Originally posted by @Leandro Zhao:
Originally posted by @Chris Mason:
You mentioned NYC, my answer will be biased from SF Bay Area experiences, mostly East Bay and Silicon Valley, with some SoCal mixed in.
People chasing cashflow don't buy SFRs. They buy 2-4 unit properties locally in neighborhoods you might consider "rough," or they look at SFRs that are a 1-3 hour drive away.
People who are already wealthy and high income (maybe from real estate, maybe from a lucky IPO), they are on an appreciation chasing strategy. If it's worth $1.5m today, it's probably had strong appreciation historically. History doesn't always repeat itself, but it's not exactly a terrible predictor either. They don't care about the cashflow, they're betting that Google (Silicon Valley), or Hollywood (SoCal), or the Bay Area housing crisis, are going to yield some combination of high demand and incomes, or low housing supply/production, or both, and thus appreciation per year greater than the short term negative cashflow, averaged out over a decade or two, at which point they unload it all and retire to the Bahamas (or whatever).
In NYC perhaps the example would be a luxury condo a block from Wall Street. If you believe the Occupy Wall Street narrative, and are part of that "Evil 1%," then wealth will keep getting concentrated, and that luxury condo is a super solid long term appreciation bet. If you need the cashflow b/c you aren't already in that "Evil 1%," it's likely the case that you just can't go toe-to-toe with those folks you'd be up against in downtown Manhattan.
Thank you for your reply!
SF is also a great example of this topic.
I see a lot of post here at BP of people buying class A and B houses. And my math, their NOI is negative.
Is there any other strategy other than buying for appreciation?
Leandro,
Definitely you're missing a few things. Buying for appreciation, or buying for cash flow? Neither is guaranteed. However, there are things that are more certain than others: 1) forced appreciation, 2) principal pay down, 3) geography, and 4) historical data of strong appreciation and rent growth in supply constrained markets. Our nose bleeding expensive San Francisco Bay Area market is one of them.
First of all, don't confuse cheap with value. Cheap doesn't mean good value. Expensive doesn't mean bad value. The market determines the risk. The lower the risk, the lower the yield and vice versa. Basically, the market says expensive markets are low risk.
Now, let's take 2 examples: Our expensive market is trading at 4 cap while the high yield market is trading at 12 cap. For everyone $1 increase in NOI, that translates to 3x increase in earnings on a 4 cap market while it's 1x on the 12 cap market.
My partner and I own close to 90 units in San Jose where an average SFH sells for around $1.2M so $400k sounds cheap. However, we invest mostly in small apartments, 6-12 units where it's "scalable" while we don't have to compete with the big boys. We just rinse and repeat year in and year out. Keep in mind that no one is going to hand you their cash flow or appreciation. You have to earn or pay for it one way or another. Fortunately, once you figure it out, you will get handsomely rewarded. Just a reminder that expensive doesn't mean bad value. It's expensive for a reason.
Best of luck.
