Officially a speculation market!!

Investor · WA · Member since 2015 · 63 posts · 21 votes

This "investment" property just went pending at 643,000 here in Oakland. It's a 2 unit each 1 bed 1 bath. Realistic rent on each unit is max $1800. $43200 gross - taxes of $9452 (actual tax for this house) insurance of ~$1500. Maintenance, capex, utilities, and vacancy of ~ $9000 (napkin math ).

Net : $23248 for a cap rate of 3.61%. Assuming max market rents and low Maintenance, capex, utilities, and vacancy.

Someone help me understand how these numbers work out for the buyer?

0 Reply

47 views

Most Popular Reply

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

10y

@Jay Hinrichs "Many like me personally owe our whole careers to Bay Area appreciation."

I'm in exactly the same camp as you :) I started as an (innocent) home owner in SF in 1994, though I was innovative by buying a 2 unit building as a TIC with a college buddy (back when TIC's were a lot less common.) So I did get an education in city processes and tic to condo conversions. But back then I was deep into my tech career, and home was just a home.

Fast forward 9 years, I'm burned out on the ups and downs of the tech life, and meantime I make a killing on my condo by just living in it. When rates dropped super low in 2003 and I refied, it was like hey, I can just pull cash out and buy another property. Ok, maybe I'll do that. I did just that, and I never looked back

Fast forward to today- some savvy purchases, repositioning/condo conversions, correct targeting of neighborhood gentrification, survival of the Great Recession and 5 SF buildings later, I've acquired some serious cash flow, not to mention more equity than I know what to do with. Outside of optimizing my current projects, I'm ready to stop buying property and coast for awhile. So yes, Bay Area RE was (and is) everything to me. Otherwise I'd still be stuck at the tech game ;)

6 Reply

See this reply in the discussion

34 Replies

Jump to latestLatest

Sort by

Mark Holencik
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
10y
I have 650,000 sitting in a savings account earning 1/2%. I buy this property and start earning 3%. This is a plus already. Now I add depreciation. In 30 years I also doubled my money when all the money is put back into my savings account. Plus any appreciation. Plus any rent increases over the next 30 years.
Sounds like a good deal to me.
There are a lot of people with that kind of money in their savings accounts.

4 Reply
Luke Mccandless
OP
Investor · WA · Member since 2015 · 63 posts · 21 votes
10y
Valid point Mark. It's always a risk reward consideration though. Not to mention, cap rates in neighboring counties are north of 7%. It seems like the main play for this investor is to hope for appreciation. Just seems like a sign of where we are in the market cycle right now to me.
0 Reply
Joe Bertolino
Investor · El Dorado Hills, CA · Member since 2012 · 1k+ posts · 1k+ votes
10y
How long will $1800 be the max in Oakland?
1 Reply
Account Closed
Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
10y
Originally posted by @Luke Mccandless:

Valid point Mark. It's always a risk reward consideration though. Not to mention, cap rates in neighboring counties are north of 7%. It seems like the main play for this investor is to hope for appreciation. Just seems like a sign of where we are in the market cycle right now to me.
Luke,
Can you give us an example or two of the neighboring counties with 7%+ cap rates? I tend to give the buyer the benefit of the doubt instead of assuming the buyer is hoping, or........ I agree with you that we're much closer to the top than bottom. In fact, we might be in the middle or the bottom of the 8th inning now.
Looking at the link you provided, I already see a couple of tactics the buyer may use to his/her advantage in the negotiation process. I'll let you figure those out. In addition, these are 900 sq. ft. 1/1. God knows if the buyer has the intention to convert them to 2/1 or 2/2 each.
As much as Mark's answer is solid, I'm not an investor at those yields. I'd rather be a seller IF I can only get 3.6% yield with not much upside potential at this time.
4 Reply
Mark Holencik
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
10y
Originally posted by @Luke Mccandless:

