Starting my REI adventure with a duplex in San Francisco Bay Area

36 Replies

Howdy everyone!

Long time lurker, first time poster here! For the past year, whenever I Googled something about REI BP would inevitably come up, but I finally made an account!

Since last spring '15 I was looking to buy a place to live in SF. The plan was to buy a house for myself, and then in a year or two look for an investment property in a cheaper city. In March, after 90+ open houses, I closed on a duplex in the Inner Sunset -- I figured why not get both the house to live in and an investment property in one shot!

I had this REI master plan to, every few years for the next 15 years, save money for a down payment, get bank financing, and then buy an investment property.

Well, the duplex I bought needed some work, as it had "deferred maintenance". And that rehab is taking longer (ie, still not done!) and costing more than I anticipated (ie, cutting into those future investment funds). I was getting bummed out.

In the meantime, having finally bought my first place, I was now hungry for more. I started learning as much as I could. I read about the 10x rule in one of @Brandon Turner 's books, and it was a lightbulb moment for me! No longer was I content to follow the conservative 'save, save, save for years --> conventional financing' route. I was going to look at the renovations not as an expense, but as value creation, as future equity that I could tap into.

My current plan is:

  1. (a) Finish the rehab, increase value of the house
  2. (b) Tap into the equity from (a) to help finance the addition of a legal unit in the garage
  3. (c) Tap into the equity from (b) to help finance more real estate investments

Not sure exactly what (c) will be. I'm leaning towards small multi-family. But I have some time to figure that out! Until then, I'm here to read, listen, network, catch up on BP podcasts, go to @J. Martin 's meetups (went to my first one on Thursday!), go to Johnson H's meetups, and just talk shop with all of y'all! 

- Harman

@Harman N. welcome to the forum - I was also at the meet up Thursday and sounds like we are focusing on the same strategy. Would love to compare notes with you and hear more about your duplex purchase!

@Harman N.

Congrats!  What's your cash on cash return on this property this year?  I don't know for sure, but considering the price, age and required maintenance of properties in that area, im willing to bet you're going to have a negative return for this year and each of the next 5 years until rents cover your expenses.

What is your investment goal?

Start there.  If it's cash flow, consider investing out of state in newer properties as I have done.  

Otherwise, you'll eventually run out of money trying to invest only in the Bay Area (FYI: I live in Berkeley and also own rental properties throughout the bay).

If your goal is growth/appreciation, make sure you focus on timing your acquisitions with real estate market cycles so you're only buying at or near the bottom and you're adding signicant value by rehabbing.

@Martin K. - my goal is primarily cash flow. What states have you invested in?

I invest in major markets where both population and jobs (two predictors of real estate demand) are moving...CA, TX, NC etc. I do signicant market research and there are also many other variables that I consider before moving into a new market...but these are the primary reasons (population forecasts and job forecasts).

If you'd like to meet and further discuss, I might be able to make time for that.  Feel free to review my profile for my website with more info or send me a message. 

@Jon S. any pockets here in California locally that are worth digging into? Fresno seems to have decent cash flowing multi family properties (at least on paper) 

@Harman N. sounds awesome. Let me know if you have any questions about marketing and wholesaling perhaps! Welcome...!

Originally posted by @Martin K. any pockets here in California locally that are worth digging into? Fresno seems to have decent cash flowing multi family properties (at least on paper) 

 Thanks, yes Fresno is also high on murder rates and low on economic development, so be careful and do your research.

Personally, long-term I still like Oakland and the East Bay, but I believe these markets peaked late last year and prices are currently flattening or are on the way down...your timing is critical.

Here's the current cycle for MultiFamily, that shadows SFR most closely:

@Jon S. agree now is not the time to be buying, I believe we are in extra innings of the current business cycle. How much do rents typically compress and how wide will cap rates get before you want to start deploying capital in the east bay? Thanks

@Martin K.

