All Forum Posts by: Amit M.

@J. Martin WRT the high end rental home, a big risk is sustaining that huge $10k per month tenant. Even for SF, that is a limited pool of renters. And when the economy snags, that's when those guys downscale pronto. Also, high end homes have expensive finishes, so you risk expensive wear and tear situations. Most people that rent out SFH's in SF have had them for awhile, so their mortgage payments aren't close to full value. They can still get decent cash flow, while holding the home for further appreciation. But doing that on new construction is very hard- unless you really get a bargain buying in. But I find that most lots or tear downs are bid to market pretty quickly by the various developers in town. Those guys made a killing in 2010-12, but now they are bidding everything up and their margins are getting squeezed.

As for rents increasing WRT prices, I am actually seeing rents stabilize and even decrease a bit in SF. The increase over the last 4 years has been insane- my mission condos are up 50% in rent from 2010-14! You can't expect that to continue. As for prices, they were on a tear throughout 2013, but I think appreciation is more modest so far in 2014. Just my intuition, and a few data sets I have seen for the first part of the year. But if our strong economy continues (and I think think it will) prices will continue upwards. So pretty soon, the price to rent ratio will probably go way out of whack. It depends on the neighborhood of course. In the mission it's already out of whack.

the reality, at least in SF, is that it's very difficult to cash flow new construction. Especially high end work. And if you're going to do a new bldg like this, it makes sense to do it high end in our market. Mostly those are done by flippers, not as buy and hold.

So if you owned that property, you could do a few things: renovate and keep it as your residence; sell to a developer; or do some moderate renovations to the existing structure and rent it out. If that lot was zoned RH2, you'd have more flexibility with new construction (i.e. sell one, rent one; or higher total income for both.) But Glen Park is almost all RH1, so most likely that's not an option here.

this is how I view it: I always start with the perspective of "never sell." That's my default orientation. But then I look at the specific situation, and there are many factors to consider. @Manch Hon listed some very valid ones. Running out of depreciation may also be another factor, although I'm not there yet.

I'll add some other factors:

1- financing. Prior to 2008 it was easy to pull 90% cash out with low doc loans. So if you had quality properties that appreciated you gained little by selling. After 5% commissions and 1% transfer tax, I may as well not sell and take out a refi at 90% LTV. Of course those good ole days are gone, but I do see that lenders are loosing lending requirements on a regular basis, so it's getting easier to keep properties and leverage them, which is always my preferred modus operandi.

2- a 1031 exchange may work well. But keep in mind that in a competitive market, you need to be able to find an exchange property in the timeframe necessary. That is not always possible when the market is tight, and you may miss the best deals by not being able to be flexible with your offer. Maybe a reverse 1031 exchange would make things easier.

3- Since I view my investments more like SFH's (once my 2-4's are condo converted) my model is more like the SFH investor who keeps good homes in appreciating areas. It's different than multi unit buyers who at some point consolidate to buy a bigger building for better effencies, centralized management, etc.

4- but at the end of the day, to me it's always about proper leverage and future appreciation potential. That, and avoiding hassles. Selling is a major hassle, not to mention the SIGNIFICANT tax issues involved. Another challenge is keeping your balance sheet in check, and not sustaining major cash flow losses. Low doc loans are over, and I need to show good yearly income to get future loans, so that effects my willingness to take on major developments, which always show big losses.

5- Avoiding major developments (where you're sitting on an empty bldg. and relying on city planning approvals of 1+ years) is the biggest change in my strategy this RE cycle. We are also still in the early-mid cycle IMO, so I can still chase rehab-to-cash flow deals. But that will probably end soon when prices escalate further. My perspective on the cycle is: 2012-13 was early, 14-15 is mid, and 16-17 is late. Now we are seeing a lot of slower moving larger players buying and entitling big projects, and the Johnny comes lately investors starting to pay a premium. I wouldn't be surprised if next year is the last year to buy anything, but that depends on the supply/demand and appreciation rate in your specific market. To me at least, it looks like San Francisco prices have slowed down this year, after crazy increases in 2013. But let's see what the summer brings.

yeah, you guys all picked up on that pretty quickly! Complex systems of efficiency are more a result of necessity. Simplified, minimal systems are a matter of desirability. As you build your real estate businesses, always keep in mind how to simplify their management, in all respects. In my case, I own only a few, but high rent units. I rarely sell, so less transactions and new tax issues. I'm busiest when in acquisition mode, but otherwise the property management aspect of stabilized properties is pretty minimal, as I own relatively few units, have quality professional career tenants, and my units are all located very close to me. That's what works for me, but everybody needs to find their own optimized management system...maybe even one that can be run on an ipad! Cheers.