Valid point Mark. It's always a risk reward consideration though. Not to mention, cap rates in neighboring counties are north of 7%. It seems like the main play for this investor is to hope for appreciation. Just seems like a sign of where we are in the market cycle right now to me.
To the investor I am talking about "appreciation" would be the least inviting of the benefits I listed. The more you can see, the farther you can go. I gave you some very profitable information if you can mine it.
Appreciation means nothing if you never plan on selling the property.
Growing up I met a lot of millionaires that people laughed at, because of the jobs they had and the vehicles they drove and the way they dressed. They never could see that these people could have bought and sold them.
2 Reply
Darrell Shepherd
Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
10y
Duplexes aren't bought on cap rates, they're bought on comps. The buyer may be living there, the last duplex I sold was a mother buying it for her and her daughter, each were taking a side. Just can't assume that every person buying has the same motivation as you. There are plenty of places where the numbers don't work for rentals, but things still sell. Confuses me too, but so does all the people in Atlanta buying rehabs at numbers I can't make money on. I just started buying in other markets...
3 Reply
Joseph Weisenbloom
Investor · Austin, TX · Member since 2013 · 443 posts · 174 votes
10y
@Luke MccandlessThey don't work out for the buyer they are earning nothing on their 150k investment. I would immediatly try to find any way possible to get out of the city. Move anywhere else in the USA except for NYC, Boston, DC, LA or Miami. Use your 150k to buy 6 houses, lower your cost of living and increase your happiness but 2000%.
1 Reply
Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y
Could be an appreciation play......and unlike many on here, I do think the savy investor can predict which neighborhoods will have a higher appreciation rate than the average rate in a metro area. Typically just buying into gentrification will do this.
Also as you gain more money.....individuals tend to like to simplify. I would much rather have say a single $600k property that gives me a 10% return than six $100k properties that give me 12% each.
[email protected]301-893-4635 Podcast Guest on Show #192
District Invest Group546 Reviews
Website View Page
3 Reply
Account Closed
Investor · Princeton, TX · Member since 2014 · 1k+ posts · 1k+ votes
10y
Don't forget this kind of appreciation play is fairly risky if you do not have the money to withstand lower rents and the inability to find a buyer during market corrections.
0 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Account Closed:

Originally posted by @Luke Mccandless:
Valid point Mark. It's always a risk reward consideration though. Not to mention, cap rates in neighboring counties are north of 7%. It seems like the main play for this investor is to hope for appreciation. Just seems like a sign of where we are in the market cycle right now to me.
Luke,
Can you give us an example or two of the neighboring counties with 7%+ cap rates?
He probably means San Joaquin and Sacramento Counties...though I think 7% is still optimistic... :-)
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@J Scott you could make those numbers in Alturas
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Gene HackerPro Member
Flipper/Rehabber · Lake Isabella, CA · Member since 2011 · 969 posts · 488 votes
10y
I would definitely file this one away as more proof of an overheated market. That said if history has shown us anything, it is that frothy markets can go farther than one would logically expect.
IMO, 3% is not worth the risk at all. There are better returns in other vehicles. With all the options in world of investing, I personally wouldn't limit the comparison to bank savings rates and cap rates from rentals in neighboring counties. Heck, you can park your money with a hard money lender and get much better returns and have a much more passive investment.
2 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
1. Net : $23248 for a cap rate of 3.61%. Assuming max market rents and low Maintenance, capex, utilities, and vacancy.
That looks like an all cash purchase. What's the cash-n-cash with a 20% down? Bet that looks far better to you :)
0 Reply
Adrian StamerPro Member
Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
10y
Originally posted by @Mark Holencik:

Originally posted by @Luke Mccandless:
Valid point Mark. It's always a risk reward consideration though. Not to mention, cap rates in neighboring counties are north of 7%. It seems like the main play for this investor is to hope for appreciation. Just seems like a sign of where we are in the market cycle right now to me.
To the investor I am talking about "appreciation" would be the least inviting of the benefits I listed. The more you can see, the farther you can go. I gave you some very profitable information if you can mine it.
Appreciation means nothing if you never plan on selling the property.
Growing up I met a lot of millionaires that people laughed at, because of the jobs they had and the vehicles they drove and the way they dressed. They never could see that these people could have bought and sold them.
Can cash out refi appreciation and reinvest it. And never sell the property
1 Reply
Luke Mccandless
OP
Investor · WA · Member since 2015 · 63 posts · 21 votes
10y
@Joe Bertolino
1: Either way you are betting on appreciation of rents or the property. Argument was just that current rents really do not justify the price ( based on an investment, which I concede is not always the only reason to buy).
2: In Oakland there is rent control as well. If you get tenants in at $1800 even if rents rise it’s not as easy as just increasing rents to market.
Couple examples of close by properties with way better numbers:
https://www.redfin.com/CA/Oakland/1734-E-24th-St-94606/home/50248015 ~6% cap rate at current rents - which I would argue are way below market.
https://www.redfin.com/CA/Richmond/153-S-12th-St-94804/home/1864148 ~6.5% cap rate
@Joseph Weisenbloom thanks I am thinking the same!
@Jeff B. I can’t see financing this since carry costs are 4% right now ( my most recent quote )
0 Reply
Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
10y
Is it speculation, or is it preservation...?
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Luke Mccandless well we know it is not going to be a cash flow play as is. Perhaps future tear down, condo conversion, etc. The intrinsic land value long term is where all the speculation might exist. Location is fundamental however you slice it. Even short term corporate rentals could double those rents in a matter of days.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Luke Mccandless having grown up in the Bay Area its always been an anomaly in my mind when houses got to 100k in Cupertino we certainly new there was a huge bubble brewing and that those prices were not sustainable... Same when the houses got to 500k then 1 million... IN my mind any prime Bay area location that throws off any positive cash flow with 20 % down or 25% down is a good investment if for nothing more than a forced savings.. nothing wrong with having a Prime Bay Area property paid off in years or so.. regardless of the economics as long as you don't have to feed it to much and or too often if they are positive that whole time..
Many like me personally owe our whole careers to Bay Area appreciation.. WE just do. and it was simply buying homes to live in... The tax free 500k when you sell can change your life and I know it did mine as I did it 4 times in the last 20 years LOL...
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
3 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
IDK Oak town but parts might still be undervalued. I was watching a Ted Talk with a professor from an IVY league school, lecturing on how bad gentrification is. What she and others don't get is...certain geoghraphical parts of cities have been sort of artifically deflated for decades. Some prime physical locations are coming home to roost as originally intended. It is not rents are going up as much as they were unreasonably depressed for decades...IMO. Oaklands location and values are not in line with the physical land value across the bridge yet and comparing foot to foot there could be more wiggle room. Understanding 1/3 of global gdp is tech and about half of that is commutable from Oakland. We are talking the entire planet as compared location wise. Proximity to the highest paying jobs in the world is pretty big we now know as the re gentrification of those formal hell holes comes to fruition. My guess is some crazy dudes who bought Oakland in the past are getting close to winning lottery type returns coming up. Location matters.
1 Reply
Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
@Jay Hinrichs '93 bought in Cupertino at 37k, following year house next door went for 64k and when we 1031'd it went for 300k. Today, the same 1200sqft 3/2 exceeds 1mil. If we only knew :sigh:
2 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Jeff B. that sounds like 1973 pricing ... I sold one Cupertino home in 1987 for just under 500k.. it was bought in 1969 for 32k. ( My parents house were I grew up)
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Matt R.:

IDK Oak town but parts might still be undervalued. I was watching a Ted Talk with a professor from an IVY league school, lecturing on how bad gentrification is. What she and others don't get is...certain geoghraphical parts of cities have been sort of artifically deflated for decades. Some prime physical locations are coming home to roost as originally intended. It is not rents are going up as much as they were unreasonably depressed for decades...IMO. Oaklands location and values are not in line with the physical land value across the bridge yet and comparing foot to foot there could be more wiggle room. Understanding 1/3 of global gdp is tech and about half of that is commutable from Oakland. We are talking the entire planet as compared location wise. Proximity to the highest paying jobs in the world is pretty big we now know as the re gentrification of those formal hell holes comes to fruition. My guess is some crazy dudes who bought Oakland in the past are getting close to winning lottery type returns coming up. Location matters.
http://www.bizjournals.com/sanfrancisco/blog/real-...
From your lips to Gods ear.
2 Reply
J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
10y
Originally posted by @Jeff B.:

@Jay Hinrichs '93 bought in Cupertino at 37k, following year house next door went for 64k and when we 1031'd it went for 300k. Today, the same 1200sqft 3/2 exceeds 1mil. If we only knew :sigh:
Eichler?
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
10y
@Account Closed That's amazing. That guy was reading my mind hole. Sometimes I impress myself:) but if I can impress you that is much better.
1 Reply
Brian Serina
Commercial Real Estate Broker · Sacramento, CA · Member since 2015 · 102 posts · 50 votes
10y
we, as in Sacramento, are getting a lot more inquiries coming in from bay area folks, both residential and commercial, both home buyers and investors.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.