Bay Area Noobie REI: Is San Jose just too expensive for me?

Question

Hello All,

I am a young investor saving up for my first multifamily investment in San Jose, CA (or the south bay area). I hope to finance with an FHA loan and live in one of the units.

At first I wanted to invest in a duplex (in about 2-3 years), but the prices are so high that the rent will not even cover the estimated mortgage.

My next strategy is to house hack a four-plex to cover the expenses and have some cash flow but that would mean waiting 7-8 years to save up for the down payment.

With that being said:

- Is it worth it to buy a duplex and rent out both units while I am still renting myself to break even / gain some positive cash flow?

- If I were to continue to try to house hack a duplex, would it be okay to be a little in the red because it is still cheaper than renting an apartment in the Bay area?

- Or is saving up for the four-plex an all around better investment?

Any wisdom would be grateful!

DG A. · Answer

You should look at east oakland.  At least Oakland in particular.  My duplex will generate ~$1,100/month above the mortgage. I would cash flow at about $400/month above all expenses based on today's rents (PITI, vacancy,  repairs,  utilities, trash,  property management, etc).

In oakland if the building is 3 units or smaller and you live there 2 years the building is no longer subject to rent control.

So you can find a property that's got below market rents that other investors won't want due to low ROI.  You can buy it below list price on financing which is rare. And then you do an owner move in eviction. And after 2 years of living there you can adjust the rents to market rate.

That's what I'm doing.  Also my property has already appreciated by ~80k.

I predict that all the "bad" areas in the bay are going to appreciate because it's the last of the affordable housing left for people making a middle class salary in the bay area. People earning less are moving out to Antioch.

Robert Marston · Answer

If you have the stomach for some hard work and forcing appreciation then there are plenty of opportunities in East Oakland and into the East sides of San Leandro/San Lorenzo and Hayward(Outside of Castro Valley School District). These properties will all probably need some elbow work but the $$ is there. There is a LOT of focus on Oakland right now and for good reason (Super hot market!) but with that, I'm noticing a lot of my clients are getting similar properties with 2-3 offers to fight with outside of Oakland rather than 6+ on the Oakland properties. Property taxes, Point of Sale requirements and closing costs in Oakland are higher than the neighboring cities (On average).Come take a gander at the Multi-Family homes in San Leandro and Hayward sometime! =)

Chris Mason · Answer

Hi Account Closed,

2-4 unit properties in core Bay Area markets are being gobbled up by very high income individuals looking for income tax shelters, tax-sheltered appreciation, and status symbols, all of which core Bay Area market MFRs are examples of. I know, because I do those mortgages too, and they tell me their goals and reasons. Their logic of income tax sheltering and tax-advantaged appreciation for them isn't wrong, and it makes sense for them given just how much of their income they currently lose to Uncle Sam, but that might not be right for you.

That's a very different set of criteria than someone looking for cashflow, someone that isn't already very high income, someone looking to use RE to build income and wealth rather than merely using it to shelter existing income and wealth from taxation Trump-style ("I pay very little in taxes" says the billionaire). The good news is that these folks aren't your competition when you leave the SF peninsula, Silicon Valley, downtown Oakland, Piedmont, etc.

Look where these high income individuals aren't looking, but where it's still within driving distance for in-person management as needed and/or where you can check in once a month to ensure that property management isn't running a frat house. Solano County. East Oakland. Richmond. East of the Tunnel. San Leandro. Hayward.

DG A. · Answer

hey Dante yes,  you only have to move into and live in one of the units.

About my cash flow. I'll put it like this. I was paying $2000/month for a 2 bedroom in east lake before I bought. My mortgage now is $2400. And I have a tenant paying me $825/ month. Round numbers I now pay $1600 a month to own a duplex. And the unit I live in now is 2 bed rooms.

I'm going to rent a room in my unit for $800 next month.  And in 12 more months I'll adjust rent to market rate ($1500/ month) for the other unit.

So yes,  I'm losing money. But I'm losing less money than i did when I was renting.

Dan H. · Answer

So you think all the wealthy investor who invest in San Jose/San Fran real estate are making poor investments?

I think most of them know what they are doing and have achieved great ROI if they invested in financed buy n hold properties as the OP is considering.  It is easily verified that the ROI on San Francisco financed buy n hold has out produced areas that rely mostly on cash flow.

Markets in the short term fluctuate but there are some markets, including San Francisco area, that historical have long term appreciation going back over 50 years.  That take it to the bank, historically guaranteed appreciation is why the property costs are so high and investors (not dumb investors) are willing to continue to purchase.

