How do buy and hold investors survive in high priced markets?

Question

Hello BP Community,

I am an aspiring investor currently living in the high priced SF bay area of California.  Currently I am still in an investigative  stage of investing.  Ive been focusing my search primarily in Sacramento county and also look regularly in Solano, San leandro, and Santa clara counties.  Going off what I see on websites such as Zillow and redfin, then plugging the financials into the BP rental calculators it has been a bit discouraging.   From what I can tell California is a pretty hard place to get cash flow, even with a sizable cash investment.  As a control, I pulled a few multi families  from Phoenix Az and Portland OR and ran the numbers.   What I found is that the Phoenix  market will cash flow fairly easy in comparison (there are  1% deals).   Portland was a bit tighter but still much more forgiving than California.

In Sacramento where I've been focusing most of my search home prices are about half of what the are in my current area but still I struggle to find anything that looks it will generate cash.   Of course I could throw all my eggs into one basket and get a modest return.  Not a good option.

What am I missing?  How do investors in markets such as this turn a profit?  What is the upside to these markets?  Are these markets spoiled for investors?  Is  California not a good place for buy and hold investors?

Thanks in advance for any input.

Ellis San Jose · Answer

Knowledge, flexibility, creativity and skill become much more critical in these types of challenging markets.  Specialized skill in solving unique problems will set you apart from the run of the mill investment strategies and formulas.

This a people business and a problem solving business, not a "real estate supermarket" where you merely pluck properties of the shelf looking for the lowest prices, highest yields, and comparison shop like going to Walmart or Costco.

My personal preference after 20+ years of investing is that I would much rather drive a 2-3 hr radius digging deep for opportunity than hopping on a plane for 3 hrs one way, spending a week in a hotel and buying off the shelf.  I mean no disrespect to others who have developed their skills and experience in acquiring properties in out of state markets.  I have done both, This is just my choice.

Bob E. · Answer

Come on people, measuring appreciation from a once in a life time market bottom in 2009-11 is misleading to a new investor.  If I recall the Dow was 7-8,000 around that time too and now it's just over 18,000, I don't know a lot of people saying the dow is going to 36,000 in the next five years so sell everything, buy on margin, and wait for the money to come rolling in.

A case in point we sold out house in Saratoga CA (right next to San Jose) pre crash,  in June of 2007 it is now worth @ 27% more then what we sold for (using NARRPR - Relators website).  So while someone might have scooped up something in the neighborhood on the cheap in 2009 - 11 we are not in that kind of market right now and prices have gone up substantially.

Matt R. · Answer

@Nick ClurmanFor decades Cali has been the biggest money maker especially for SFRs buy and holders. The top five cities where landlords make the most money since 2009 are San Jose, SF,LA, SD and Riverside. Those are also the top five for the nation. The time factor with rising rents and values is one way they survive. Some areas average 7% rent growth and appreciation annually - that's a double both on rent and value every decade. Putting large down deposits, repositioning, vrbo and forced appreciation are more ways to survive. Lastly buying right, getting a deal, short sales, foreclosures, off market, good timing etc are always a good start. Good Luck with your search!

River Smith · Answer

I really don't know much about real estate investing, but I do know that my condo in SJ went up 20% last year, and I've seen it over and over again since moving to CA in 1989.  I only wish I could have bought in 2010, I would have been a millionaire on just a couple of homes in this crazy market.  I hope to make another 20% and put $100K down on a duplex next year.  Just like Bob Bowling stated, sit and watch the appreciation grow.  To me this area is not about cash flow, but about appreciation..................and it's amazing!!

Account Closed · Answer

put $200,000 down on a million dollar house.  Wait 10 years and sell for over $2 000,000.  Walk away with $1,200,000.  Also SF rents have increased on average 15.5% every year since 2009. https://www.rentjungle.com/average-rent-in-san-fra...

But @Matt R is correct that long term is closer to 7%.

Bob Dreher · Answer

@Nick Clurman

Rent is a function of supply and demand. What is the current supply of rentals in the market in which you have interest? Further, consider the pipeline of additional supply which is projected to enter that market over the next few years...

Price to Rent ratios are a good starting place...what are the economic forecasts for continued growth (job creation, wage growth, etc.)? Without sustained wage growth, rents can only climb so high. If buying single family homes, your are then not only competing with other income buyers but also with the amenity buyer (I like the way the kitchen flows into the family room). Again, appreciation is limited by the affordability...(ability of the buyer pool to qualify and service debt)

Money can be made in any market...it just takes much longer and requires creativity and diligence to identify the opportunities in mature market cycles...in addition to sticking to your financial model...without getting emotionally involved, which results in over paying for deals.  Scared money loses!! Patience is a virtue. Good luck.

Account Closed · Answer

Look at that $550,000 three year gain!  Let's see how you do that in a low cost area.

Check out this discussion.

http://www.biggerpockets.com/forums/55/topics/2032...

Andre Key · Answer

I agree look in the outskirts of your market, they will soon follow suit of the larger metro area.  Also I'm curious to how you are finding the potential properties that you are interested in.  Hopefully you are applying some techniques that may land you some generous returns on rents.

If the prices in the market are high I'm pretty sure rents are skyrocketing as well.  I can image there being a lot of competition in your market but I tend to think there are deals in any kind of market.

Derek Jones · Answer

There are still good rentals to be had on and off market.  If you are searching around downtown/midtown expect to lose money as those properties are priced too high for any decent returns.  I've seen some good properties on paper but you may have to deal with tenant issues.

Ali Boone · Answer

The only upside is the potential for appreciation. Which is, fine, but it's a different strategy. I've never gone that route just because cash flow has been more my focus. I'm down in LA, so same problem as up where you are, so I've always bought out-of-state. I love it. Super low prices, great returns, no hassle.

How do buy and hold investors survive in high priced markets?

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