The answer to your question depends on if I can locate investment partners willing to coinvest. You're now seeing avg cap rates around 3-4% in Oakland, so question is are you able to locate investors willing to invest their capital with you for a return of 3-4%? Unless you have a unique way of generating a higher return and can attract investor capital or are investing your own self-directed IRA and buying in cash (most current buyers/hence long horizon), it's going to be tough for you.

Most people now investing are doing so with little to no yield expectation in the short term.  They typically have very deep pockets, are looking to park cash, and have a very long time horizon, like 20+ years...

Personally, I am interested in deals locally, but am timing acquisitions, with these expectations in mind (low to zero short term yield expectation, very long-term investment horizon).

Makes sense thanks @Jon S.

@Harman N.

Congrats on buying your property and welcome to BP. This is a great resource to learn and network. Viewing the renovations as value creation is a great way to look at it, but don't cut too far into those investment funds. Best of luck with finishing the rehab.

Originally posted by @Jon S. :

@Harman N.

Congrats!  What's your cash on cash return on this property this year?  I don't know for sure, but considering the price, age and required maintenance of properties in that area, im willing to bet you're going to have a negative return for this year and each of the next 5 years until rents cover your expenses.

What is your investment goal?

Start there.  If it's cash flow, consider investing out of state in newer properties as I have done.  

Otherwise, you'll eventually run out of money trying to invest only in the Bay Area (FYI: I live in Berkeley and also own rental properties throughout the bay).

If your goal is growth/appreciation, make sure you focus on timing your acquisitions with real estate market cycles so you're only buying at or near the bottom and you're adding signicant value by rehabbing.

Like to follow up on a couple of your comments:

I own several properties far East Bay acquired 2012 time frame. They have appreciated about 100% and rents up about 40%. I have more recently bought a couple in the midwest perhaps the same reason you have (one just in June).

I am inclined to hang on to my East Bay properties even if underlying appreciation slows. My return on cost is good, but my return on FMV is low due to underlying appreciation outrunning the rental income. I still easily cash flow, but I could sell and move everything to the center of the country. But again I don't think I want to do that. I will just incrementally add to my properties in the midwest and only if the deals are solid. Any thoughts?

With regard to out of state purchases, I am orienting myself to newer properties as well. Not doing turnkey per se because I think I can get things very close to turn key advantages at prices better than turnkey deals. Actually buying in a place I lived before moving to CA, it has had very strong long term growth for many years and I already have all the necessary infrastructure in place (agent/mgr, insurance guy, etc.) Any thoughts?

Great job Harman way to go 

Originally posted by @Harman N. :

Howdy everyone!

Long time lurker, first time poster here! For the past year, whenever I Googled something about REI BP would inevitably come up, but I finally made an account!

Since last spring '15 I was looking to buy a place to live in SF. The plan was to buy a house for myself, and then in a year or two look for an investment property in a cheaper city. In March, after 90+ open houses, I closed on a duplex in the Inner Sunset -- I figured why not get both the house to live in and an investment property in one shot!

I had this REI master plan to, every few years for the next 15 years, save money for a down payment, get bank financing, and then buy an investment property.

Well, the duplex I bought needed some work, as it had "deferred maintenance". And that rehab is taking longer (ie, still not done!) and costing more than I anticipated (ie, cutting into those future investment funds). I was getting bummed out.

In the meantime, having finally bought my first place, I was now hungry for more. I started learning as much as I could. I read about the 10x rule in one of @Brandon Turner 's books, and it was a lightbulb moment for me! No longer was I content to follow the conservative 'save, save, save for years --> conventional financing' route. I was going to look at the renovations not as an expense, but as value creation, as future equity that I could tap into.

My current plan is:

  1. (a) Finish the rehab, increase value of the house
  2. (b) Tap into the equity from (a) to help finance the addition of a legal unit in the garage
  3. (c) Tap into the equity from (b) to help finance more real estate investments

Not sure exactly what (c) will be. I'm leaning towards small multi-family. But I have some time to figure that out! Until then, I'm here to read, listen, network, catch up on BP podcasts, go to @J. Martin 's meetups (went to my first one on Thursday!), go to Johnson H's meetups, and just talk shop with all of y'all! 

