Purchasing Rental Properties in an Expensive Marketplace.

[Taylor McMullen]

Hello everyone, 

I am wondering if anyone has any experience investing in expensive market places? The 20% down payment can be a real challenge when the average property is $650k+

It can be very tricky, especially for younger people, to obtain the 20% down payment. That is, if you are aiming for a positive cash flow.

If you are in the market currently, you could use a combination of cash savings and equity loans...

What are your thoughts?

[David Faulkner]

I invest in an expensive area, SF rentals for nearly 15 years, and have a vastly different take on things than most. High demand and limited supply is what generally creates an expensive market. If the conditions that cause that high demand and limited supply are persistent, then these conditions also cause high appreciation rates in both purchase price and rents. You can confirm this by studying the historical pricing and rents over the long term. For example, coastal Southern California is very expensive, but the long term average appreciation rate is 6%-8%, depending on the specific city, and rents have increased at a similar clip, and this is average over the last 40 or so years. So, the question then is are you speculating by assuming the same 40 year average rates of appreciation and rent increases? Are the conditions that cause the high demand and limited supply persistent? Is it true that these properties offer lower cash flow in the long term if the rents go up rapidly vs a market with higher initial cash flow but lower rates of rental increase?

Also, another hallmark to be aware of in these markets is that prices tend to be more volatile then less expensive markets. Not always, and validate this statement with your own independent analysis, but in general this tends to be true I believe because people tend to stretch more than they should financially at times to get into these markets and when a downturn hits that strategy backfires on them. This is actually good news for the conservative, patient, and prudent investor who can use this volatility to their advantage to ocassionally pick up properties at bargain basement prices. It also means that risk management, multiple exit strategies, and conservative financing are also especially important IMO in these type of markets.

A few things to consider as you do your own independent analysis and make your own decision ...