How can you invest in SFH that cost over 500K?

Question

In my city, SFH goes for about 400k, and the rent for those unit for 2.5k. After the mortgage, the landlord has no money left to pay for any other fees (property tax, maintenance, etc).

Is there anything i'm missing here?

Cities like NYC where houses goes over 1m. Is it even an investment or just burning cash?

What is your strategy for overpriced cities?

Chris Mason · Answer

You mentioned NYC, my answer will be biased from SF Bay Area experiences, mostly East Bay and Silicon Valley, with some SoCal mixed in. People chasing cashflow don't buy SFRs. They buy 2-4 unit properties locally in neighborhoods you might consider "rough," or they look at SFRs that are a 1-3 hour drive away. People who are already wealthy and high income (maybe from real estate, maybe from a lucky IPO), they are on an appreciation chasing strategy. If it's worth $1.5m today, it's probably had strong appreciation historically. History doesn't always repeat itself, but it's not exactly a terrible predictor either. They don't care about the cashflow, they're betting that Google (Silicon Valley), or Hollywood (SoCal), or the Bay Area housing crisis, are going to yield some combination of high demand and incomes, or low housing supply/production, or both, and thus appreciation per year greater than the short term negative cashflow, averaged out over a decade or two, at which point they unload it all and retire to the Bahamas (or whatever). In NYC perhaps the example would be a luxury condo a block from Wall Street. If you believe the Occupy Wall Street narrative, and are part of that "Evil 1%," then wealth will keep getting concentrated, and that luxury condo is a super solid long term appreciation bet. If you need the cashflow b/c you aren't already in that "Evil 1%," it's likely the case that you just can't go toe-to-toe with those folks you'd be up against in downtown Manhattan.

Account Closed · Answer

Leandro,Definitely you're missing a few things. Buying for appreciation, or buying for cash flow? Neither is guaranteed. However, there are things that are more certain than others: 1) forced appreciation, 2) principal pay down, 3) geography, and 4) historical data of strong appreciation and rent growth in supply constrained markets. Our nose bleeding expensive San Francisco Bay Area market is one of them.First of all, don't confuse cheap with value. Cheap doesn't mean good value. Expensive doesn't mean bad value. The market determines the risk. The lower the risk, the lower the yield and vice versa. Basically, the market says expensive markets are low risk.Now, let's take 2 examples: Our expensive market is trading at 4 cap while the high yield market is trading at 12 cap. For everyone $1 increase in NOI, that translates to 3x increase in earnings on a 4 cap market while it's 1x on the 12 cap market.My partner and I own close to 90 units in San Jose where an average SFH sells for around $1.2M so $400k sounds cheap. However, we invest mostly in small apartments, 6-12 units where it's "scalable" while we don't have to compete with the big boys. We just rinse and repeat year in and year out. Keep in mind that no one is going to hand you their cash flow or appreciation. You have to earn or pay for it one way or another. Fortunately, once you figure it out, you will get handsomely rewarded. Just a reminder that expensive doesn't mean bad value. It's expensive for a reason.Best of luck.

Account Closed · Answer

Incredible thread. @Chris Mason and Account Closed right on the money, as always. @Leandro Zhao you asked “is there any other strategy other than buying for appreciation”. The best strategy here in the Bay Area is value-add. Like Minh said, no one is going to hand it to you.

Account Closed · Answer

Leandro, I'm glad you found my post helpful. I've bought these properties on- and off-market, but mostly off-market. Know your market "well" so you can spot a deal from miles away. Establish relationship with agents in your target market. Don't be a pain in the rear to work with. It takes time to build the relationship, but if each deal yields you $500k in equity, how many deals do you really have to do per year? Everything in life has a price. The crap the shysters peddling on this site is cheap for a reason. Account Closed recently bought an 8-unit deal in his market for $1.25M. Appraisal came in at $1.6M. Once stabilized, it's worth $2.3-$2.4M. Just ponder on that for a moment. How many doors do you have to own with these $100-$200/door OOS to get that kind of equity? Stop thinking like the 99%er and start to think like the 1%er. Our markets are expensive for a reason, and there's a ton of money to be made with much less efforts compared to the cheap crap OOS. I self-managed when I had 16 doors, mostly single units. As I scale up the biz with my partner, we have a property manager to manage all our buildings from day 1. You want to be an investor, not a landlord. Best of luck.

Chris Mason · Answer

Sure. Stuff that might pan out, might not. Is San Francisco going to outright ban all short term rentals tomorrow? Is the bottom going to fall out of the corporate housing for medium term consultants market when a bunch of big tech companies in Silicon Valley realize it's cheaper to build their own (making a term up here, but it rhymes so it could be a thing) "DINK dorms"? Is Oakland REALLY about to have a tech boom, making anything SFR purchased at the 2019 price a cashflow monster in 2024? Who knows.

Theresa Harris · Answer

@Leandro Zhao Look for places with secondary suites where you can rent the main floor and the second floor (or basement) separately. Where I have some of my rentals, prices jumped and single family homes also start at $400K. You can get $3+K per month by dividing the house into two suites. Some also add a third unit though you'd have to check your local laws for restrictions.

Leandro Zhao · Answer

@Minh Le wow just wow! Reading your post is incredible! Do you mind me if I ask you how you buy this properties and your strategy? I'm a newbie and I would like to learn more about this.How do you manage all these units?Thank you for your post

Jared Forman · Answer

The only way an investment will make sense is if it cashflows. On the surface it might not cashflow, but can you change something about the property or the business model to make it cashflow. Get creative

Ali Boone · Answer

Buy in another city non-local to you. That's been my strategy living in Los Angeles. As it is for a lot of Californians and New Yorkers.

Alex G. · Answer

In my (Eastern Mass) experience, overpriced cities tend to get more overpriced in boom times, and are first to recover from periodically occurring busts (e.g. S&L debacle, subprime mortgage crisis). Ergo, the least risky strategy is house flipping.