- Harman

I agree with you on most of the part except turn key. I have seen those properties many times but they never made any sense to me.but again everyone is different. I am also investing out of state. I kind of like slowly appreciation in the market in that way you can acquire home on your timeframe

Originally posted by @Christopher Smith :
Originally posted by @Jon S.:

@Harman N.

Congrats!  What's your cash on cash return on this property this year?  I don't know for sure, but considering the price, age and required maintenance of properties in that area, im willing to bet you're going to have a negative return for this year and each of the next 5 years until rents cover your expenses.

What is your investment goal?

Start there.  If it's cash flow, consider investing out of state in newer properties as I have done.  

Otherwise, you'll eventually run out of money trying to invest only in the Bay Area (FYI: I live in Berkeley and also own rental properties throughout the bay).

If your goal is growth/appreciation, make sure you focus on timing your acquisitions with real estate market cycles so you're only buying at or near the bottom and you're adding signicant value by rehabbing.

Like to follow up on a couple of your comments:

I own several properties far East Bay acquired 2012 time frame. They have appreciated about 100% and rents up about 40%. I have more recently bought a couple in the midwest perhaps the same reason you have (one just in June).

I am inclined to hang on to my East Bay properties even if underlying appreciation slows. My return on cost is good, but my return on FMV is low due to underlying appreciation outrunning the rental income. I still easily cash flow, but I could sell and move everything to the center of the country. But again I don't think I want to do that. I will just incrementally add to my properties in the midwest and only if the deals are solid. Any thoughts?

With regard to out of state purchases, I am orienting myself to newer properties as well. Not doing turnkey per se because I think I can get things very close to turn key advantages at prices better than turnkey deals. Actually buying in a place I lived before moving to CA, it has had very strong long term growth for many years and I already have all the necessary infrastructure in place (agent/mgr, insurance guy, etc.) Any thoughts?

All you aspiring SF investors on this thread, do yourselves a favor, and search on BP for the numerous threads dedicated to "cashflow vs appreciation."  Look for posts by @Minh Le @Bob Bowling @jay hinrichs and myself. Spend a couple of quality reading hours on this, trust me, you'll learn a lot. 

@Harman N. ,

Glad you could make it out to the meetup, and congrats on getting active on BP!

I've never been the "save for a long time" type of guy (and accumulated ?$1MM in debt by the time I hit 30yo - but to each their own! ;) @Chris M is a lender if you're looking for someone who knows their stuff..

Sorry the rehab's going a bit long, but yes, you should be adding equity. Definitely heed the word of @Amit M. - tread carefully. Amit, I told Harman he might be able to get you lunch and pick your brain about adding a unit in SF if he comes out to the Mission..

There are successful out of state investors, but many have not done it right also.. Takes a lot of up-front research work.. There will be SF Bay and Out of State pros at the Summit next weekend if you can make it.. (see signature link) @Charlie Brown , I'll see you there!

@Martin K. 's REI BAR camp last weekend, and he's been crushing it taking the "non-turnkey" route. He has a podcast, and was generous in sharing how he does it at the meetup. I think he'll be out at the Summit to chat too if he can make it ;)

Originally posted by @Amit M. :

All you aspiring SF investors on this thread, do yourselves a favor, and search on BP for the numerous threads dedicated to "cashflow vs appreciation."  Look for posts by @Minh Le @Bob Bowling @Jay Hinrichs  and myself. Spend a couple of quality reading hours on this, trust me, you'll learn a lot. 

I guess what Amit was trying to say is that everything in life has a price. Real estate in the Bay Area is expensive for a reason compared to cheap RE elsewhere. 

Let's put yourself in the renter's shoes. If you could buy a house for $100k with a monthly PITI of $600, why would you pay $1,000-$1,200/mo to rent it? On the other hand, why would I ever sell you a performing property in the Bay Area? Why?

As Jay Hinrichs has encountered, there are a lot of con artists on this site. Don't let them part you from your hard earned money. 

