Why appreciation matters in the SF/Bay Area

168 Replies

Originally posted by @Deepak P.:

@Manch Hon   Agree. Multi-unit is the way to reduce per sq ft costs but long way out for me too (capital needs, like u said)

@Minh L. If it is $250/sq ft on the peninsula, wonder if that could be a tad bit lower for east bay

Anyone know if there are significant building code differences between bay area neighborhoods that building new in, say, Fremont might be lot less expensive than in San Jose? Or say, from building in Palo Alto vs. building in Fremont?

@Kyle Zaylor  

, any comments on variation in building costs/ease for different cities in the Bay? And how have you been..?

@J. Martin   I'm seeing ~$250/sf around the Bay Area as well. 

East Bay does have a few characteristics that could pencil a bit lower.  

I think the true differences in total development cost are coming out of the nuances between municipalities/communities. Given the increases in costs of labor and materials across the board in the region, there isn't much differentiation in these buckets. However, East Bay does have a few advantages with less expensive land and permitting (generally, at least). The biggest differences I'm seeing around the Bay are primarily in holding costs. Planning commissions, architectural review boards, etc. tend to just blow up a new construction schedule on the Peninsula. If a project is teetering between a green light and red light, more often than not this is where it could go south rather unexpectedly.

Lately I've been seeing a few more "diamond in the rough" projects that get green lit only after a bit of homework and legwork upfront (via a specific easement, lot line adjustment, etc.). I think the scarcity of homerun deals is bringing out these types of plays.

J, when's the next meetup taking place? I've been tied up during the last few but am itching to meet up with everyone again.  

@J. Martin  - Negative cash flow, sounds like you are speculating now. I wish you the best but be careful. You should know what the consequences are given what we've seen during our day jobs.

@J. Martin  Does the 250/ft cost include all the soft costs as well? And what grade will the building be? I talked to some prefab people and that's the number I got. I thought stick-built projects would be more costly?

I think the basic labor and material costs are more/less similar throughout the Bay Area. BUT, in higher end, Palo Alto, SF, etc. by default you use better materials, so PSF is inevitably higher. Can easily be $300-350 for new SFH's that sell north of $2mil.

In addition, the permitting process and time delays can make a huge difference. In SF it's on a level by itself. Sometimes delays last 2-3 years. And if it's over 10 units, 3-4 years, given all the lip service paid to affordable housing, NIMBY's, etc. Be prepared for a real cluster f*ck if you want to build anything new here.  Consequently almost all new constr in SF is for sale. You'd be insane trying to hold any of it, unless you have a whole lotta cash to put down. 

@Amit M.  When I asked my prefab guy last year about the permitting process, he just said Woodside is particularly difficult. I specifically asked him about the peninsula and Marin, he said process is manageable and it's a known beast. Woodside is a complete disaster. 

There was a story of how the great Steve Jobs spent 10 or 20 years trying to knock down his derelict Woodside property and only got permits to do so shortly before he died. 

do you guys buy earthquake insurance for your bay area properties? additional 2k-4k per year on top of already negative cash flow.

No, I don't buy earthquake insurance. 

It has been a lot of fun reading this thread. Up here in what I call the northern north bay things have been going up pretty fast too. Makes it hard to get started and build momentum, but I'm looking to get a HELOC on my 2012 triplex and use that to move forward. Looking forward to getting to know some of you SF/bay area folks. Any upcoming meetups that I should know about? (aside from one in November which I've heard about)

Originally posted by @Abhay K.:

do you guys buy earthquake insurance for your bay area properties? additional 2k-4k per year on top of already negative cash flow.

 There is almost no reason to buy earthquake insurance unless your house is not anchored to your foundation with anchor bolts, or it's a brick or masonry building with no reinforcement. Earthquake insurance has deductible around $30k-$50k. With wood-framed construction in our area, we will likely have sheetrock cracks and some other minor damage. There's no way the damage is more than $30k-$50k, which is our deductible

In my opinion, buying earthquake insurance is like flushing money down the drain. Sometimes, I'm thinking of getting into the insurance business, but how can I compete with Warren Buffett?

@Minh L. And I am pretty suspicious what will be covered in earthquake insurance and what it won't. Earthquake damages are so rare I don't have a lot of data points on the strength of its coverage.

@Manch Hon @Minh L. - Unfortunately, many homes in San Francisco don't have anchor bolts as the homes are so old. In addition, if you are remodeling the first floor of a home, San Francisco now mandates that you cover all the walls in your garage with drywall. Sad to say, my dad didn't think of putting in anchor bolts until after his home remodel and his home insurance mentioned in was mandatory if he wanted earthquake insurance. 

