Investment Property vs. Own House – SF Bay Area

[Bastian Kneuse]

Hi everybody,

I recently discovered the Bigger Pockets podcast and became an instant fan. I am new to BP and real estate investing in particular. I have done some research as well as read some books to familiarize myself with this subject and concluded that I would like to get involved in real estate investing. As I am getting more knowledgeable about the “ins” and “outs”, I am struggling with the following question: Should I purchase my own house first and then engage in investment properties? Or is there a scenario where it makes sense to continue being a renter, while investing in out-of-state properties?

Let’s back-up for a second…. I am currently living in the San Francisco Bay area (very expensive!!) and live in a rental property with my wife and baby boy. Our monthly rent pushes $4,000 (...did I say I live in the SF Bay area?). We moved to the SF Bay area about 2 years ago for job reasons (…you guessed it – technology) and currently rent a 2 bedroom house. Both, my wife and I have a comfortable 6-figure income as well as savings stacked away, which enables us to “swing” the rent. Most of our savings are nicely invested in the stock market; however I would like to implement a system that provides additional passive income on a regular basis, which led me to real estate investing as a viable option. I considered purchasing a home in the SF Bay area, but some arguments deter me: 1) I am unsure on how long my family will stay in the Bay area – there is a distinct possibility that we will move to a new location within the next 5 years. 2) Houses here are pushing the million dollar mark tying up a lot of capital, which could be used differently (season tickets for the Warriors, anyone?). 3) The SF Bay area housing market is extremely hot – I am very fearful about a mild to severe bust in the near term. 4) Buying a house in the SF Bay area would not leave enough ammo to pursue other investment properties.

I am currently looking into single family investment properties in Jacksonville, FL. (Seeing the words “investment properties” and “Florida” in the same sentence may give some people the chills, but I can back that up.) A) The Jacksonville economy seems to be very promising over the medium term – a lot of growth happening. B) My sister-in-law and brother-in-law are real estate agents in Jacksonville and can hook me up with good deals, excellent contractors and property management companies. C) I used to live in Florida and am familiar with how things are being done there. D) I have eyes and feet on the ground given parts of my family live there. If I would take a portion of my current savings, I could probably invest in 2-3 properties in the Jacksonville area for a buy-->fix-up-->rent-out strategy.

Long story short, I am very interested in some expert opinions on how to proceed in my real estate investment endeavor. I would appreciate any feedback…if good or bad.

…you made it! Thanks for sticking with me to the end. :-)

[Account Closed]

@Bastian Kneuse I understand your frustration and pain. Buying a property in the Bay Area is great if you're looking to acquire an appreciating asset, but if you can't sustain many years of negative cash flow, then you'll be out of the investing game very soon. @Arlen Chou is definitely someone you should talk to if you have the ability to invest here.

Unfortunately for me and many others, I'm still young in my career, and the handicap of putting all of my eggs in one basket would significantly impact my standard of living while also making me pay a huge opportunity cost.

I have talked to a lot of investors here in the Bay Area, and concluded that if you want cashflow, go out of state, if you want appreciation, stay in the Bay. For newer investors, or those who don't have that much capital, you should start with properties that cashflow well. Once you don't need the cashflow anymore, you can purchase some properties in the Bay. The more expensive properties will give you negative cash flow and lots of depreciation, which will help with your taxes.

I actually bought 2 houses in Jax last year and so far, they've been great! The main strategy you should always focus on is to 'buy right'. You also need to trust your property manager.

I wouldn't worry about house prices in the Bay going down anytime soon. All of the investors that I've talked to say that the bust will be in the 5-10% range. At the end of the day, you have to look at the long term growth of the asset. What are prices going to be 20 years from now? From what I see, the Bay Area is still the place that all of the smartest kids are moving to. We have all of the top dogs in tech and we're still hiring! When I asked my dad if we're going to have a recession soon, he said, 'Don't ask me, I'll ask you. Is your company hiring people or laying them off? Are they starting or shutting down their programs?' Most people are bullish about the Bay.

Good luck!