Thoughts on Investing in the San Francisco, CA Bay Area?

Question

Hello All,

Just pondering if anyone has any tips or thoughts on the current Bubble in the Bay Area, CA and how to or not to get started in it with limited resources. The obvious answer is, you can't! Which is the idea that has held me back for so long, but in an attempt to to play devils advocate I was just wondering in anyone here has any ideas or thoughts that may not have been brought up yet on BP podcast.

I understand traveling 1-2 hours opens up almost infinite options, but CA just seems like such an endless variable/huge risk ratio.

Examples;

About 2 hours north you can buy a 1-2 acre parcel with lake views, for as little as $7K. Say I, myself could build a house in there for 70K in 1 year, that would now list and be valued at $120K. Seems like a decent profit, but last year with the drought fires raged and burned a lot of the houses down, also the drought threatens the lake (and the property values around the lake I would assume?).

3 blocks from my current place where I rent a 2 bed apt. at fair market value  for $2,350 with my partner a vacant house sits owned by a church that was sold for $7K in 1978. Currently the average price of homes on the block is $800K. Now there is a chance that if somehow you could get it from the Church at a good price, that if you were to build there you could uncover a  HAZMAT situation sending construction costs into a potential project killing situation.

With only enough savings to survive for 6 months if I had to stop working, and a credit history that is not great after starting my business in  2008 on my own at the age of 24, it took some time to calibrate.

I can't seem to ever not be just treading water financially. I have become disenfranchised by books like Rich Dad Poor Dad, but also feel that if I had HAD a 10 year goal when I was 20 I'd be in a very different spot, so I am not trying to shirk ownership for my decisions in my life. I guess I am simply finding myself struggling to free mental space to believe it's actually possible to become "financially independent" , and not just another pyramid scheme, book or, no offense intended "social networking site" etc.

Sometimes it just all seems impossible to go from where you are to where you would like to be and to loose hope, when coping with the stress that full time employment can create.

The things and sacrifices I have seen other people make to "get there" are simply not part of my make up/what I am willing to do. I feel like sometimes only the people who are cut through, back stabbing, unethical and basically crooked get "hooked up" in this business.

Any advice or thoughts appreciated and I apologize is this post seems really negative. I understand the importance of examining negative thought patterns and beliefs and hope that no one is offended or put off by this I feel that I am struggling to overcome a part mental part real problem, and hope that it is clear that I don't want to come across as saying I think all real-estate people are crooks etc.

Account Closed · Answer

I just glanced at the financials so not commenting on this property but this type of market.  O vacancy is very much possible over decades.  Having a tenant move out as a new one is moving in is not uncommon.

As far as expenses running low think about how these properties have high rent per sf vs. areas that may only be getting say $1000 bucks rent for a 2000sf home with several baths and HVAC systems that a lot of Bay Area properties don't have.  There's your expense items!

Now your cash flow eaters, if you care about that, will be the big ass mortgage but if yer smart you realize that expense is fixed and it is money going to increase your equity.

Chris Mason · Answer

The core East Bay areas, like Berkeley where you are at and Oakland/Alameda where I am at, are "appreciation markets." Meaning that the 2% rule isn't going to happen, so you just buy a place slightly cash flow positive, hopefully passing the 1% rule, and bet on appreciation. This can be risky, what if UC Berkeley stops being the #1 public university on the planet because they let the PC Police run too amok? That's something no economic predictor can calculate, but that could potentially hurt home values and market rent.

If you go up to Solano county and that area (just one example), it's a "cash flow market," meaning you can use the inherited/conventional/standard BP wisdom with cap rates, 2% rule, and so on.

Sellers in those areas sometimes actually like folks from our areas, because they know we place a premium on reliably closing on time, something not strictly speaking a requirement in such markets. So it's viewed kind of like "extra credit" when sellers evaluate offers. Listing agents in our area are like "meh" when they see a detailed 25 day close timeline, but up there it knocks their socks off because it's so rarely seen. And they advise their clients accordingly.

At a pragmatic level, looking in those markets kind of shuts you out of house hacking. Commuting from Vallejo to Berkeley would be horrible.

Some pros and cons to consider. Good luck!

