Why appreciation matters in the SF/Bay Area

168 Replies

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Originally posted by @Ben Leybovich:

@Johnson H. I would hope that new investors would read my comments as 180 degrees opposite to an endorsement.  LOL

 I wish you had said this from the very beginning! LOL

I am looking forward to you writing more about your future deals and syndications, always a great read for me. I appreciate your articles Ben!

Originally posted by @Ben Leybovich:

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.  

So what did you advise him to do? I hope it's not killing his golden goose in SF and slog it out in Midwest...

Originally posted by @Ben Leybovich:

Hahahaha - wouldn't you like to know...?  Hahaha

 He does, which is why he is asking. Was this a paid call or paid coaching Ben?

Originally posted by @Johnson H.:
Originally posted by @Ben Leybovich:

Hahahaha - wouldn't you like to know...?  Hahaha

 He does, which is why he is asking. Was this a paid call or paid coaching Ben?

Oops. Poor guy. At least we have one fewer investor competing for deals in the Bay Area. Good job Ben! Keep it up.

Originally posted by @Ben Leybovich:

Didn't charge him a cent, @Johnson H. .  Think I should have?  I think I should have - damn it...I am too nice for my own damn good :)

 Alright, if it wasn't a paid call, why don't you spill the beans and tell us what you told him. Shed your words of wisdom on us Ben!

Not today -:)

Going to go bathe my kids.  We've been home all day living off that fully leveraged Mid West cash flow, and they certainly need baths!  Besides, I already talked to my good friend Serge Shuhkat (Podcast 60) on the phone for an hour today, as well as spent an hour at lunch (while Patrisha was home with the kids) with the mystery caller.  And tonight, there;s a planned telephone conference with a certain Brandon Turner.  That's enough BP exposure for one day!

I am out.  

P.S. Remember that 10-unit I bought last year (I blogged about it)? T9 stands at $19,000.  That's on track to making over $20,000 CF and $100,000+ of equity by year's end.  No help from the marketplace - all yours truly.  No down-payment either :)  I guess he called cause while $60,000 of equity on $60,000 of down-payment is nice, he really wanted to know how to do what I do :)

Should I blog about it, @Johnson H.  ?

They practically give away properties in some midwest areas. I would argue significantly more skill is needed in SF as compared.  Yes you will make more appreciation but with that comes real world competition at all levels. Anyone can get a shack in the midwest for almost nothing and squeeze cash flow immediately. Hardly anyone can do the same in SF. It is like comparing the major leagues to the minors. My guess is... average midwest dudes would get eaten alive and strike out competing in the big leagues. 

@Ben Leybovich  

Ben the major point your missing is for those that play in SF they have to have already been VERY successful at another career as it takes real money to make money in Bay Area.. The reason you can buy no down cheap stuff in the mid west is there is no real demand for it like there is in other markets.. And any claim of appreciation in the mid west is just hog wash.. Nothing sells for FMV it only sells for what someone will pay for it backing in to the 2% or better rules.. you may have cash flow good for you. But I doubt you could sell the property tomorrow and make 60k.. so yes the mid west is the land of the investor will limited resources no collateral and wants to get in the game nothing wrong with that.. But to call Bay Area folks brainless investors well that's just not right your talking about a lot of very sharp dudes and dudettes in the Bay Area this is not a market dominated by blue collar industries and Welfare renters...

But yes I am one of those Brainless folks that buy just living in the bay area and Portlandia the last 40 years made just about 2 million in tax free cash as I sold my personal residences and many millions more in all sorts of different investments. And that with a nice high school education but got my RE license at 18 and learned the bizz.

Originally posted by @Amit M.:

no, @Ben Leybovich   is right. There are a lot of stupid, wealthy people in the Bay Area.  Unlike the mid west, where there are a lot of stupid, poor people.  

 Right, there are definitely no stupid people in Mexico. Oops, I mean California..

Originally posted by @Ben Leybovich:

Not today -:)

Going to go bathe my kids.  We've been home all day living off that fully leveraged Mid West cash flow, and they certainly need baths!  Besides, I already talked to my good friend Serge Shuhkat (Podcast 60) on the phone for an hour today, as well as spent an hour at lunch (while Patrisha was home with the kids) with the mystery caller.  And tonight, there;s a planned telephone conference with a certain Brandon Turner.  That's enough BP exposure for one day!

