points interest rates dont affect sales ( to a certain degree) simply because most folks will be moving up and putting HUGE downs.. 50% or paying cash..
Were interest rates affect is say what i do.. that 450k starter home.. on my one project right now we have lost probably 3 or 4 buyers because payment was a little to high for them.. last year they probably bought.. but that has not stopped us we sold 12 plus homes since Jan 1.. and will be sold out by May so 6 months to sell 23 homes at 420 to 475k.. which is middle of the road were we are at..
but i can really see it affect other areas were wages are more set.. than on west coast were wages can be high stock options and other entrepreneurial things can happen to create more liquidity. And so far we sold two homes for cash just as an aside.
I grew up in Cupertino my parents paid 28k for their home in 69 worth 2.5 today.. I bought my first home in Palo Alto for 185k probably worth close to 3 million today.. and its nothing special..
its just hard to argue against that market in any way.. If i was living there and had the means thats where i would be buying..
I've purchased my first SFH in Santa Cruz 2 years ago, and appreciation has gone way up as we know this area can do. However, I do not plan on the appreciation continuing over the next 5 years, as crashes happen as well, let's not forget.
So I'm house-hacking, building an additional living unit on the property to rent or move into and rent the main house, and essentially break-even on the living expenses at that point. Of course my capital reserves take a big hit for the addition, but I think it sets me up nicely for the future, as I can save even faster with "no mortgage" in Santa Cruz county!
When the market turns, hopefully in 3-4 years, I'll be ready to pull the trigger on another similar SFH, duplex, or larger. After a few of these buy and hold properties, I'll retire comfortably with millions in assets (assuming silicon valley doesn't go completely dead).
@Matt Mainini has it right! (It’s not easy, but stay the course.) That’s exactly what I did. I’m just adding value (to the tune of $2.4 mil+) to my last three buildings purchased and I’m done ✅. Then it’s just property management, or hand it off when I don’t want to do that either.
Thanks San Francisco Bay Area real estate. You’ve been awesome!
I beg to differ although I have seen prices going up or probably doubling but not in 5 years more so in 10-12 years. Having said that, past performance is not an indication of future results. If you can stomach the negative cash flow on an investment property it's ok to buy one and hope and pray it will double in few years. I would much rather invest in a cash flowing property and enjoy the bliss now than wait. I know folks in their 60 & 70s whose homes have doubled or quadrupled but some are not around to enjoy the gains or are not even interested in those gains anymore.
I agree with several other folks on this thread; I would be concerned that appreciation trends may not continue at the same rate. In fact, maybe the opposite. I've been reading lately that many people are actually leaving the area en masse due to the cost of living, which means it could become a cheaper city to invest in soon (hopefully).
I feel that a lot of those strong, tech-sector jobs are moving to cheaper areas (Austin, TX and Denver, CO. are cities that come to mind). But again, I'm approaching this from a purely demographic standpoint. Mathematically, I could be entirely wrong.
Gambling on appreciation is just that, gambling. You are crossing your fingers that appreciation will bail you out. You would do better to buy right and fix up/force appreciation. At least you then have some control over increasing the value of your home. Real Estate is cyclical and if you buy at a peak and your are hemorrhaging cash, that is a serious situation that has less than ideal exit strategies.
always a good time as long as you buy right
Bay Area will always be one of the most desirable places in the world to live and people with lot of money will keep buying and spending. I wouldn’t count on similar appreciation over the next 5 years as we’ve seen over the past 5, but long term as long as you can weather the ups and downs, Bay Area will always be a good place to park your money
Also note the location of people posting responses. You’ll notice very different investment philosophies based on where people are from.
Taking advice from someone from Ohio would mean selling a Palo Alto house in the 1980’s because it was overpriced and certainly wouldn’t keep going up.
@David Poulsen true . I guess the trick is buying right in the current market in the Bay Area and buying deeply under market versus say the Midwest .
There was a guy I listened to on a podcast that was wholesaling in SF and making huge profits like 6 figures or more per deal .
I’d say it would depend on how much negative cash flow a month . How stable is your job/income
Any risks of layoffs in a downturn
At some point the economy will experience another recession I don’t think it’s too crazy to think it could be within 5 years .
As other posters mentioned long term SF property should remain in demand and desirable just like property in L.A or NYC which are other cities with a lack of available land and many things that attract people from across the country and globe .
But there are always risks and past performance isn’t a guarantee of future results .
I guess it possible to turn this chart upside down and read it that way...
I believe the Bay Area real estate market is a great investment option. The problem is that the market has come up far and very fast in the last 6 years. Most property values have doubled. I would look for slower appreciation or a pause in appreciation in the near future but over a 10 or 15 year horizon odds are good that you will come out strong. Plus if you own in the Bay, you own enough to buy a lot anywhere else. So my thinking is to be cautious near term but bullish long term.
@Matt R. you beat me to posting that chart! Yeah, I don’t think it’s just a fluke. And I don’t think the appreciation ride is over in the Bay Area yet. i.e. we’re not Detroit in the 1980’s. More like Detroit in the 1950’s!
@Sam Josh that’s my sentiment. If you buy right...get a decent off market deal, value added, gentrifying neighborhood, good long term fixed financing, etc. then you increase your chance of getting quicker appreciation.
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