Who is Investing in the Uninvestable Markets?

Question

This is purely curiosity.

We hear all the time about aspiring investors who are priced out of their local markets, experienced investors who invest far from their homes, and markets that are too expensive to work in. Markets like this exist all over the country.

Let's use San Francisco as an example.

We all know it's one of the priciest markets in the country. We often hear how it's too expensive for homeowners to even buy there, muchless invest successfully. Many people live there, and have to rent there.

So who owns all the rental units? Someone has to. And they can't all be losing money. Who are they? What are their criteria for analyzing their deals? Have they all owned their properties for decades? Do they never change hands? Is it impossible for a new investor [to the market, or to investing in general] to get into the market?

Jay Hinrichs · Answer

investors are NOT losing money on west coast assets.. you can buy properties every day that cash flow IE 20 or 25% down and return 3 to 5%.. plus mortgage pay-down deprecation and were the real money is made APPRECIATION and TRUE liquidity.

As @April Crossley identified.. most CASH flow markets.. the values are simply what a cash flow investor will pay nothing more will be nothing more and the liquidity is limited to those looking for 10% plus returns... unless you rents go up substantially the value of the SFR's just never move and over time  you need higher monthly returns becasue your going to feed it right back in with cap ex and if you have a bummer tenant and every one gets one.. that cost you 5 to 6k in lost rent and make ready.. your cash flow home has now lost 3 YEARS of income.. so it will take you 3 years to get back what you lost and another 3 to get were you were , and thats if those 6 years run perfect.

Whereas ,  West coast high priced Real estate comes with VERY stable tenant base and bad days with tenants while rare but its not nearly as pronounced when it does happen.. the properties can be liquidated in a matter of days ( instead of months or years) by simply listing them on MLS.

and based on History if you own a rental in a high price west coast market.. you have probably made 50% or better in appreciation on top of someone paying off your property for you.. FAR better deal over time than buying low end rentals that cash flow 10% but never go up in value..

The barrier to entry is what drives investors to cheaper markets.. and if investors want in the game this is were they are forced to go.. its not so much because they do not want rentals were they live its because the barrier to entry is quite high.  Out in the cash flow markets you can get into a property with 20k in your jeans and 5k in reserves.. not going to do that in SF... So I see those areas as starter areas and I see those that are successful in lower priced areas those that can get scale and get to 10 units ASAP  so that when they have a bummer ( and we all do) it kind of income averages.

Frank Chin · Answer

My family invests in real estate, and coincidentally invests in NYC and San Francisco. And I can confirm that properties in A and B neighborhoods do not cash flow in the normal sense, meaning down payment of 20% or less, conventional mortgages and so forth.

Some years back, while searching for properties to buy, we stopped by the window of a real estate office advertising several properties. Another lady, later turned out to be Chinese, was also looking, and we started talking. We asked if she's looking to move to our area. She said "no, for some relatives living in China and Hong Kong". I said "Oh, are they moving to NYC". She said "no, just making an investment". Then I said "wow, how do they plan applying for mortgages"? She replied "No, I think it'll be all cash, then pointing to those advertised in the window, said these go for $200K?" Today those houses will go for $1,000,000 and up. I nodded. She went on to say "in that case they could pick up several all cash".

Never once did she mention about cash flow.

Then I was taking courses at the NYU real estate school. One instructor just happens to be a real investor, and says to the class, "I'll be talking about some real deals I'm currently working on". So, during that semester, most of the deals, mostly commercial, was in Westchester, NY, just north of NYC. He lives right here in Manhattan, NYC. Someone asked him why all his deals are outside of NYC. His reply, "Because I can't compete with the boatloads of cash coming in from overseas".

Then the questioner persisted, "OK, I understand, but does it have to do with Westchester". The instructor, now a little annoyed said "Because they never heard of Westchester in China, don't you get it". Then the class went "Ohhhhhh.."

Then the mid 90's, in the middle of the real estate crash I picked up my own home, a duplex at auction for $200,000 from the REO bank, with them giving me a mortgage at 10% down. It's currently over a million. But back then, after taking over, market rents for the 2 apartments will exceed the monthly mortgage by $500.00."

Then, around 10 years ago, I see them tearing down old 1 family houses with large lots, and putting up two 2 families all over my neighborhood. One investor I know knew someone retiring, his neighbor, made a deal to buy his home for $450K. Then the man's wife got a realtor involved, an investor paid $550K all cash, if the man would move in 2 weeks. Torn down the house, cost about $800 to construct a two 2-family houses on the site, and back then, each house sells for $995K.

Any cashflow? Seems like no one cares.

And who's buying it? The block across the street from me has 8 houses, are all attached 1 families, goes for over $450,000. Five of them changed hands in the last 3 years, and four of them are Asian.

There you have it. My house is now paid up. I'm just an't wait for the next real estate crash to come.

Christian Reyes · Answer

I'm by no means an expert but I can relate to @Frank Chin's response. I lived in Westchester County for years all while looking for decent entries into the investment world. What I found were three things:

1. Appreciation(it is happening)

2. Barrier to entry is increasing

3. Cash flow is negligent( 3%-5%) if you buy an already rehabbed house(which many are)

The only solution? Go into the neighborhoods not many are looking into. However, Westchester county taxes are something like $7k for a single family per year and multifamilies(depending on the school zone) could range anywhere from $9k to $15k.

As a result, I have to move on to lesser competitive markets in the area. The issue of course is finding them.

Anthony Gayden · Answer

@Colin Reid

I think that those markets have the absolute best potential for making the most money in real estate. The problem is that many people just don't have the resources to compete in those hyper-competitive markets. I will include myself in that column.

Colin Reid · Answer

Thanks, everyone!

I figured part was barriers to entry, and in some markets it was appreciation bets. I've only invested in Texas and New Mexico, in smaller towns (30k-250k population), and helped my wife score a good deal in PA before we got married (which was expensive by my standards, but the numbers work, so whatever). I assumed there were different strategies, or at least higher prices for entry, in those super-high markets. I did't really consider tons of foreign money ignorantly flooding in, buying cash. I appreciate all the insight.

April Crossley · Answer

I'm not saying West Coast investors are losing money.  Hope that wasn't implied in my answer. I'm saying there are investor everywhere that will buy and not care if a place cash flows or has a negative return. West coast, east coast, doesn't matter.  Just bc one person has certain criteria for a deal doesnt' mean its someone elses. It all comes down to what you are looking for and willing to take- cash flow vs. appreciation vs. wanting a cupcake property that cash flows like a pig and will appreciate (finding deals below market, doing value add, etc.) ... and a whole bunch of other things to consider.  Barrier to entry is definitely a big one I would assume in this area on the west coast for new investors.  I see it alll the time with people from NY flooding our market.

Who is Investing in the Uninvestable Markets?

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