Harmon, congrats on your purchase. You should consider shore up your balance sheet to weather through the next recession whenever that is. You'd be happy looking back in 10 years if you could weather the storm. 

@Christopher Smith congrats on success in the East Bay. Are cash flowing deals still available out in the east bay or are you just seeing better deals in the mid-west? 

@Martin K. ,

You can also find 4plexes at about the 1% rule in Richmond, after you raise rents.. I have a couple properties out there.. But they tend to decline in value during downturns. If you're holding for long term and getting cash flow, maybe not a big deal..

Originally posted by @Martin K. :

@Christopher Smith congrats on success in the East Bay. Are cash flowing deals still available out in the east bay or are you just seeing better deals in the mid-west? 

There are probably better folks than I am at finding deals locally so I can't say they don't exist, but I am making no more Brentwood additions at these price levels. Mine here still cash flow well on my cost, but since underlying appreciation has doubled their value in 4 to 5 years that of course cuts the rental yield drastically (rents are up 40% over the same time frame - which actually is not bad itself). 

However, I've decided NOT to sell my Brentwood properties since they still easily cash flow for me (but note - I have no debt on them) and I think appreciation potential is still significant, but my future investments will be in the Midwest where rental yields are roughly 2x what it is here. My main decision there is whether I will start debt financing my acquisitions and/or venture into multi family. 

In the end, I kind of see my  Brentwood properties as growth stocks and my out of state properties as utility stocks. They both have a welcome home in my rental property portfolio generating a healthy source of income and underlying appreciation.

@J. Martin - thanks, I remember you saying that at the meetup. I will reach out, would love to hear about your experiences as a landlord in Richmond.

@Christopher Smith  makes sense - and I like the way you think about your portfolio. How has out of state investing been for you? Thinking of keeping it local for my first investment but to your point I may be waiting on the sidelines for sometime before the math starts to look attractive for Buy and Hold out here. Thanks. 

Originally posted by @J. Martin :

@Harman N. ,

Glad you could make it out to the meetup, and congrats on getting active on BP!

I've never been the "save for a long time" type of guy (and accumulated ?$1MM in debt by the time I hit 30yo - but to each their own! ;) @Chris M is a lender if you're looking for someone who knows their stuff..

Sorry the rehab's going a bit long, but yes, you should be adding equity. Definitely heed the word of @Amit M. - tread carefully. Amit, I told Harman he might be able to get you lunch and pick your brain about adding a unit in SF if he comes out to the Mission..

There are successful out of state investors, but many have not done it right also.. Takes a lot of up-front research work.. There will be SF Bay and Out of State pros at the Summit next weekend if you can make it.. (see signature link) @Charlie Brown , I'll see you there!

@Martin K. 's REI BAR camp last weekend, and he's been crushing it taking the "non-turnkey" route. He has a podcast, and was generous in sharing how he does it at the meetup. I think he'll be out at the Summit to chat too if he can make it ;)

Yeah I am thinking about pulling cash out of my Brentwood properties "if" I can continue to find solid opportunities in the mid west. I'm a little different than most folks here (not currently doing Indianapolis, KC, etc). I am actually buying in a high growth area between Dayton and Cincinnati. I lived there before moving to CA so I know the place well and I already have all the infrastructure in place (e.g., Agent/Prop Mgr, Insurance guy, etc.). It really makes things much easier. I simply give my Agent/Prop Mgr POA, and he does most everything except decide upon the final price, very very close to turnkey, but a little better since the deals I get are below market. Not hugely below (maybe 15%) since the properties are new and in a top shelf neighborhood, but for something that is as simple as turn key I see it as the best of all worlds. Not sure I would be brave enough to do this without the existing infrastructure team.

@Amit M. - I actually did spend a couple of hours late over the weekend reading your older threads, as @J. Martin said I should look you up since you had success with the 'buy 2-4 & add value in SF' strategy. Why appreciation matters in the SF/Bay Area thread in particular was a good one. Would love to pick your brain over a Mission burrito!

@Minh Le - I love the way you laid out your goals in your profile! 

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