Why appreciation matters in the SF/Bay Area

168 Replies

9-11% annual appreciation year after year for a decade is too rich IMO. Usually it's a year or two of crazy appreciation (like 2013) and then it slows down (like 2014).  If we average 5-7% on average for a decade that's great too!  At 7% average you basically double the property value in 10 years. And given that we always have a market correction in any given 10 year cycle, you'll need over 7% appreciation in the "good" 6-7 years to offset any declines/stagnations in the "bad" 3-4 years. 

Per @J. Martin   And then we can complain about how our return on equity is getting so low!

@Minh L.  and @J Martin, you guys are hilarious!

Always funny to see these Bay Area threads and see the same names pop up over and over again...@Amit M. @Bob Bowling and @Jay Hinrichs .

Seems like I need to get my money into the state I live in before rates shoot up, especially after the end of the Fed stops purchasing bonds!

9-11% annual appreciation year after year is only possible with very high inflation IMO. Anyway it's the "real" appreciation, meaning nominal minus inflation, that matters. 

People often betch about housing prices in the Bay Area. I actually count myself very lucky to have access to this very rich and vibrant market. It's where fortunes are made!

Real estate investing is just like any other investment. You want it diversified. Part of your portfolio is long term stable growth with relatively low risk (apartments, etc.) and some some more aggressive assets such as homes in gentrification areas (west oakland), fix and flip, etc. I do the same with my stoke portfolio... you have your retirement funds that you put in stable long term thinking companies, then you "gamble" with the rest haha

Originally posted by @J Martin:

@Minh L. , 

I thought you would be buying the boat! lol Sounds good. I'm in. And I have a promise for you too: If we're going on a cruise with significant others, I'll get a significant other! lol

 If you can't get one, I'll find you one. 

@Johnson H.  ,

I had lunch with FRB a couple of days ago, they are scaling back on their lending. They want investors to have more skin in the game. That means bigger down payment. They believe we are at the tail end of this cycle and the market might too out next year. Ironically, Marcus & Millichap also believes the commercial market will likely top out next year too. I sort of agree with it. Things are quite frothy in the commercial arena now. However, I believe the residential market here still has some legs left because rents are quite high now, and interest rates are still quite low. 

@Manch Hon  ,

Right now, I see wage inflation in the Tech sector, but not else where. I hope the minimum wage will get boost up to $15/hour in the coming years. $20/hour is even better.  We live in an inflationary environment so I have inflation comes sooner than later. That should boost real estate prices for us investors while our mortgages are fixed. Well, most of them are fixed, not all. 

Originally posted by @Jeffrey Reyes:

Real estate investing is just like any other investment. You want it diversified. Part of your portfolio is long term stable growth with relatively low risk (apartments, etc.) and some some more aggressive assets such as homes in gentrification areas (west oakland), fix and flip, etc. I do the same with my stoke portfolio... you have your retirement funds that you put in stable long term thinking companies, then you "gamble" with the rest haha

 Jeffrey, I guess you haven't read any of Warren Buffett's books. Otherwise, you wouldn't use the term diversified. According to Buffett, diversification is for the ignorance. It all depends on your risk tolerance. 

I think people forget about rent growth when they are talking about appreciation.  Over time, rental growth of 4% annually makes a big difference in cash flow over one that only grows 2%.  Replacement cost seems to be one of the most underappreciated metrics here on BP (although I realize it is harder to get a feel for than running a pro-forma on a property).

I see people usually talk down states like Illinois and CA over tenant friendly laws. 

@Minh L. , @J. Martin  , what are your thoughts on this?  I only have 7 units over a few years and only had a few days of vacancy over that time, much less any evictions, but I am in $1,500 + units.  I am sure it may make more of a difference in lower income and non-urban areas.  I just don't see anyone here ever struggling with long evictions.  I know if you don't follow the rules, it can be a very long process but it seems a little over done as an issue people bring up.

@Minh L.  - With the market as hot the way it is and with lenders having tons of deposits, if FRB won't do it, I'm sure another bank will. Greater fool theory, and its the reason why I have a job.

Funny you mentioned multifamily, I was interested in a 10 unit in Concord, ran the numbers, turns out actual cap is 3.5% and proforma of 4.5% when rents are brought up to market. Sellers are definitely reaching these days.

@Manch Hon  yeah I was just taking a look since the cap rate wasn't calculated with this property by the agent. These days I am looking everywhere for my next market. Either is the Bay Area, SoCal, Seattle, Portland, or Texas. I'm thinking very hard about it as wherever I go, I will buy multiple properties. There just doesn't seem to be any deals to be had anymore that I can find. What are you looking to buy these days?

@Johnson H.  I am putting all my idle cash into flipping nowadays. If I were to buy another rental today I may take a hard look at some less popular parts of Frement. That plus Union City and Castro Valley. I am surprised to find that CV has some pretty decent schools. 

The Peninsula and most of South Bay has become too expensive even for people pulling in mid-100K salaries. Towns around the eastern end of dumbarton should benefit I think... That's my theory anyway. 

@Manch Hon - I like flipping, I have flipped two in Phoenix but in San Francisco, I am not finding any quality deals to flip. Are you constantly able to find deals or as it been a difficult time for you as well? For your ARV, are you adding in additional appreciation during your hold time? Seems difficult to be conservative in this market.

@Johnson H.  First ever flipping project still on-going. So don't know if my numbers are crap or not. Ask me again in 3 months. :) 

To me, high price market is good because margin of error is also larger. That's especially important for newbies like me. SF in particular is interesting. People are willing to pay extra premium for nice looking houses. While it may be true in all markets, but the extent people are willing to pay for quality is so extraordinary in SF. Which makes properties very difficult to comp. 

