Is Bay Area market crazier than normal?

Question

New to the forum, but not a total newbie. I wanted to hear people's opinion about housing market around Bay.

I've been looking into Brentwood, CA which seems to be last area with house prices that make some sense.

Math:

- 4 bed, ~2000 sq ft, ~5000+ sq ft lot, good schools 6+, 1990+

- 630-670k asking price

- property tax 1.3-1.6%, mortgage 3.2%

- after running some numbers, it gives me 3.3k-3.6k per month to own (mortgage, insurance, property tax, sometimes HOA, not counting utilities and maintenance)

- rents in the area are closer to 3k tho, but everything goes within a week or two, so I bet if you are patient, you could rent it with cashflow (saw couple houses that went on Zillow for rent 3d after closing and were rented out with cashflow after 7d)

So there is this upper limit of ~700k above which owning costs are way higher than avg rent (for same reason locations inside Bay do not make sense, I think). The case would be to buy to live in, and I know you should not mix investment with home to live in, but still, knowing that you can move somewhere else and rent this one out without loosing too much money is much more compelling. So then you can stick to 30y fixed and treat it as free money as some Youtubers say:D

However, there seems to be like 10 buyers per house, making it very competitive and final sales going for 30-100k above asking price (especially when it seems a trend to artificially lower asking price to get more people into the race).

I've only been looking at this since beginning of March and real estate agents told me that this crazy thing is going on for over a year and it is just getting worse, that you had to bid more and more, essentially driving prices up and up.

I do realize this is worse scenario to buy RE if you even remotely think about it as investment but I want to stop paying someone's else mortgage:D

What are others thoughts about that market? Was it always that crazy? Would you stay away and buy 5 SFH with cashflow in other states?

Adam

Darius Ogloza · Answer

If I wanted a bag of quarters for the laundromat every month, I would buy in other states with "cash flow." Since I want to build wealth, I buy in California.

Arlen Chou · Answer

@Adam Kuszczak keep in mind that cash flow is not only a function of purchase price and rental price. A large factor in cash flow is the down payment. The larger the down payment the lower the monthly nut. Maintenance costs are also a huge grey area. I understand that many people underwrite with a general number for each property they analyze, but the reality is that each building will require different maintenance budgets.If you look at the macro state of affairs' in the Bay Area, I don't think the supply of properties will catch up to demand anytime in the near future. As a fact, the government is boosting demand with their proposal for a first time buyers credit on the owner occupant side and their call to limit 1031 exchanges which will further push institutional money into the SFR market. On top of that, if you believe that inflation is coming down the road because of all of the cash that was printed last year, I think real estate appreciation in the Bay Area is not going to go away in the near future.The secret sauce is trying to figure out how to make the numbers work so you can take advantage of the appreciation.Good luck to you!-Arlen

Adam Kuszczak · Answer

@Arlen Chou I am planning to stay in Bay only couple years, but when I move out I was not planning to sell but switch that property to be rental, so as long as it covers mortgage, property tax and insurance, it would be good. I wonder if maintenance could kill it. @Jaron Walling wrote that his estimate is -$820 cashflow per month, but maybe it is on pessimistic side of fixed costs being 3.6k but rent being 3k, plus $220 for maintenance. I see a lot of competition in rentals too. Like check this one out https://www.zillow.com/homedet... bought for 727k, renting for $3275, no idea how this make sense.I run numbers without maintenance for 730k property (mortgage 3%, property tax 1.26%) giving $3485 per month and I believe it could be rented for 3.5k now (yes, that could change to less in couple year, however I would rather say it is more likely to change to more). Also, from what I see, almost all the rentals are going within 7d being on the market have dozens of applicants according to Zillow.I compare this to renting. If I rent for 3y for even 3k, I am throwing away 108k. Versus owning (1k per month towards principal) - 90k (=(3.5k-1k)*3*12). So 18k. If I rent for 3.5k, then difference is 36k. Yes, that is a question for me to answerThanks all for insight and opinions

Arlen Chou · Answer

@Adam Kuszczak getting to the party late is usually better than not getting there at all... it just depends on when you think the party will end. The BA market has been crazy for over 30 years. People have always said that appreciation cannot continue, this is a massive debate on this forum. The question you need to ask yourself is how long will you stay in this particular market. If you plan to be in this market for 30 years, then the downside is minimal. If you want to play the swings in the market, then I would advise you to be extremely cautious. Keep in mind that we have gone/going through 3 rounds of government stimulus. All that has done is kicked the can down the road. We have not had serious correction in a long time, it will come, it is just a matter of when. So the bigger question you should ask yourself is "when" do you think the party will end and if you can deal with the hangover until the next party. If you think the party will end soon, or you don't think you can deal with the hangover then your time might be better spent getting ready for the next party or better yet be ready to take advantage of all of partiers that passed out after the party.Sorry to the long party analogy, but I think you get my point. HahahaGood luck to you!