@Manch Hon  ,

@Kathryn M.  and I are in contract on a Victorian duplex around 30th St & Chestnut. Looking to get in at about $120/ft. So I think that leaves lots of room. Just need to make sure we get it closed..

@Orion Walker  ,

Most people recommend saving your earthquake insurance money to do actual seismic upgrades to your property, if that is your concern. I know Kathryn thinks about this too.. Orion, I'm having a meetup at Danny Shepstone's fixer in West Oakland next Wed, 7/30. Check out website in my signature to sign up for my meetup group to get emailed the address. @Minh L. , sorry forgot you were busy on Wed. I'll try to do it on Tues next time, but had something scheduled already this week.

    @Johnson H.  , I believe you can add anchor bolts later, if you have a crawl space.. maybe @Daniel S.  , Kyle and I will be at Portal restaurant/bar on the south side of Lake Merritt next Tuesday around 6:30 if you're interested in dropping by.. Who else on here lives around the lake..?

Yes, anchor bolts are easy to install provided there is decent enough crawlspace area.  Hammer drill (possibly right-angle drill if tight), Concrete bit, Concrete Epoxy, Bolts, done. You would probably want some shear-walls installed in strategic places as well, which an engineer could advise. 

@Johnson H.

@J Martin

@Daniel S.  ,

I'm in contract to buy a 3,400 sq. ft. building. It's a rectangular shape and has 2 stories. It has a partial basement and crawl space. Do you know roughly how much it would cost to install anchor bolts? Thanks. 

 
 

Did you own when you were living in the Bay Area, or were you renting?  Do you mind sharing which city you used to live in, and why you decided to pack your bags and got out the here?

@Minh L. Sorry I missed this question Minh.  I was purposely trying to stay out of this conversation as much as possible because I wanted to hear other peoples experiences and I probably have a reputation as Mr. Appreciation.  I did buy in The East Bay, the heart of the bay area in 1986 that doubled in value by 1988 and each decade after.  I've kept the property and the original plan was to spend the next couple of summers there and have my garden and spend the winter in Honolulu.  This is my first year and I've spent it all in Honolulu.  Best laid plan.

I have a low Prop 13 tax base and would love to transfer it to a condo in SF but SF does not participate in Prop 90. I'll probably transfer to a good area of Oakland or San Mateo County. I don't want to manage a SFR from Honolulu and when I come to SF between tenancies it would be nice to be in an urban area where I don't need a car and near fun stuff.

I lived in Honolulu late 70's early 80's but there are few high paying jobs so when the economy tanked I fled to CA.  I kept investing in Honolulu as the plan was always to retire here.  I love the year round warm temps and water you can get into year round.  I can walk into Waikiki for the bustle but am on the beach with Kapiolani Park as my back yard.  Nothing against SF but just prefer here.

sorry @Minh L. I've been really bad at reviewing my tags on here...  But I'm trying to get better at it!

Regarding your seismic retrofitting, I'd say maybe $50-$100 each. It would depend on how many, access, and whether you are having it inspected. Many building inspectors would need to watch you fill the holes with concrete epoxy to ensure they are cleaned out and mixed and filled property before inserting the bolts. The concrete dust from drilling the holes should be blown out with an air pump (best to use an air compressor) so the epoxy has a good bond. You should also consider sheer-walls, tie-downs/hold downs, and some UFP10's. It would cost more or less depending on difficulty or ease. It's best to have an engineer at least tell you where to locate these items. There is such a thing as doing too much. The placement of sheer-walls, UFP10's, etc., need to be strategically placed to allow some flexibly of movement of the building (such as bridges are designed to allow movement so they don't snap or break).  Here is a useful guild published by Simpson Strong-Tie, who basically have a monopoly on construction fasteners and connectors. 

http://www.strongtie.com/ftp/fliers/F-SEISRETRGD12R.pdf

www.HomeEvo.com

Some Real Estate Investing is glamour - but, most is a grind and hard work.  It takes about as much brain power to make wealth in SF or Hawaii as it does to fall out of a tree; anyone with a down-payment can do it, @Amit M.  and @Bob Bowling .  Well, perhaps a thought here or there is required, but not much.  So...

What should the rest of the country do?  I am used to having to earn creatively everything I've got - the market gives me nothing in Ohio.  Indian, Kentucky, Michigan are more of the same - investing here requires skill and perspective!

Thoughts, gentlemen? 

I don't see how anyone in SF or Hawaii wouldn't be offended by that statement, whether they're doing well or not. This is hard work no matter where in the country you are. There are ways, of course, to improve your odds and shorten the learning curve, but no one achieves significant success without putting in the time and effort and building the proper skill set. Just because you happen to be in a market that may be more than difficult than others doesn't mean that the rest of us simply owe any success to our location or that those who are still putting the pieces together are brainless.