@Rocely Mati as various posts have indicated you can achieve better cash flow in other locations but you live in perhaps the best location in the nation historically for ROI for financed buy hold and are considering investing elsewhere.  Think about that.  Think about all the wealthy investors (including foreign investors) who can invest anywhere in the world and choose to invest in San Francisco area.  Are they stupid?

I like your idea of house hacking a duplex in one of the best areas for financed buy n hold ROI in the nation (likely the best location).

Good luck

Jeremy Lee · Answer

Hi and welcome to BP,

One thing to consider is the cost of a multi-plex even in the worst areas of San Jose, most of them would be north of $1 million. You need to consider the rent that you are currently paying versus the rent that would would be receiving from a unit, considering expenses like taxes, vacancy, HOA and expected costs to rehab the property from one tenant to the next. Most recently, you should take a look at possible SJ rent control that may occur. These factors weighted against the price and monthly cashflow may mean that the numbers don't make any sense. Look up price to rent ratio and SJ/SF top the list. It would take a hella long time for you to pay off the property from just your rents compared to other cities.

Somethings to consider:

• are you looking to live rent free or with reduced rent or for positive cashflow?If you want cashflow, consider investing in other areas - out of state, hard money lending or even discounted notes. Your ROI would be much higher.If you are looking to live rent-free and know you won't be leaving for 10 or more years, it could be worth it to buy a property and househack, but saving for 5 years would really be hard, especially if the cash sits liquid while inflation out paces interest rates. During this time, you would want to investigate alternative investment strategies to get better ROI than just letting your cash sit, this might help you get to the down payment much faster, but again I would use this strategy if you know you will never move again.Its ok if you loose money each month on the property aslong as you are either looking to stay for a long time or it is less than the cost of renting a place, usually as a general rule, you shouldn't do this, but SJ is just a different market, but you need to do your research to the total cost of owning a rental property. Your monthly costs aren't just the mortgage.
• If you want cashflow, consider investing in other areas - out of state, hard money lending or even discounted notes. Your ROI would be much higher.
• If you are looking to live rent-free and know you won't be leaving for 10 or more years, it could be worth it to buy a property and househack, but saving for 5 years would really be hard, especially if the cash sits liquid while inflation out paces interest rates. During this time, you would want to investigate alternative investment strategies to get better ROI than just letting your cash sit, this might help you get to the down payment much faster, but again I would use this strategy if you know you will never move again.
• Its ok if you loose money each month on the property aslong as you are either looking to stay for a long time or it is less than the cost of renting a place, usually as a general rule, you shouldn't do this, but SJ is just a different market, but you need to do your research to the total cost of owning a rental property. Your monthly costs aren't just the mortgage.

• If you want cashflow, consider investing in other areas - out of state, hard money lending or even discounted notes. Your ROI would be much higher.
• If you are looking to live rent-free and know you won't be leaving for 10 or more years, it could be worth it to buy a property and househack, but saving for 5 years would really be hard, especially if the cash sits liquid while inflation out paces interest rates. During this time, you would want to investigate alternative investment strategies to get better ROI than just letting your cash sit, this might help you get to the down payment much faster, but again I would use this strategy if you know you will never move again.
• Its ok if you loose money each month on the property aslong as you are either looking to stay for a long time or it is less than the cost of renting a place, usually as a general rule, you shouldn't do this, but SJ is just a different market, but you need to do your research to the total cost of owning a rental property. Your monthly costs aren't just the mortgage.

Good Luck!

Adam Sanders · Answer

The bay area is a tough place to get started with how expensive it is. A few thoughts on your questions:

• How long can you afford to lose money on a duplex every month? It could take years before the rents cover the mortgage and then years after that before you even break even on expenses. Your only real chance of making money is on appreciation of the property.
• You need to look at the total cost of ownership when comparing renting vs. buying, not just the cost of a mortgage. That means taxes, repairs, insurance, etc. which can add up really quickly.
• Have you looked at investing in less expensive areas? Sitting on your cash for 3-8 years is a long time and really hard to say is a good idea for you without knowing what your other options are.

Vivek Khoche · Answer

Account Closed - connect with them and explore the possibilities.

Happy Investing

Vivek

Account Closed · Answer

Well said Daniel! This was pretty much the dilemma for me. Overall I would be looking at losing money but at the same time saving on the high monthly rent payment for a rental that I don't even own.

I am very glad you posted and am excited again to start REI in the bay!

Account Closed · Answer

That's an interesting way to see it. I will definitely start expanding my search criteria to those areas! Thanks for the insight!

Bay Area Noobie REI: Is San Jose just too expensive for me?

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