Derrick Dill · Answer

I just bought in the Bay area a few months ago. It's a house-hack that cash flows. Outlined my purchase here:https://www.biggerpockets.com/...

Brian Garlington · Answer

Or do both like I did........Have multiple in the Bay Area that appreictae in value.....do cash out refi and buy more out of state and in the Bay Area. Make the sacrifice. If it's just you and a spouse, set your ego aside and buy a house with an in law unit or buy one and put an in law unit in it. The smart move at that point is to move into the in law unit. You'll only be there 2 to 5 years. Rent out the main house and you live (almost?) for free. Then when you move out of the inlaw unit rent that out to someone else. Or buy a duplex/triplex in an up and coming neighborHOOD. You're only there a couple of years right? Or buy a 2/2 Condo....you and the spouse live there and you rent out the other bedroom to a traveling nurse. There are specific websites deidcated to rentals for traveling nurses.These are just SOME of the strategies I have advised my clients to do.

Maria D'Aura · Answer

@Adam KuszczakIf you're firm on moving out of the property in 2-5 years you could run into issues if the market takes a turn.Timing is everything and flexibility will save you. If that isn't a firm time-frame and you could extend it if needed then you're in a better position. Or at least if you could afford to hang on to it longer if the market turned. Of course it depends on your long-term goals. I had a property that was cash flow negative when I moved out of it. It remained that way for years. I hung onto it for a lot of different reasons, but the last few years I owned it there was a small amount of cash flow. The thing is it was in the Silicon Valley and hanging onto it ended up paying off in the end. 1031'd into a 4 unit I was able to pay cash for. It just depends on what your goal is. Do you want cashflow now or wealth later?Also, buying an investment in the Bay Area can be tricky. Not a lot of them cashflow when you run the numbers. You need to get really creative in your thinking and how you look at properties. Can you see a value add? How much space do you really need for yourself? More challenging if you have a family with kids, but I'll tell you if I were single with no kids my strategy would be different. I'd be looking for a single family fixer with a floor plan that lended itself well to creating two separate living spaces within the existing space. It's something I have a knack for seeing and visualizing when looking at floor plans. I have another single family that has a perfect layout to be a 2 unit property with very little construction costs. I have great tenants so I'm leaving it alone for now, but if they ever move out I have a plan for that property. Just my 2 cents.

Brian Garlington · Answer

I was just out in Oakley and Antioch this past weekend showing properties and this very subject came up. In a nutshell the other poster is right. Those numbers from a cashflow perspective are terrible when you consider other states. If you want cashflow here in the Bay Area you need to consider a multifamily 2-4 unit.

Jaron Walling · Answer

@Adam Kuszczak "bought for 727k, renting for $3275, no idea how this make sense." - Crazy stuff right?! They probably purchased that property for the long haul. It's a long term appreciation play. I don't see other strategies that work for it. In your market unless you find a good DEAL the value add, flip, and cash-flow gets tossed out the window. I don't see many experienced investors buying shiny new properties listed on the MLS with 20+ offers, but it's never to late to get in the game.

Adam Kuszczak · Answer

@Brian Garlingtonyeah that is what I plan, to buy out of state anyway. There is almost no duplexes or triplexes in nice neighborhoods in Brentwood, especially after 1990, that is the problem. All the house hacking, I read about it, so know the topic but at this stage of my life it is not an option. The question then becomes if it is worth overpaying around Bay vs spending that money (loan) out of state. And I know the answer is always: it is better out of state in this situation, unless you want to live in your own house and not rent. That is question for me to answer.The main opinion I am seeking here is if this crazy market was always there in Bay, or is it extra crazy now. MeetKevin and Grapham have some videos showing stats that house inventory is super low, so I am already 6 months late to the party....