Why would someone be a LL in a HCOL area?

[Ryan Rubel]

After reading these forums for a while and learning about the 2% rule, I'm a bit confused as to why someone would buy a house and rent it out in very HCOL areas like San Francisco. I live in Melbourne Australia and our current SFH that we rent is worth $1.2M but we pay $3100/mth for this property. This just seems like a bad investment for the owner, correct?

We're moving to San Francisco very soon and have started looking at properties to rent.. same thing!  $1.1M homes being rented out for $3,000/mth.  What gives?  I see several houses that have been rehabbed and turned into rentals.  One actual example:  Very poor condition home sells for $900k and need major rehab - someone bought the home, rehabbed it, and now is renting it out for $2900/mth.  Why?

Thanks for any insight

[Ryan Landis]

@Ryan Rubel something a bit different in the Bay Area (and many other HCOL areas) is the preservation of capital for a lot of investors. Yes, from a cash flow perspective, that buyer may not be doing terrific (even if they paid cash for that I imagine their property taxes, insurance, operating expenses, reserves, etc. are not giving them the best return in terms of cash flow). But, and this is very important to remember, there are a lot of individuals out here with a good chunk of change and depending on what their goal is, this might be aligned with it. So, for someone with a lot of money in a country where the currency is volatile, they may consider "storing" money in SF real estate a better idea that possibly losing 40% this year from fluctuations (SF is one of the most well known cities in the world and draws a lot of international interest).

Secondly, for those doing this locally, you also have to remember that the very poor condition home that was rehabbed could easily be worth a few hundred thousand dollars more now depending on where it is. If the buyer had the intent to have it as a buy and hold and later sells using a 1031, they did pretty well.

Again, not exactly sure why everyone does it, and as @Thomas S. mentioned there are also those that do make speculative purchases/do not understand the cash flow process, but it does make sense for some people (even if there might be better ways to do it from those who are on BP).