I am out.  

P.S. Remember that 10-unit I bought last year (I blogged about it)? T9 stands at $19,000.  That's on track to making over $20,000 CF and $100,000+ of equity by year's end.  No help from the marketplace - all yours truly.  No down-payment either :)  I guess he called cause while $60,000 of equity on $60,000 of down-payment is nice, he really wanted to know how to do what I do :)

Should I blog about it, @Johnson H. ?

 No thanks. 

Dude relax...it's theater of the absurd. 
Now that Ben got his *** handed to him...I wonder what bob bowling had to say....
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Originally posted by @Wilson Churchill:
Originally posted by @Amit M.:

no, @Ben Leybovich   is right. There are a lot of stupid, wealthy people in the Bay Area.  Unlike the mid west, where there are a lot of stupid, poor people.  

 Right, there are definitely no stupid people in Mexico. Oops, I mean California..

Hahaha @Amit M.  - very nice :)

As to Bob (and others), I'll let you ask them yourself.  But, he did contact me privately, and the tone was both less confrontational and less argumentative than you'd think...lol

On the other hand, I think I see smoke coming out of you on both ends - no need - I understand it's hotter than hell in SF as is!

I honestly can't figure out why you're steaming - I agree with you.  Appreciation is important - there would literally be no other good reason to invest in SF if it weren't for crazy appreciation.  Unfortunately, the rest of us, outside of a few very hot markets, do not benefit from this type of appreciation.  We have to manufacture wealth in RE; we get very little help (if any) from the marketplace.  Manufacturing wealth, you can certainly agree, requires much more fluency in the sport than a simple capacity to buy...

@Jay Hinrichs  - congratulations to you on all of your success.  I do disagree, however, that money is indicative of intelligence, as your post suggests.  From your post, I derive that your initial success was underpinned by a capacity to buy a home for your family, stay there for a few years, and sell it for $500,000 more than you paid for it tax free.  Excellent strategy, however one that does not work in most other places because SF is a very specific marketplace.  This alone validate my point :)

Now - I happen to have a number of family and friends who live in CA.  Let me tell you, not everyone in SF is rich, and if they are not this doesn't make them stupid.  They are PHDs in chemical engineering and theoretical physics.  Definitely not stupid, and definitely not rich!

I've been a harsh critic, Jay, of a lot of my music friends who have dedicated their lives to perfecting a craft which doesn't pay.  I've been pushing them to recognize certain economic realities, and most have resisted.  But, to say they are anything less than brilliant people simply because they live in Michigan or Ohio as opposed to SF, and the home they bought 20 years ago for $90,000 is still only worth $140,000 is somewhat short-sided, Jay...

Finally, I would love nothing more for all of the CA guys to stay there. However, a lot of you have been so starved for yield that you are running here to Ohio and paying 7 CAPs for C Class product. I have gotten over-bid on every offer I've placed in the last 12 months - I guess it's cause nobody wants to buy stuff here, Jay. I can't compete at Pro Forma 7 CAP which turns into 4 in real terms - I let the CA guys take it. I'll just have to wait and pick things up on the cheap when they foreclose, which they will...

Well - sorry it took so long to respond.  I have kids, which means I have a life outside of BP.  But hopefully this clears up my perspective.

Originally posted by @Ben Leybovich:

Finally, I would love nothing more for all of the CA guys to stay there. However, a lot of you have been so starved for yield that you are running here to Ohio and paying 7 CAPs for C Class product. I have gotten over-bid on every offer I've placed in the last 12 months - I guess it's cause nobody wants to buy stuff here, Jay. I can't compete at Pro Forma 7 CAP which turns into 4 in real terms - I let the CA guys take it. I'll just have to wait and pick things up on the cheap when they foreclose, which they will...

Ben, I've experienced the same phenomenon here in Cleveland. SFR foreclosure prices are up over 100% from 2012. In the last two years I've seen apartment buildings purchased at 15% cap and flipped for 8%. How's that for price appreciation?

I suppose we have a bubble here, but never in California...because weather, amirite?

One more note -- California does not have a monopoly on price appreciation markets. There are plenty of them out here in Ohio. My mother bought her current house in 1979, located in beautiful Chagrin Falls, Ohio, for $70,000. It's currently worth $500,000. And believe me, you can't get houses to cash flow for any reason in this neighborhood. Still more opportunity exists in the gentrifying neighborhoods.