James B. · Answer

@Kevin Brackett, @David Greene, Chris Mason

Here's what you can expect in San Mateo on a 4plex:

https://www.biggerpockets.com/forums/311/topics/289613-thrilled-to-share-my-friends-bay-area-4plex-with-bp

Kevin Brackett · Answer

Thanks for the overwhelming responses!! My mind is trying to compute...

I understand house hacking living uncomfortably etc. you can't have been in the Bay Area 10 years without making serious sacrifices on living situations (so many I have made  will spare you the details) especially right now as the housing "crisis" widens and continues to accelerate around here. I can't stress how frugal of a life I have lived or how far I have come given my options when I left home at 16, including but not limited to traveling other countries, places, volunteering, riding freight trains, and even hitchhiking across the country as well many other experiences that have shaped me.

I think my main problem is I don't WANT to go to live in a super rural town and abandon a lifework of connections and move backwards in a sense, but simply am beginning to feel its the only option. I do appreciate all your feed back thank you for taking the time to respond and share your stories!!

Thanks for your thoughts and ideas I know this was a pretty vague topic and maybe should be posted in the "discontent with the rat race/socioeconomic structures that seem trap people in them based on class for life while they perpetually struggle to get a bite of the carrot that perpetually dangles just out of reach from their hungry teeth" section...

So thanks again for humoring me y'all and for the positive feed back!

Chris Mason · Answer

That agent earned his commission with that one! Good for him, and for your friend.

Priced a little high for house hacking, though. Four unit FHA high balance loan limit is about $1.2m in our area. $490k down payment is slightly more of a down payment than most house hackers want. None of the traditional benefits of FHA 3.5% down are present at that price point, hell 25% down is still north of $400k.

But it is priced such that someone with ballpark 25%-30% down could barely be in that range where it can be called high balance and not jumbo, meaning still open to high income folks with "meh" credit, and thus more potential buyers (assuming these folks have lenders that have figured this out). Was that intentional when they thought about the next incrimental "do we do this next $75k of work so we can sell it for >$75k more," or did the improvements that made sense just happen to put it where it's at now?

I know folks consider the impact of financing on sale value when they consider building that 5th unit that'll push it to commercial financing, was "type of financing available to buyers" a consideration here?

Account Closed · Answer

The Bay Area is a very profitable market.  Have you looked into any first time home buyer programs?  Have you looked at FHA.  Maybe look into patterning with someone on the first property.

David Greene · Answer

The first question you need to ask yourself is, how bad do you want this?

If you want it badly enough, you need to look for a way to start saving money. House-hacking, moving further away and commuting to save on rent, cutting down on eating out, etc. are all viable options for saving up some money to invest. They say it takes money to make money, and this is a good maxim to leave by.

Investing in San Francisco would be a bad place for someone to begin their investing career. It is, however, a great place for making a high wage that will take you very far if you look to invest out of state. If you can save up 5k (about 6 months time if you can eliminate your rent payment alone) you can put 10% down on a 50k rental in the midwest or the south. That will get your foot in the door.

If you aren't willing to make personal sacrifices towards your own comfort, real estate may not be the best place for you. You have to get comfortable being uncomfortable in this asset class, and that begins in our personal lives.

James B. · Answer

Chris Mason

Can't answer your questions because I don't know the intricacies of the project-I'm just happy for my friend to bring it to market.

Yes, the Bay Area is expensive!

Blake F. · Answer

$1000/year for repairs/maintenance for a 4plex?  Even with a recent remodel that seems low.  And no vacancy?  I know the bay area has a super low vacancy rate, but the expenses running at only 20-25% of gross income seems obviously underestimated.

Andrey Y. · Answer

Kevin, seems to me that your post is disguised with something about Bay Area investing, but in reality you wanted to discuss something entirely different?

My suggestion is, stop thinking about REI (or reading BP, which are effectively the same thing). Go out and Volunteer somewhere you are passionate about, look into some books on Stoicism, or take 1-2 weeks of to Travel. Try Thailand or the Philippines, where $150/month gets you a pretty decent apartment. This is much needed perspective which I am afraid to say, a lot of entitled (and non-entitled) Americans lack.

Good Luck!

Thoughts on Investing in the San Francisco, CA Bay Area?

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