All Forum Posts by: Alex Vidal

 This is laughable! How can you predict that in the long run?

Jon - You do realize that IRR calculations/forecasts are heavily weighted to the exit price? Therefore you're blatantly contradicting yourself saying that you get 20%+ IRRs, but you think investing appreciation is speculation and you can't predict appreciation.

I find it very hard to believe that you can find a stabilized out of state property (like one Max would hypothetically be investing in) that can generate a 20%+ IRR. The only way you're going to get to a 20%+ IRR, is through value add short term investing or unrealistic assumptions. Any one can throw out claims like you have above, but I'd be very interested to see your financial models and assumptions to see how realistic they really are.

Additionally, you need to realize that no matter how high prices currently are in the Bay Area, they have only just now reached pre-recession levels. There's plenty of room for the Bay Area to continue this upward trend because of land scarcity, much more difficult lending practices than 2005, job growth, income growth, and pent-up demand from the Millennial generation. Many out of state markets have had a huge run up in recent years and have now greatly surpassed their pre-recession levels and that throws up a big red flag for me. 

Additionally, there are plenty of properties locally that can cash flow day 1. I purchased an A+ located $1M SFR this year, that generates a 9% cash-on-cash return in the East Bay. Real estate is an industry built upon inefficiency, all it takes is a little digging and work to find a truly good deal.

Over the past 20 years (which includes 10 years of the worst market in recent history), SF home prices have increased 3.5x and SJ homes have increased 4x. Rather than simply saying appreciation is speculation, I challenge you to show me any market in the US that has experienced appreciation anywhere close to that. Additionally, although there's no rental data going back that far in history, I also guarantee that rents have experienced similar (or quite possibly more) exponential growth. 

Are you telling me that you'd rather buy something turnkey in the Midwest that will most likely increase in price 2x over the next 30 years and maybe see rents increase 2x, rather than property in the Bay Area that will not only make you a multi-millionaire in 30 years or sooner when the loan's fully paid off, but will also be spitting off more rental cash flow than you know what to do with? Also what do you think is going to happen when turnkey investors eventually start exiting the popular out of state markets en masse?

The majority of out of state investing is shortsighted and built upon unrealistic assumptions and inflated numbers. Invest in solid property that pencils out, in a market with strong fundamentals, lock a loan in for 30 years and you'll kill it in the long run. 

I also forgot to mention that as a high earning Mechanical Engineer at Apple, you'll be able to write down the mortgage interest expense on your properties if you get a loan rather than buy all cash. 

Additionally, equity (wealth) grows tax free via 1031 exchanges whereas cash flow is taxed each year.

@Max Maloney

Unlike the majority of people faced with this dilemma, you currently have the capital available to actually buy in the Bay Area with 20% or more down.

If you want to build long-term wealth, then invest in the Bay Area, there are plenty of opportunities for duplexes-fourplexes in middle class to upper middle class locations in the $500k - $1M range. The great thing about the current market conditions is that right now you can lock into a 4% or better 30 year fixed loan, which will allow you to achieve some solid day 1 cash flow in the Bay Area. Also you'll have the ability to add easy value to the property create equity. Additionally, in the long term (15+ years) the power of Bay Area appreciation and rent growth will undoubtedly add a large amount of money to your net worth. 

If you're in need of short term cash flow or only want to own real estate for the next 3-5 years, then go the turnkey out of state route. You'll get some nice cash flow and the price of your home may not be as volatile as the Bay Area in the short term. You may gain a little appreciation, but nothing that will greatly affect your net worth. Also you wont need to do any work (except manage from afar) and you wont be able to add equity to the property via simple repairs/upgrades because the turnkey company has already done that and reaped the profits. Any capex hits will also affect your returns much greater than in a higher priced asset. Capex costs, although they vary slightly by region, are basically the same for any similar sized house. The problem with lower priced turnkey properties is that the proportion of the capex costs to the price of the house is much larger and if you buy multiple turnkey properties rather than 1 higher priced property, you're adding multiple roofs, HVAC systems, driveways etc to your portfolio that will eventually need to be replaced.

Jordan - Big red flag, a 401K's gain is not tax free...A Roth 401K's and a Roth IRA's are.

Samir - Go the SFR route and make a downpayment at the point where you can achieve the lowest possible 30 year fixed interest rate and still be able to cash flow $200-$300/Mo. That way you can have a slight cushion and build up a war chest to prepare for capex. It'll also allow you to lock into the current extremely low interest rates before they rise.