Deals have been very hard to find. Many of the deals I passed turned out to be bought by flippers and they all made very good profits on them. So either my numbers are too conservative, or when tide is high nobody knows you are swimming naked... must be both. :)

@Manch Hon   - Yeah, the market is so hot that I am seeing prices in where I live that I have never ever seen before. It is a good market to flip in until the demand dries up. I don't when that will be, I just don't want to me caught holding the hot potato when the market crashes. I have seen it happen to too many people. I like a conservative margin but that is difficult to find these days.

@Matt Mason  ,

I completely agree with what you said. Looks like we are in the same market price range. My average rent is over $1,800/unit. The cheapest unit is 1,370/month, and the highest one is $2,800/month. Fair market rents for the $1,370 unit is $1,700 - $1,750. These tenants have been there for almost 5 years and are blue collar workers so I leave them alone. 

Vacancy is about 1%, and that included 3 months of vacancy from an eviction in 2010 and a 10-day vacancy in one of the units. The evicted tenant apologized to me on her vacated day. Things happened and she made the wrong decision in my opinion. 

In April 2012, I decided to rent to a single mom who has a eviction on her record in 2008. It's been good for the last 2+ years. Some people deserve a second chance. I do things where I feel right and don't strictly follow the books. So far, I haven't regretted with my decision................yet.

@Manch Hon  @Johnson H. When you're looking at a property in the City there are so many variables that you need to add into your analysis that is not present in other areas. Rent control, Ellis Act, the building department timelines, parking, etc. Some hot deals we are funding are 3-4 level flats that are currently apartments and converting into a TIC. You can find them in the 1-1.8 range, rehab budget of 100k per flat plus 100k for misc. and exterior so your in it for around 2-2.5 but a TIC will sell for 750-1.5 per flat depending on bed/bath and sq ft. Also because of the expense of housing in SF, West Oakland and Berkeley are VERY HOT.

@Jeffrey Reyes - I am a native of San Francisco so I am very familiar with all of those variables and you are right that it is very unique to SF. With TIC's I'm concern that with the glut of condos coming out to the market, there will be less demand for them considering the financing difficulties. I saw your profile that you are a hard money lender, what are you financing these days and what do you like and dislike about the current market?

@Johnson H. I understand your concern with TIC/Condos/Coops so thats why you have to research the district inventory (both active and pending due to escrows possibly falling out). The way I see it is buying is still 25% cheaper then renting in SF. That sounds crazy but run your numbers. Until interest rates rise, rents drop or property values move too high that will still be the case. The fact is there is very few places to build. We are funding everything from a fixer in Noe Valley for 1.2mil tearing down and building a new home selling for 4mil to $300,000 SFR projects in Antioch. It all depends on the project and borrower. Hopefully that answered your questions?

@Jeffrey Reyes  West O is appreciating like nuts. I bought a TH summer of 2013. And this year units with exact same floorplan sold for 30% more. Just one year. That's very intense. I'd look for flip opportunities there but it seems competition is even more intense than the city.

I don't dare landlord in SF. Seen too many horror stories with landlords stuck with underpaying tenants for life. It's a good flip market though. Like I said people are VERY willing to pay for quality. 

Here's a couple of recent articles that may be worth looking at:

Foreign Buyers Splurge On US Homes, Drive up Prices

Why Housing Will Crash Again–But For Different Reasons Than Last Time

I'm not vouching for either article and I'm not taking a stand on the appreciation vs. cash flow issue.  I just thought these articles were interesting.

There is a lot of great information on this thread.

I'm not as familiar with SF market as most of you but wanted to share my own perspective. I've only lived here for a few years. I think Minh mentioned that tech wages have gone up recently. Which has contributed to the fast rising home prices here. I work in IT but for a govt agency and even we are getting a raise, sort of, this year. I've been in IT for many years and over time salaries have gone up and down but overall up. But no where near the pace home prices have gone up. Both my wife and I work in tech and we both are lucky to have pretty good incomes. Luckily we already own a home here but if we didn't I seriously don't know if we could even afford one now.

I don't doubt homes will keep appreciating here long term but who can afford it? Other cities like London, NY, HK are even more expensive so people out there some how afford it. It is just hard to imagine. Unless owner occupied buyers are not the main factor in the movement of home prices.

This is a great post. And could be titled why appreciation matters anywhere.

The demand from investors/owners world wide for the good areas of Cali is off the charts.

10 buyers per listing currently..even if interest rates go up 2% you would still have 5 buyers per listing. The momentum continues. I will not be surprised if these prices double in the next 10 years. So many reasons why between weather, universities, jobs, culture etc...it is not going to go away. The only thing to get this to level off is some catastrophic event. 



@John T.  ,

Thanks for sharing the articles. I didn't bother reading the 2nd article because it was written by Charles Hugh Smith. Like Tyler Durden of Zerohedge, he's a perma-bear.  These guys have been wrong for years. Instead of admitting they were wrong, they are now doubling down on their bet. It's unfortunate for readers who listened to these two guys and missed out on a home buying opportunity once in a life time. 

@Ken Lau  ,

Home prices have always been outrages in the Bay Area. I talked to my older neighbors who bought their houses in 1972 for $22k and 1976 for $55k, they were losing sleep over it because home prices were so expensive. I talked to other neighbors who bought their houses in the 80's for +$100k and in the 90's for +$200k, and everyone said it was a lot of money too. One had to borrow money from mom and pop for the down payment. Fast forward to now, these houses are selling for $700k to $900k. Regardless of what we think, home prices in the Bay Area will always be expensive. It's just a matter of less expensive during a recession, expensive during normal time, and more expensive at the top of the market. 

I have a couple of charts I'd like to share once I'm on my laptop, and why I believe we're no where near the top of the market. 

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