@Account Closed "I am not encouraging EVERYBODY to invest in SF or Honolulu but to look in their local investment area and take into account the potential appreciation in the various areas and property types. Every town has a wrong side of the tracks. A lot of people can't invest in initial no cash flow properties. And a lot need the cash flow for their salary. AND despite the facts probably 80% will continue to think it's too good to be true and the market will turn any century now! LOL And, there's always room for educated experienced investors. The Johnny come latelys will just help clear out some of the crap and churn some properties for the seasoned investors."

Yes, I second that completely. There are varying degrees of appreciation in most areas, and analyzing that is important, in addition to calculating cash flow. And yes, most people can't afford to buy in our expensive markets. The exception are out of town people that are already wealthy, and they mostly look to park their cash in appreciating markets. But usually they are not active investors, adding value, going into gentrifying neighborhoods, etc. They usually like to buy newer condos in secure condo towers near downtown. And depending on their timing, and their leverage (or lack of if buying all cash) they may do well or they may just do okay. I'm always much more active: repositioning properties, expanding, lot splits, refinancing/leveraging, renovations, buying out low rent tenants, condo converting, sussing out up and coming neighborhoods, etc., etc. When done well it all reflects on my returns.

BTW, I'm guessing that noe condo would go for minimum $800k today, maybe closer to $875k.

@J. Martin you will probably appreciate this book. It's one of my faves: buy and hold, by David schumacher. Several versions out. Check it out!

@Account Closed I like your $16,000 starting figure, as that is the exact number I started my "investing career" (although I didn't know it at the time) back in 1994. Back then I was a kid working hard in tech...in the days when Sun Micro, SGI and HP were cool companies...yikes! My grandmother left me $16,000 and I brought a 2 unit bldg in Noe Valley with a friend/partner, my unit for $160,000. Back then Noe was a sleepy little neighborhood (not the über-yuppie-destination it is today ;). Plus the market was real sslllooowwww in '94. We looked for months, and came back to this building because it was so cheap!

Fast forward a decade, and in 2004 I decided to get serious about real estate investing and do it full time. In 10 years time that unit (which I converted to a condo) went from $160,000 to $705,000 when I sold it (I couldn't resist the $500,000 tax free gain.) I had also leveraged and borrowed on that unit earlier to purchase 2 more buildings in SF. I put in maybe $15k to condo convert, so it appreciated from $175k to $705k in 10 years. Plus remember that my initial cash outlay was only $16k. Frankly I'm too lazy to run the numbers again (anybody want to crunch the appreciation rate on that?). But I do remember that it's not too shabby!

@J Martin "I think you need to make that a whole new topic, and tell the BP world what's going on!"

Frankly, I'm of two minds on that. One one hand I do enjoy the intellectual battle, wit, and not to mention somewhat self serving bravado that goes with expounding on your POV. On the other hand, why promote how good your market is? I'm happy that others are fixed on fly over states. Why get more competition into our markets?

@Account Closed "I thought 59.5 was the new 40!"

It probably is, especially if you have done well with your real estate investments!!

I agree with everyone's comments here so far. What creates the whole 'appreciation mystique' is that it is highly complex, and dependent on local and global influences. There's local effects like the tech industry, NIMBYism, limited growth, area desireability, etc. Add to that macroeconomic policy, globalization trends and politics, and you have a fun, and never ending quest trying to sort out all the variables!

Right now in SF there is a lot of political backlash due to the lack of affordability. SF may be a beacon for things to come in other cities and regions if the economy continues to expand...although economic results have been highly mixed. Quite frankly I wouldn't be surprised if other cities in the Bay Area start adopting rent control measures. While that will freak out many investors, it will also create opportunity for others, who know how to work (and make money) with rent control.

I have personally become fearless WRT all the political activism happening here. I know that the more distortions politicians throw into the mix, the more opportunities there are to make money, if you know how to maneuver 'the system.' For instance, with more rent control restrictions, there are now many property owners who are renting units only as short term corporate, vacation, etc. There are also more owners who are wealthy enough that they can afford to keep units off the market by leaving them empty! It is belived that there are at least several thousand vacant by choice units in SF. These responses by property owners to ownerous rent control measures actually cause current market rents to be even higher! The idiots at city hall don't get that; the more restrictions they put on housing, the more housing becomes expensive. And when you have natural turn over in a unit, it's literally a party for the landlord!

So there are many factors that contribute to the substantial appreciation in the Bay Area, and SF in particular. And investors who dismiss appreciation as pure speculation or just an added 'nice to have' bonus, are not taking a critical look at the myriad of factors that make appreciation a very real thing.

geez, you guys are all so impressive with multi monitors, various systems of über efficiencies, virtual assistants...and I'm just some lazy f*ck trying to run everything off an iPad mini!