@Samir S.

What are some of the parameters that you're looking for ie purchase price, your equity available for a downpayment, potential rent, estimated expenses etc.? No one can really answer the question without these details, every deal is different. 

I'd advise against a condo/townhome, you'd be better off buying a house in Folsom/Roseville if you can afford it. The HOA fees are definitely going to kill your cash flow potential each month and you will need to analyze the HOA's viability and their reserve account and projected capex allocations for the future. Take the plunge and buy a SFR if you can.

@Brent Seehusen

 No of course I doubt it will triple again over the next 10 years, but it will continue to grow due to supply constraints, inflation/increased interest rates, and the inability of most people to buy giving you as a landlord a huge advantage. 

The hypothetical buyers would be cash flowing now even if they kept an old $800k/6% loan in place - $4,800 (monthly loan payment), 1,300 (monthly taxes/insurance estimate), $1k (R&M and water estimate) = $7,100/Mo. expenses and $8,450 monthly rent = $1,350 monthly cash flow with basically zero vacancy in the market. If they had any sense and refinanced the existing loan to $660k at 4%, they'd reduce their monthly expenses to $5,450 and they'd be cash flowing $3k/month. 

As I said previously, the numbers would've never made sense to purchase this property in 2005, at the absolute worst time in the market, since rents did not support the purchase price. However, with today's low interest rates and rising rents, you can purchase a property in an A+ location and still cash flow very nicely. I recently purchased a $1M house in the east bay in one of the top school districts in CA where the median house price is $1.5M and the property cash flows approx $1.7k/month day 1 giving me an almost 9% cash-on-cash return year 1 (including a $50k rehab). 

I seriously doubt there was any other time in recent history when purchasing an A+ located single family home in the Bay Area would yield those returns. The reason it's possible is because of the extremely low interest rates that you can and should lock into ASAP. 

Value-add commercial real estate if you're looking for that much cash flow in a short 5 year time horizon. Not. Really a viable option if you don't have commercial experience though.

@Brent Seehusen

I don't think anyone meant to claim that SF specifically is a good single family home market at this point in time and SF in 2005 was undoubtedly a terrible market to buy a property. In 2005 interest rates were around 6% and rents were roughly 1/3rd of what they are today, those numbers on a $1M asset would never have come close to penciling out. 

The SF data was simply used as a tool to extrapolate for other communities in the Bay Area as a whole, since most services only track major markets. You chose to compare the height of the market to today, which is a flawed argument. What other markets across the U.S. have greatly surpassed their pre-recession levels? If a market is currently far outperforming its pre-recession levels, then I'd think that would be a huge red-flag for any investor. The fact that SF/the Bay Area is just now reaching those pre-recession heights signals to me that there is additional room for growth/appreciation over the coming years. 

Your argument also fails to realize the equity gains of paying down the mortgage and the massive rent growth over the past 10 years. From 2005-2015, if you put 20% down on a $1M duplex for example, you would've now realized $140K in equity gains and the rent for each unit would've almost tripled to today's median rent of $4,225. Even if you had bought this negative cash flowing property at the absolute worst possible time in the 2005 market, you would've still increased your equity by 70% and you'd now be cash flowing quite nicely in a top U.S. market (even if you chose not to refinance in the previous couple years which would've also have been a huge mistake). 

As I previously stated, right now you can lock into a 30 year fixed rate at sub-4% interest rates! This coupled by undeniable exponential rent and appreciation over a span of 30 years is a no-brainer for any buy and hold investor. I'd urge everyone to take advantage of these unprecedented conditions if they have the capital or the capabilities to do so.

"Regarding your last post, the SF bay area is about the last place you'd want to buy and hold especially if you're just starting out."

@Account Closed showed you, you can buy a $1M house with only $50K in equity. Additionally if you dont have $50K, then there are plenty of opportunities for duplexes to fourplexes in the $200-$400K range in less desirable areas. You'll need to be willing to make the sacrifice to live in one of the units and do some of the work yourself to create sweat equity. Anyone who tells you that real estate is easy is naive and you need to have the fortitude to set some goals for yourself and make your dreams come true. Real estate is all about finding market inefficiencies and turnkey operators have already taken all the profits out and eliminated your potential upside. You need to get creative, improve your W-2 income, house hack, or find some way to make yourself valuable to others whereby they're willing to invest their money with you.