Appreciation vs. Cash Flow in Bay Area

17 Replies

Hello Bigger Pockets!

I am a newbie currently living in the Bay Area of California. My interest lies in rental properties. I am working on becoming better at analyzing deals. I’m working to get all of my finances together by the end of next year and hopefully house hack my first investment. As I am looking at more deals, I realize it is a little difficult to find positive cash flowing properties in my area. I thought about trying to invest out of state and was advised by a local investor that the sharks will eat me alive since this would be my first. (Still didn’t fully understand what he meant by that haha). I also read on another discussion that appreciation will continue to increase in the Bay Area and that cash flow doesn’t matter as much. I understand that positive cash flow and appreciation play huge wealth generating factors but I feel like it’ll be hard to find a property with both. What matters more? Getting a property in the Bay Area and rely on appreciation or going out of state to try and find both factors?  

Well for sure, everyone is going to have their own opinions. Local investors stick hard to saying anyone who doesn't invest locally isn't being smart. To each their own... I live in LA and have always invested out-of-state and I've never been eaten alive. There are ways to make any strategy work and lessen risk.

As far as appreciation vs cash flow, check this out-

https://www.biggerpockets.com/renewsblog/2014/06/2...

Not sure if it helps a ton, but might spark some thoughts for you.

A couple considerations when thinking about appreciation:

  1. Where are we in the current real estate market? (hint: far from the bottom, but hard to say on how close to the top)
  2. How much appreciation would you actually need to be profitable? If you are using a mortgage, that will be an especially good question because how much will you be paying in just mortgage interest alone? You'd need enough appreciation to make up for that, property expenses, property taxes, etc (less what you make in cash flow from other units).

Let me know if you want to chat anymore! Message anytime.

Hi @Taylor Cu ,

One thing to keep in mind is rent appreciation & Prop 13.

Texas: Rent went up 10%, yay! But now the tax man says my property tax bill went up 20%, awww. :(

California: Rent went up 10%, yay! Tax man can't touch me because of Prop 13, yay a second time!

I've seen plenty of people build modest rental portfolios by doing nothing more than converting the old home to a rental, instead of selling it, after 5 years when they are ready to move onto a new home. Prop 13 doesn't go away just because you moved out, you can keep the 30YF you got when you purchased it, and your insurance starts to get cheaper as you have multiple policies with the same agent. Rent goes up over time, but expenses in California tend to hold flat relative to inflation.

Outside of that waiting game, there are cashflow positive deals in the Bay Area, they cross my desk frequently. You might have to do a little more than double click to have Redfin show you multifamily, like have a local agent send you daily notices when anything multifamily in Pittsburg, Vallejo, Oakland, etc (build your own city list), hits the market, and then run numbers when you get home from work (not just rent/capex/etc, but run comps on the property to figure out what it'll actually sell for, since we know list price is irrelevant in our area).

Originally posted by @Ali Boone :

Well for sure, everyone is going to have their own opinions. Local investors stick hard to saying anyone who doesn't invest locally isn't being smart. To each their own... I live in LA and have always invested out-of-state and I've never been eaten alive. There are ways to make any strategy work and lessen risk.

As far as appreciation vs cash flow, check this out-

https://www.biggerpockets.com/renewsblog/2014/06/2...

Not sure if it helps a ton, but might spark some thoughts for you.

A couple considerations when thinking about appreciation:

  1. Where are we in the current real estate market? (hint: far from the bottom, but hard to say on how close to the top)
  2. How much appreciation would you actually need to be profitable? If you are using a mortgage, that will be an especially good question because how much will you be paying in just mortgage interest alone? You'd need enough appreciation to make up for that, property expenses, property taxes, etc (less what you make in cash flow from other units).

Let me know if you want to chat anymore! Message anytime.

Hi Ali! Thank you for the response! I studied mechanical engineering. Its cool seeing a fellow engineering in the real estate game. I loved the article. Definitely sparked a some questions/thoughts. I'm definitely interested in the third option. I don't think I have a solid understanding of how to speculate appreciation in the real estate market. How do you know which markets look promising vs. others? Where do you look? How was it like buying your first property out of state? 

Originally posted by @Taylor Cu :
Originally posted by @Ali Boone:

Well for sure, everyone is going to have their own opinions. Local investors stick hard to saying anyone who doesn't invest locally isn't being smart. To each their own... I live in LA and have always invested out-of-state and I've never been eaten alive. There are ways to make any strategy work and lessen risk.

As far as appreciation vs cash flow, check this out-

https://www.biggerpockets.com/renewsblog/2014/06/2...

Not sure if it helps a ton, but might spark some thoughts for you.