The one missing element that leaves me scratching my head is this. If you buy in a warzone neighborhood in Ohio, you expect prices to go down. This is economic reality. This isn't true in California. Population movements and easy money have done well to distort it into a marketplace that doesn't make sense at all to the rest of the country.

I think some people actually believe you can throw a dartboard anywhere on a map and make money. I get calls often from people who intend to do just that in Cleveland. I have developed something of an informal script for advising about the risks of purchasing a 25% cap rental off Craigslist. People here want to live in a good neighborhood, and pricing reflects that. It seems that lower-income people in California are desperate enough to do anything to get a roof over their heads. It's kind of a sad situation, which makes me wonder how long it will sustain itself.

Ben, Ben, Ben...

Look, no matter how hard you try to spin it, your original comment was 1- inaccurate and 2- offended many CA investors:

"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."

1- it's wrong because the easy and high rate appreciation you are talking about does occur, but usually for a year or three only. And then some people overpay, and their investment isn't so hot in the short term. Also, most of us make good deals on the buy side, add value, rehab, work with city restrictions and/or tenant laws, etc., to bring our gem into highest and best use- which also makes it safer to hold during down turns. That takes brains, and in the SF market trust me, a lot of it. 

2- I'd easily roll with your comment if it was more along the line of- successful and established CA investors don't have to work very hard. I'm sure you'd still piss some people off, but I'd personally agree with you. At least for me, I don't usually work very hard. I work smart. I don't do flips-schmips, don't bother with arduous syndications, etc. I'd rather just leverage, buy what I can on my own, add lotsa value and benefit from the immediate equity upside as well as cash flow.  

Now let me get back to perfecting my home made craft lattés. 

@Amit M.   - Any chance that latte ships well to Ohio?  I wouldn't mind one; it's not even October and not 56 out there...

Look - we are talking about a buy decision for $200 of paper CF which required deployment of $60,000.  He did it, but he now knows this was stupid, with the only mitigating factor being that $60,000 worth of appreciation.  I am not even arguing the underlying fundamentals or lack thereof - there is both scarcity and growth, so the appreciation may very well be warranted.  It's all good.  But, it makes it easier - you have to agree.   

Can you imagine me deploying $60,000 in Ohio over $200/moth of CF?  Of course not - unless the back end can be forced to a tremendous extent.  But, certainly not retail, and certainly not cause of anything to do with appreciation... The market in CA, and SF in specific, certainly allows for a lot of "bumper" against mistakes, which most us do not have elsewhere in the country.  Appreciation helps - I concur with your original assertion! 

Appreciation, not in your case or bob's, but in many, many, many other people's cases serves as protection against stupidity; it supports longevity in this full-contact sport where there would otherwise be none considering the lack of perspective which is prevalent in REI today. This was the thrust of my original thought...

It's been a pleasure to engage in this discussion with you, Amit.  We likely agree more than disagree at the end of the day.  Gonna go have a cup of coffee :)

Originally posted by @Ben Leybovich:

Look - we are talking about a buy decision for $200 of paper CF which required deployment of $60,000.  He did it, but he now knows this was stupid, with the only mitigating factor being that $60,000 worth of appreciation. 

I must be dense. Why is it stupid?

I apparently started this tussle by calling Ben out on the initial "brainless" comment and have largely just watched from the sidelines since. However, the overall gist I get from reading all the ensuing comments is that Ben resents the fact that some people live in markets that currently exhibit greater appreciation than his market does. Are people in other markets supposed to apologize to you for their location?

And no, that is NOT in any way admitting his earlier point that you can be "brainless" and still be successful there, because I still think that's a crock.

Originally posted by @Michael Borger:

I apparently started this tussle by calling Ben out on the initial "brainless" comment and have largely just watched from the sidelines since. 

Actually I have no issue with that whatsoever. I like making money the easy way. If the Bay Area market is so easy even brainless people can make a killing, hey, why argue? Time to get your buckets ready to catch the raining gold coins. 

I just can't get what is so stupid about making money the easy way. According to Ben SF will bail you out even if you did everything wrong. Should the logical conclusion be we all invest in SF? Or we need to go to Cleveland, use all our wits to beat the crappy market to prove our manhood?

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