Does it make sense to invest in the bay area?

Question

I wanted to have somewhat of an open discussion on this topic with the forum and see if I can get some solid feedback here on whether it make sense to invest in lower cap rate areas such as the SF and the Bay area. I'm mostly interested in feedback and motives of people who are already investing or have been invested in the bay area, if possible.

The reality here is that multifamily properties are selling at 4% cap rates. People here (sellers and buyers) anticipate market recovery in 5-7 years, gradual decrease in unemployment rate, and return to continued slowed appreciation in 5-7 years. Also, people have a lot of equity and wealth so multifamily pricing does not go down as I would expect it to be....

I know a lot of people in the forum wont even consider looking at poor cap rates like this but this is the reality here. I can come up with my own analysis and my required return but it wont help me much. The market will eventually dictate the price and as long as sellers have multiple offers, have enough equity and not really motivated, it wont help me analyzing the deal, show how poor my c-o-c return is and bring it to the table as a negotiating factor. This is how the market is here in general. There are still a lot of people who believe in long term appreciation in the bay area.

Has anybody who has been investing in the bay area can share some of his experience when negotiating their multi family deals deals here? How strong these sellers really are nowdays?

Jak Dadi · Answer

It really depends on where in Bay Area you are investing in. I started looking at San Jose/Sunnyvale/Redwood city...and ended up buying 5 fourplexes in East Bay..the cap rates range from 9% to 18% and GRM is 4-5. My focus is on cash flow and I am assuming that when the market does recover, East Bay would appreciate slightly more than South Bay, since the decline in prices was worse in EB. And of course, I would recommend you hire a property manager and also be open to having Section 8 tenants. The minimum cash flow return I look for is 20-25% on these properties.

Jonathan G. · Answer

Right, yet other markets like DFW are following with similar rent growth. The question is how likely is it to see the 13% rent growth continue going forward….Rent growth is already built into the asking price. If you can overcome the remote management issue you can benefit greatly from investing out of state. I’m invested in both California and Texas. They are both good markets right now but Texas has the potential to provide better cash flow. California is good on long term appreciation but having a low cash flow in California is a big risk to my opinion.

Joey Wang · Answer

Jonathan, the Bay Area apartment market does experience lower cap rates compared to other regions, but you're wise to still consider investing here. Remember that cap rate represents return for one point in time. It's not an overall return so it doesn't paint the overall investment potential. Contrary to the residential housing market, apartment is the hottest commercial property sector in the Bay Area currently and across the US. You may have recently heard from local TV news and articles that rents are not only rising here, it's outperforming other markets. So what does this mean if you own an apartment here?

Let's take for example Santa Clara County which has experienced 13% rent growth over this past year. If you had owned a 6 unit apartment with rents previously at $1,200, your total gross rental income (absent of vacancies) would be $144,000. With 13% growth, your new gross income is $162,720, a increase of $18,720. If the property sold at a 5 cap with expenses at 40%, you just realized an additional $224,640 of capital in one year just from rent growth.

There's a reason why cap rates are lower here in the Bay Area, and it can't be understood by looking at a single number.

Jason Kosowan · Answer

I think Jak is right.

Unless you inherit a large unit there(in which case, you're probably set), most places in the Peninsula are a very bad deal. (Possible exceptions are South San Francisco / Daly City).

That being said, East Bay and Central Valley are a much better deal. I have a couple there and they cash-flow reasonably. Oh, and get familiar with Sec8 regulations.

Joshua D. · Answer

If you're content with such low returns, I'd recommend stocks, where you have considerably lower headaches.

Does it make sense to invest in the bay area?

Does it make sense to invest in the bay area?

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