A couple considerations when thinking about appreciation:

  1. Where are we in the current real estate market? (hint: far from the bottom, but hard to say on how close to the top)
  2. How much appreciation would you actually need to be profitable? If you are using a mortgage, that will be an especially good question because how much will you be paying in just mortgage interest alone? You'd need enough appreciation to make up for that, property expenses, property taxes, etc (less what you make in cash flow from other units).

Let me know if you want to chat anymore! Message anytime.

Hi Ali! Thank you for the response! I studied mechanical engineering. Its cool seeing a fellow engineering in the real estate game. I loved the article. Definitely sparked a some questions/thoughts. I'm definitely interested in the third option. I don't think I have a solid understanding of how to speculate appreciation in the real estate market. How do you know which markets look promising vs. others? Where do you look? How was it like buying your first property out of state? 

 Easiest one to think of is new transit hubs. If a government actually finishes some new BART station or ferry terminal, making a new commute route more doable, that's a pretty solid predictor of home values near said transit hub. But, like the name indicates, it's pure speculation if this ferry terminal, or that bullet train, is ever actually going to get built.

Originally posted by @Chris Mason :

Hi @Taylor Cu,

One thing to keep in mind is rent appreciation & Prop 13.

Texas: Rent went up 10%, yay! But now the tax man says my property tax bill went up 20%, awww. :(

California: Rent went up 10%, yay! Tax man can't touch me because of Prop 13, yay a second time!

I've seen plenty of people build modest rental portfolios by doing nothing more than converting the old home to a rental, instead of selling it, after 5 years when they are ready to move onto a new home. Prop 13 doesn't go away just because you moved out, you can keep the 30YF you got when you purchased it, and your insurance starts to get cheaper as you have multiple policies with the same agent. Rent goes up over time, but expenses in California tend to hold flat relative to inflation.

Outside of that waiting game, there are cashflow positive deals in the Bay Area, they cross my desk frequently. You might have to do a little more than double click to have Redfin show you multifamily, like have a local agent send you daily notices when anything multifamily in Pittsburg, Vallejo, Oakland, etc (build your own city list), hits the market, and then run numbers when you get home from work (not just rent/capex/etc, but run comps on the property to figure out what it'll actually sell for, since we know list price is irrelevant in our area).

Hi Chris, 

Thank you for the response! I did not know of Prop 13 and the rent going up 10%. That is good to know. Where did you find that information?  I'm glad that there are still cashflow positive deals in the Bay. I just have to find it. I want to get more in touch with a local agent but I feel like I'm not ready to get in touch because I don't have my finances lined up and need to educate myself more. I would hate to have the local agent send me properties and waste their time when I'm not ready to buy at the moment. Is that okay reasoning? Also What is your method of running comps?  Thanks for your help! I appreciate it!  

Originally posted by @David Song :

Taylor Cu

With your background, flipping might be a better choice.

Hi David,

I appreciate the response. I considered flipping but I don't think it is right for me. I'm currently in the process of leaving the general contracting industry and changing my occupation.  

Originally posted by @Chris Mason :
Originally posted by @Taylor Cu:
Originally posted by @Ali Boone:

Well for sure, everyone is going to have their own opinions. Local investors stick hard to saying anyone who doesn't invest locally isn't being smart. To each their own... I live in LA and have always invested out-of-state and I've never been eaten alive. There are ways to make any strategy work and lessen risk.

As far as appreciation vs cash flow, check this out-

https://www.biggerpockets.com/renewsblog/2014/06/2...

Not sure if it helps a ton, but might spark some thoughts for you.

A couple considerations when thinking about appreciation:

  1. Where are we in the current real estate market? (hint: far from the bottom, but hard to say on how close to the top)
  2. How much appreciation would you actually need to be profitable? If you are using a mortgage, that will be an especially good question because how much will you be paying in just mortgage interest alone? You'd need enough appreciation to make up for that, property expenses, property taxes, etc (less what you make in cash flow from other units).

Let me know if you want to chat anymore! Message anytime.

Hi Ali! Thank you for the response! I studied mechanical engineering. Its cool seeing a fellow engineering in the real estate game. I loved the article. Definitely sparked a some questions/thoughts. I'm definitely interested in the third option. I don't think I have a solid understanding of how to speculate appreciation in the real estate market. How do you know which markets look promising vs. others? Where do you look? How was it like buying your first property out of state? 

 Easiest one to think of is new transit hubs. If a government actually finishes some new BART station or ferry terminal, making a new commute route more doable, that's a pretty solid predictor of home values near said transit hub. But, like the name indicates, it's pure speculation if this ferry terminal, or that bullet train, is ever actually going to get built.

 Whoa!! Mind Blown! I didn't even think of that. Awesome. Thanks Chris! 

Oh very cool! You'll know your way around a spreadsheet just fine then. Haha. Love the engineers!

