Help Needed to Assess Investment Property

7 Replies | San Jose, California

BiggerPocket Community - I live in the heart of Silicon Valley (Santa Clara) and own a townhouse. We are looking to upgrade to a single family next year but I am debating whether I should rent my townhouse or buy a property outside of Silicon Valley or California where I could get better cap rates. With about 50% equity in the house, I have close to 0% cash-on-cash ROI and 2.37% Cap Rate which is standard for the area. Given the low cash returns and cap rate, the only potential upside to keeping this property is the appreciation and strong rent growth (>3%). Here are the options I have:

1. Rent the townhouse

2. Sell the townhouse and invest in another property with better cash-on-cash ROI and Cap rate.

What do you guys think? Thanks for your time!

Why almost 0% roi? With 50% equity what is your piti and what is the monthly rent? We need to see your numbers, and a bit more info on the townhome (size, location, hoa, etc.)  to help you.  But in general you’ll do much better keeping prime Bay Area property than going out of state. In a few years you should have hundreds of thousands in added appreciation. And with 50% equity you should cash flow ok too. IMO your equity position = win-win. That’s how people get rich in the Bay Area. Or put it this way, more people get rich in the Bay Area by investing in RE for the long term than by striking it rich with start up stock options or utilizing stock purchase plans of larger tech companies. 

How much is the HOA due? Most investors do not want to pay steep hoa dues as it eats up one's cash flow. The rental demand has tapered off as there are less people coming for the jobs citing high cost of housing as primary reason.

The prime rentals are SFH near tech center bought years ago. Those who are buying today is often done in cash. Home prices can not go much more. They are close to apex value.

Thanks for your replies. My PITI is approximately $2950. HOA is $280. I am also considering hiring a property management company, which would cost about $200 (assuming 6%). I expect rent in the range of $3400-$3600 for the 2 bedroom townhouse.

Sam - I do see your point. There are couple of considerations: There is a lot of commercial construction around North San Jose/North Santa Clara area especially around Great America Parkway. That keeps me optimistic but at the same time there are lot of new condos flooding the market which would continue to pressure the rental prices. 

Sam - what report/data source do you use to track the rental market trend (i.e. prices, demand) in silicon valley?

@Rohan Desai my vote is to keep it. I'm with @Amit M. , think longer term. I have properties in Santa Clara County, too and it still has legs to go especially w/ all the new campuses i.e. Apple, Google, and IMO the often overlooked NVIDIA. Selling and all the transaction costs will eat into a chunk of your returns.

Since the recovery for every 8 people that came to the Bay for a job, there has been 1 new housing unit for them. Supply is below 1 month right now. 95051 zip code went up 22% this year. Below is from a recent economic forecast conf hosted by Pacific Union.

@Rohan Desai

There is a private server constantly out scrubs local rental market data. Unfortunately, the test scripts no longer works. Most data is in depth knowledge of the SFBA in working with the home owners.  The rent suggested above $3400-$3600 sounds too steep. A gated high end new unit you might get $3200 if you are lucky. Two story frame 2-3 br is way lower. Again rental market is not very active since 2016 due to few out of town people wanting to work here. There are as many people leaving than coming for jobs. 

@Rohan Desai

How much do you think the townhouse would sell for and how much cash would that give you. Like @Sam Shueh mentioned, that HOA really puts a damper on your returns.

If you could get enough cash out of it, you may be able to get into a duplex and househack it. Or go for 3-4 units in an area without rent control.