Rental Property Investor · Oakland · Member since 2016 · 19 posts · 10 votes
Hey everyone,
Last year, I started looking at multifamily property in Oakland to house hack so I could live cheaply / free while building equity. While the cash flow and numbers can work with the right property, I think a recession is 1-2 years away, so buying now could have some drawbacks since I only plan to stay in the area for ~5 years max.
Below is how I'm thinking about it, but what do you think? Am I off base, have I missed something?
To test my thinking, I created a simple model that projected total cash flow and equity over 5 years if I:
Bought a good, cash-flowing MFH now and recession hit in 2019
Waited and bought an MFH in 2019 during a recession
Waited and bought an MFH in 2020 during a recession
The model assumes that a recession results in a 10-20% drop in housing prices which rebound over 1-2 years. If I don't buy, I would rent for $1300-$1400 / mo by living with a roommate (what I actually do now).
Based on the model, I think waiting to buy makes sense for a few reasons:
Buying during a recession is 15%-40% better from an equity and cash flow perspective when compared to buying a deal right now. This is driven by better rent:price ratios during a recession, not buying high and going through the rollercoaster of house value fluctuation, etc.
I can afford a house in a better location once house values fall in a recession
Obviously, waiting to buy obviously only works if I am still employed and can get a mortgage approved in a recession. I think I can make that work given my work situation and how much I can save each month to meet higher down payment requirements when lending tightens up.
Mentality: You and I are very much alike; you are very analytical, which is a gift, but it also can trick you into thinking you can outsmart the future and mathematically win at investing. The Cure for analysts like us is to take action after crafting one plan and sticking to it. Now matter what, set your plan with (on this date, when values going down 18.785%, when I have $x,...) and then stick to the plan.
Economics: A recession is a good time to buy discounted properties, but it's also a good time to be a Holder. Buyers that over-leveraged themselves are now pushed into the renter's market, increasing demand but supply is stagnant, increasing the prices, which in turn increases the value of your rental. There are two sides to every coin.
Potential Plan: Let's pretend you don't wait and buy something today that cash flows or breaks even. If your property value drops 20% in 2019, your loan is locked in and is still being partially paid off monthly. Sure you can now say you 'overpaid' but you have your Househack and life's dandy.
You're thinking very intelligently, just remember to take action, my friend. That's the best thing I ever did.
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
@Brent M. when you say "everybody appears to be bullish and no great threats on the horizon", that describes the sentiment for many years leading up to a recession. Just like after a recession people feel bearish and paranoid of what is over the horizon. It an emotional response, not logical.
I think California in particular is very well positioned, so I don't understand why so many CA investors predict doom and gloom. The tax change will result in a major cash influx into the California economy - more than any other state in the country - through business tax reductions and cash repatriation. What happens to those billions of dollars? Either companies expand or strengthen their value. Expansion means more employees and higher wages. Stronger value means owners and share holders have more money. People will use that money to invest. How do people in California invest? Some will buy a bigger house or cars. Some will invest in startups that hire people. Some will invest in the stock market. Many will invest in real estate.
@Eric Li Sitting on the side lines waiting for a recession is a fools game. Not calling you a fool, just making the point that none of us can predict when it will happen. Then when the recession finally hits, people get scared they will lose their job and don't invest. If you don't have courage to invest when times are good, you won't have courage to invest when times are bad. Even disciplined investors who profited from the last crash all wish they had acquired more.
Fort Lauderdale, FL · Member since 2016 · 30 posts · 18 votes
8y
@Eric Li Novice opinion here but it seems the opportunity cost of not acting now, would be far more expensive then a value hit on a property that- if purchased correctly (cash flowing)- you should be holding onto long-term anyway. From now till the potential correction your building credit, equity, relevance, expertise, and a network, all of which puts you in a better position to move on properties if and when the market drops.
Mountain View, CA · Member since 2017 · 1 post · 3 votes
8y
I agree with most of investors here that waiting is not the right strategy. But the real problem is that it is really hard to find "good deals" these days in Oakland.
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
8y
@Eric Li there has been a lot of good advice here. The best time to buy is now. I think as a beginning investor it is too easy to get caught up comparing properties to the past, but we cannot go to the past to buy a property. Look for solid cash flow deals that meet whatever return criteria you have set, and then buy something after you find a "base hit". Don't swing for the fences!
I have helped a lot of folks here in my local Chicago west suburbs market find deals that are hitting 15-20% COC returns right out of the gate. I think this is a good metric to use when evaluating house hacks.
Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes
8y
The San Andreas fault is long-overdue for a serious seismic shift. Your looking at 7.9 maybe 8.x quake. I would not put my money into real assets in that part of the country. Invest out of state in a quad so you have a place to live during the rebuild years.
Sunnyvale , CA · Member since 2017 · 373 posts · 362 votes
8y
The recession brings down everyone. So don’t be too confident in :
1) Ability to time it
2) Ability to take full advantage of it
You buy when you are ready, rather than Time the market.
Yes prices are high at this time. They might go higher before they come down but then they will go back up again. Who knows.
Good luck.
Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
8y
The best time to buy real estate was 20 years ago. The second best time is right now.
Ask 100 successful real estate investors "What's the one thing you wish you'd done differently?", and 98 of them will likely say "I wish I would've started sooner".
Real estate investing is all about opportunity cost. And what many analytical models fail to factor in is the cost of doing nothing.
I suggest considering three models:
Investor A: Buys a property now that is cash flow positive, and market continues to go up.
Investor B: Buys a property now that is cash flow positive, and market declines (during which time he has no reason to sell, because his property is cash flow positive), then eventually goes back up.
Investor C: Does nothing for 3-5 years waiting for the recession he predicted. Throws away $17k/yr on rent (paying Investor D's mortgage). After five years, he has invested $85k of his hard-earned cash (rent money) in Investor D's retirement plan.
