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

36 Replies

Price is relative to the person who can afford it. Even if Bay Area is expensive for 'most' people, it looks like @Harman N. can afford it, no biggie. Caps are clearly compressed but it's inverse to appreciation rate. 

Congrats & welcome!

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?

Chris,

Your strategy is actually not that unique.  I've met with many investors that buy out of state to generate the cash flow needed to continue buying local properties for appreciation but with slightly negative or zero cash flow.  If you believe you'll meet your investment goals more quickly by doing that, good for you.  

Personally, my investment goals revolve around cash flow so, although my properties locally now cash flow, I lost a lot of potential out of state cash flow generation with the capital I put in to them and the negative cash flow I experienced in the passed.  If I were to start over, I'm not sure I would have acquired them.  I experienced about 5 years of negative cash flow, until my rents surpassed my expenses.  For every property I bought locally, I'm very confident I could have acquired 3-4 out of state properties that would generate a 12-15% Cash on Cash return.

The investments that you choose not to make are equally as critical as the investments you do make.  Formulate an investment strategy is be very disciplined about applying it.  Do not do deals that do not meet your investment criteria.  You'll likely regret it.  Every bad deal will compound your move from achieving your goal (if loss of value/negative cash flow).  

The most successful investors, focus on quality, not quantity.  Then they try to scale what they are doing.

Please remember that people, including investors, often make decisions or fail to make decisions based on fear and the unknown.  Gather information from as many sources as possible, then decide what is right course of action for yourself.  Be careful not to make decisions based on somebody else's fear.  Fear is generally caused from not-knowing or 1 failed deal....This could include (1) fear of investing in big million-dollar properties, (2) fear of investing out-of-state, (3) fear of investing in other property types (office/self-storage, etc.), etc.  Fully educate yourself and make your own decision so you can meet your own investment goals.

@Harman N. yeah I'm pretty slammed these days as I have several projects concurrently, but maybe next month is a possibility. (Although I'm pretty bored with burritos, so a more exciting lunch option would be better ;). Check in with me next month though. Cheers

@Jon S. - 12-15% cash on cash return with what kind of leverage? 

@Amit M. - I'll try you next month. Maybe the best restaurant in the city? I've been there ~170 times but not since I moved out of the Mission :-( 

Originally posted by @Harman N. :

@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! 

Thank you Harman. So what restaurant is the best in the City? Wife and I love to eat.

Amit is actually busy working? Hard to believe. :>)

Originally posted by @J. Martin :

@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..

J,

Why buy in Richmond when I can get 1% in San Jose? (Wink wink) 10th St will achieve this in the next couple of weeks, and we still have some units under FMR. We can make it a 2% if I turn it into a Frat house according to our PM.

Johnson saw the building over the weekend, and he said I stole it.  Lol!  It's by far my favorite building due to its location and lot size. I like it more than our Japan town buildings.  No, I will not share my secret ingredient.  :>) 

@Minh Le - I am a very simple man when it comes to eating. I like hole in the wall places, so you probably don't wanna take your wife on a date to any place I recommend :-)

Having said that, Pakwan on 16th Street is my favorite place in SF. It's BYOB too, so super cheap!

I also love Yamo - a small Burmese place with 6-8 seats at a counter, cash only, $6-8 a dish -- hands down the best deal in the city!

Originally posted by @Harman N. :

@Jon S. - 12-15% cash on cash return with what kind of leverage? 

75 or 80% LTV @ a 4-6% rate depending on the property.

@Minh Le yeah it sucks, I'm actually working these days!  Went out of country for the month of June, come back to 3! unexpected vacancies. 2 were at market rate, so that sucked. The 3rd was an unexpected windfall, as I was able to increase rent by $900 :) Plus I have a new major renovation just about done, plus have another building recently emptied of old tenants, with medium renovations on the front burner. Once I get that one done overall cashflow will be fat. Probably take a break from a future renovation project, just because I'm sick of dealing with f**king contractors every day!  Don't know how much patience I have for property management either (today I relit a pilot light on a tenant's water heater, so that was an accomplishment ;). I can see getting a PM for everything on the horizon. When cashflow is beyond what you expect, the expense of a PM all of a sudden seems very worthwhile! 

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