Buying my first one was exciting. Fairly hands-off other than doing due diligence and I was pretty pumped for it. Making money on day #1 never hurts :)

I work with some market experts who know how to tell all of that stuff. Market stats and numbers and analysis has never really been in my interested realms, so I follow the people who are much better at it than I am. 

Happy to chat anytime! Message anytime.

@Taylor Cu   if you don't own a primary in the bay area you may want to consider house hacking.. best of both worlds

gets a roof over your head.. and you can use FHA 3.5% down loan to get your first one.. 4 plex would be great live in one unit rent the other three out live for free that would be the goal.. that in my mind is what I would do Very first thing before looking for any other real estate.. what is one out of state small rental going to do for you.. unless you have a way to scale out of state.. you should stick in state and put a roof over your head.. that's my opinion.. don't get so caught up in does it cash flow does it not does it appreciate does it not.. you get a 2 to 4 plex in the bay area keep it forever and you can retire on it in 30 years.. not going to happen buying one or a few out of state cheapie rentals that make 200 a month.. and never appreciate.. I like out of state for 10 or more doors.. you need to find a way to get that.. you want that 2k a month coming in so every year you can add at least one more door just one your cash flow.

Suggest you get a duplex out of SFBA 2 hour driving distance, Stockton, ELk Grove etc. to get a taste first.

You try in SFBA and can not pay for vacancy or pitch in mortgage or huge down payment you are losing money until the Recession hits here (<24 months). Then you have no tenants and huge expenses.

Those in SFBA with recently acquired rentals are looking for tax write off.

Originally posted by @Jay Hinrichs :

@Taylor Cu  if you don't own a primary in the bay area you may want to consider house hacking.. best of both worlds

gets a roof over your head.. and you can use FHA 3.5% down loan to get your first one.. 4 plex would be great live in one unit rent the other three out live for free that would be the goal.. that in my mind is what I would do Very first thing before looking for any other real estate.. what is one out of state small rental going to do for you.. unless you have a way to scale out of state.. you should stick in state and put a roof over your head.. that's my opinion.. don't get so caught up in does it cash flow does it not does it appreciate does it not.. you get a 2 to 4 plex in the bay area keep it forever and you can retire on it in 30 years.. not going to happen buying one or a few out of state cheapie rentals that make 200 a month.. and never appreciate.. I like out of state for 10 or more doors.. you need to find a way to get that.. you want that 2k a month coming in so every year you can add at least one more door just one your cash flow.

Whoa! I never expected an actual guest on the podcast to actually respond to my post! Awesome! Thank you for the response. I don't own a primary so house hacking a multi-family was definitely part of the plan. As I'm currently getting my finances together, do you have advice/tips on what I should do when looking for my first property?  

@Taylor Cu   there are 250 or so folks that did pod casts I am not so special.. but I do believe wholeheartily as someone who grew up in the bay area.. that I would do everything I could to get a property in the bay area and house hack is a perfect way.. way before I would venture to other markets..once you have that accomplished then go hunting for more.

Originally posted by @Sam Shueh :

Suggest you get a duplex out of SFBA 2 hour driving distance, Stockton, ELk Grove etc. to get a taste first.

You try in SFBA and can not pay for vacancy or pitch in mortgage or huge down payment you are losing money until the Recession hits here (<24 months). Then you have no tenants and huge expenses.

Those in SFBA with recently acquired rentals are looking for tax write off.

 Hi Sam, Thank you for your input! I'll look into cities two hour driving distance from SFBA. 

Originally posted by @Jay Hinrichs :

@Taylor Cu  there are 250 or so folks that did pod casts I am not so special.. but I do believe wholeheartily as someone who grew up in the bay area.. that I would do everything I could to get a property in the bay area and house hack is a perfect way.. way before I would venture to other markets..once you have that accomplished then go hunting for more.

Thank you for the advice. I feel like I have so many questions to ask as a beginner. In a competitive market like the Bay Area, how would a new investor like myself gain leverage over other experienced investors/home owners in purchasing a property? How can I make my offer stand out? 

Welcome to BP @Taylor Cu ! Prices in the Bay Area are still going up, but at a lower rate. As a real estate broker, I might recommend looking at different markets. There plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.

A very good source of local analysis is rereport.com.

Originally posted by @Leslie Pappas :

Welcome to BP @Taylor Cu! Prices in the Bay Area are still going up, but at a lower rate. As a real estate broker, I might recommend looking at different markets. There plenty of other opportunities elsewhere, my clients are involved in institutional grade properties across the country. My recommendation is to choose cities in safe and economically diversified areas with above-average income and population growth. It can also be safer to diversify your investment properties across the country. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key.

A very good source of local analysis is rereport.com.

 Thank you Leslie for the response and input! I'll check out the link.