@Michael Borger - you can get offended if you want, but that would be silly.  Amit and Bob are big boys and tried hands, and they are unlikely to be offended at my restatement of the reality that is expressed in the original post itself - it is a whole lot easier to create wealth in Hawaii and SF than most other places because the market takes care of you.  Such is the statement made by @Amit M.  , and I simply concur - it's a whole lot easier to play the game when the market is on your side. The rest of us, need a lot more skill, effort, creativity, tenacity, discipline, and perspective.

This should make a nice post for the blog.  If I'm pissing people off here, imagine how many more I can piss off writing an article like that :)

Of course, it's easier if the market is on your side. I don't deny that. But your crude remark about how it "takes about as much brain power to make wealth in SF or Hawaii as it does to fall out of a tree" is completely out of line. That's a slap in the face to anyone in those markets who still hasn't "made it" yet.

To that point, there's a big difference between the market being on your side and the market "taking care of you". Again, you discount all of the work that goes into being a successful real estate investor, much of which is completely irrelevant to your local market. You still need to learn how to put deals together, raise capital, manage contractors, build relationships with agents and mortgage professionals, learn how to market effectively, understand contractors, learn different acquisition strategies, etc. Being in Hawaii or SF doesn't mean you don't have to go through that learning curve and/or implement those building blocks.

I do just fine for myself on Oahu, but I know plenty of people here who are just beginning, still managing a full time job while trying to build their real estate business or who are just hitting one of 100 struggles that many people hit along this journey -- and you just effectively labeled them all as brainless with your statement above. If I were one of them and saw your "fall out of a tree" remark, I'd likely be offended and justifiably so.

Haha - those beginners you speak of - they will be just fine if they can manage to buy 1 shack and hold onto it for 5 years.  Do you think they can manage to buy 1 shack, Michael?  Cause if not, then the brainless argument really does have some gravitas :)

Originally posted by @Ben Leybovich:

Haha - those beginners you speak of - they will be just fine if they can manage to buy 1 shack and hold onto it for 5 years.  Do you think they can manage to buy 1 shack, Michael?  Cause if not, then the brainless argument really does have some gravitas :)

I have to agree with Michael that your comment is offensive Ben. In addition, I believe it's poor advice to tell a beginner to just buy a shack in San Francisco. Not everyone can manage to save the $100k down payment needed on a $500k shack in a less than desirable part of town that will also need significant rehab. In addition, this shack won't cash flow and the investor will have to deal with very tenant friendly rental laws that the investor needs to understand right away or they can be sued. I would never tell a beginner to buy a negative cash flow property unless they have a high net worth and understand they are speculating. Prices in San Francisco were down 30-50% during the downturn, it was a rough and fearful time out here just like the rest of america. 

As you know Ben, the key in real estate investing is buying right and it is not easy anywhere. 

@Johnson H.  I find it disappointing that some of you are offended.  However, while there are times when it's appropriate to apologize - this isn't one of them.  I believe what I stated is the truth...case and point:

About 1 hour ago I took a call from someone in the San Francisco area; a BPer.  He had contacted me asking for guidance.  We discussed lots of things, but what is applicable to this thread is that he had bought a condo in SF in 2012 by putting 60k down.  The Pro Forma CF looks to be about $200.  He is happy having any CF in SF, but he knows intuitively it's not the wisest deployment of capital...or is it?  The freaking thing is worth $60,000 more today than he paid for it 2 short years ago!!!

Does this not prove my point?  Do you all know how hard we in the Mid West have to work for $60,000?  He has literally done everything wrong, and yet he generated $60k of wealth.  I think that he will be the first to tell you that he is an example of someone falling out of a tree and hitting a $60,000 payday...no knowledge required...market took care of it for him...!

He is wise enough to feel intuitively that something is aloof (easy come easy go), and smart enough to call and get 45 minutes of free time with me - I think he'll tell you that he learned a lot.  

I've never posted anything on the forums or written anything on the blog that I didn't think people could learn from.  I am not running for miss congeniality here - only expressing a point of view that I believe to be valid, and in support of the original post.  No need to be offended :)

@Ben Leybovich   - That example can be applied in a number of metros, Phoenix, Vegas, Portland, Seattle, Miami, Boise, Boston, etc. Anyone buying a property in a desirable location two years ago should be seeing nice equity gains today. The market saved this investor, as it did with many investors without needing much skill just like the market from 2002-2006. 

Correct me if I'm wrong, but your point is that it is not very difficult to make money with real estate in San Francisco. My point is that past performance isn't an indicator of future performance and there is always a risk of losing money. If that same investor purchased a condo today in San Francisco, I don't know if he will see a $60k gain two years from now. 

I don't want new investors reading this thread thinking that investing in real estate in San Francisco is an easy investment decision. The market does not always take care of you.

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