multiunits in San Jose, CA

[Jonathan G.]

Hey there,

I own few properties but now looking to buy my first multiunit building. I started my research in San Jose, CA where I live. I started by researching on loopnet, cariglist and talking to agents in my area. All buildings have low cap rates of no more than 6-7% ?!?. Or at least this is what is published and said around here. Are people actually buying at these low cap rates in my area ?!? I'm planning on starting putting offers at much lower than asking and see the respond I'm getting.....

Can you tell me, in this economy, why would people buy at such low cap rates and bet on appreciation? I don't get it.

[Holly Hansen]

There are three main "buy and hold" investing strategies we all consider on when looking at a property:
1) You are either looking for great cashflow (10% cap rate or higher)

2) Decent cashflow and equity play (any positive cap rate with the intent to sell within 2 to 3 years for equity profit)

3) Pure quity play - (could even be negative from a cash flow perspective) , but it is a hot emerging market and you hold onto the property for maximum of 6 months (or no longer than a year) with the intent to flip for profits.

Having been born and raised in San Jose, and still work here (at Realtor.com), I can tell you to get any cash flow at all for the Silicon Valley is remarkable.
When I first started looking at investments here, any property would automatically be underwater on your rent to mortgage ratio.

You were lucky if you could have someone cover most of your mortgage.
So to see a 6 to 7% cashflow is pretty amazing here.

Personally I would never invest in this area for cashflow. (If you wanted great cash flow you would have invested here 10 - 20 years ago).

The only investing strategy I would recommend for Silicon Valley (as also called out by JScott in #2), is to invest for an equity play. But you will have to hold to this property for 2 or 3 years for a real pay off.

If you want good/great cashflow - you will have to look outside the bay area and more than likely out of state.