San Mateo, CA · Member since 2015 · 16 posts · 7 votes
8y
I too believe a recession is coming. I have a couple SFRs in Sacramento and have considered doing a cash out refi, then investing temporarily in the stock market so I can hopefully sell off quickly if the market turns. The idea being that I appreciate quickly there in a higher liquidity.
Conversely, I’ve considered other plays that can work. Investing out of the state with turn keys or cash flowing properties or researching Notes investing more.
Frankly, I’ve got no decisions solid yet, but I AM watching the local Bay Area and Sacramento markets closely. What I’ve come up with is that smaller MFPs are the way to go IF you can swing more than a couple million for the purchase price. In Oakland and San Jose, I see a few properties on the order of 1.x-3 mil that are MFPs. Some have very low cap rates, but these are anywhere from 2-8 units. These seem like they can be BRRR’d and the cap rate increased. For reference, a 2-3 bedroom SFR runs about the same amount.
My issue is that even with my present investments, I don’t believe I have enough to purchase these alone. Due to this, I’m not spending any REAL time analyzing if they can cash flow or not, it’s just they’re what would be closest to what I can afford. Presently, what I CAN afford are crappy units in the bad parts of Sacramento, so, I am presently in a holding pattern. Really, I’m spending more time just reading up on the financial analysis side, which will determine if those East Bay or South Bay properties make sense.
I’d figure that if the MFPs I see in the Bay are indeed great deals, it’s probably a question of just rounding folks up to get in on the deal. I’m also going to guess that there’s no real deals to be had though given that there are so many available. Good investors would’ve snapped up things that make sense to snap up. Meaning that the Oakland and San Jose area properties are perhaps still sketchier areas so tenant quality is bad or that the properties require too much fixing up.
Frankly, I need to go actually drive through those property areas to know since I don’t live there, so it’s a bit hard to know why MFPs aren’t moving as fast in those areas. Certainly cap rates are low on many of these as I said, but also, I still don’t know how to qualify for million dollar plus loans when I only have tens of thousands in equity to throw at it. Not in any practical sense, that is. And again, my understanding of deal analysis sucks so, I’m not yet at a point where I’d post a deal to ask for investors. So, for me, I’m going to sit on things until I feel a little stronger at the analysis side of things while my existing properties appreciate.
Also, someone said something about earthquakes. Quick response to that is that earthquakes are like hurricanes and tornadoes. Folks who don’t live here are freaked out by them but they don’t happen frequently enough to worry about. We prepare for them as much as possible and many MFP places need to have seismic retrofitting so, it’s just not a huge deal. If you knew a hurricane was coming, you prepare for that or have insurance that can address it. Same thing here. Scarier than earthquakes are fires and mudslides, though. They wipe out a lot of areas each year. They’re probably more akin to us as tornadoes are to midwesterners. Folks talk about how CA doesn’t have seasons. Ours are just different: the green season(winter/spring), the brown season(spring/summer), the fire season(summer/fall), and the mud season(fall/winter). That’s roughly the breakdown, but the timing straddles everyone else’s seasons.
San Mateo, CA · Member since 2015 · 16 posts · 7 votes
8y
Forgot to add a few things here that are important points. The first is that as a landlord, you’d better be really solid on tenant rights ESPECIALLY aim the Bay Area. I think SF just instituted a thing where rents cannot be raised by more than 2% a year? I’m not sure of local city/county laws that you’d need to be weary of, but just be aware the Bay is really bad for landlord rights. While I’d love to house hack here, I’d only do it if I had a property manager to consult. Realistically, you need someone who’s current on the laws and practices for your region. So, be careful there. Be aware that SF is both a city AND county so, their laws are gonna be different than Alameda, Santa Clara, San Mateo, and Marin counties as well as the various cities inside those counties.
Also, I don’t see ANYTHING that meets the 2% rule. If anything, you’ll barely make the 1% rule here. That goes for Sacramento area as well. I’ve been watching the Bay as well as everything along Highway 50 all the way up to Tahoe, even though I probably wouldn’t invest past Sacramento county. El Dorado county (El Dorado Hills to Tahoe) is pretty rural and the incomes don’t justify the housing prices and it’ll be tough to get 1% rules there. I’m also not focused in that Vallejo area because I don’t know it well. Housing is more affordable there, but it’s a rough-ish area as a whole. Same with Contra Costa county, but probably it’s infinitely better than Alameda county in terms of price and profit potential.
I did see that Concord has really low purchase prices on condos/townhouses, but their HOAs are insane. I’d advise trying to be striking distance from BART if you go Contra Costa county or Alameda county. I’d also check out Hayward/Castro Valley/Union City areas since they’re nice, relatively cheap, and fine as long as you have no need to cross 92 because it’s a bear for traffic. Again, BART is your friend. Hayward rents are a lot cheaper than San Mateo rents due to the traffic on 92 for the commute to San Mateo area.
Real Estate Agent · El Dorado Hills, CA · Member since 2017 · 160 posts · 67 votes
8y
I agree with much of what you said Scott, although I would add something to this line : “El Dorado county (El Dorado Hills to Tahoe) is pretty rural and the incomes don’t justify the housing prices and it’ll be tough to get 1% rules there.”
El Dorado Hills, adjacent to the eastern edge of Sacramento County has a 2016 US Census median household income of $125,489.
San Mateo, CA · Member since 2015 · 16 posts · 7 votes
8y
I totally agree, Ben. It’s probably the only town in EDCounty I’d try to invest in. I’m sort of still looking in that area since that region has prices I can still somewhat afford. The bay is too crazy right now, but I’m not opposed to it either. Just trying to find what works with my finances
