How to Invest Living in a High Cost Market?

Question

Hello!

I am looking to purchase my first property in the next year. Ideally I would buy a condo I can live in and rent out a second bedroom, or live in for a few years and sell/rent. The problem is that I live in Oakland, CA where even one bedroom condos seem to be out of my price range. Even if I'm able to get a loan, the mortgage payments are looking significantly more than my current rent.

Therefore, I've started looking to nearby cities (Sacramento) to see if I can buy a lower priced one bedroom unit to rent out while living as a tenant in Oakland. This seems odd since I would be renting a property that I live in while also owning a condo I rent out.

Is this something typical to do while living in a high priced market? Are there any ways to accomplish my goals where I live?

Thank you

Trevor Ewen · Answer

@Brian Blenner

J. Martin has the right idea. You're (we're) at the top of the market cycle in our high-priced urban markets. What goes up definitely comes down.

I think investing within a 2 hour drive of where you live is paramount in order to be directly involved in the process. Outside that, you will need to surrender about 10% of your monthly to management, which means you have to run your numbers that much harder.

I like markets with a low baseline that have not yet seen the upward trajectory that so dominates coastal cities. I am also anticipating an outward migration to smaller satellite towns and mid markets as cities grow in density and wealth per sq. foot.

Real Clear Politics had a great article this week on the matter: http://www.realclearpolitics.com/articles/2016/01/...

Justin Nero · Answer

I live in Oakland as well and have been renting my primary residence even though I own a Triplex here. Mathematically, it has worked out for me because I bought at a good time in a rapidly gentrifying neighborhood. I do know people that have purchased primary residences here and done well and quite a few that had poor results. That all came down to their timing when they purchased. I actually totally agree with JM's posts and the outlook here. Personally, I believe that househacking a duplex is a much better option than buying a Condo here because the high rents can offset the the possibility of declining value.

Anje Walfoort · Answer

@Brian Blenner I have been in the Real Estate industry for 15 years and have seen many people do exactly what you are talking about.  My sister currently lives in the high priced market of Orange County and is looking to buy a home in Redding, CA where I am located at.  You may want to look at Redding as the location to buy because it is priced significantly less than Sacramento.

A few things that you want to find out.  Do you have the funds for a down payment if you aren't doing it as primary residence?  Are you able to commute?  Is there a possibility for your to buy a duplex or multiple units instead of a condo?  You can get excellent financing (depending on your situation) for 1 to 4 units when it is your primary residence.

There are several tax benefits to owning over renting, but if you are renting out a residence you want to make sure that you have money to fix anything that may come up for your tenants.  Just a few things to think about!

Russell Brazil · Answer

Remember there will be tax advantages to owning as well, which will decrease your taxable income.

Any major city, no matter how expensive, will have areas that are more affordable. Ive lived in DC and Boston, both very high cost of living areas, and both have properties that are very very cheap...as Im sure does the bay area. You just may need to adjust your expectations on where you want to live in a given metro area.

Trevor Ewen · Answer

@Michael Harris

You're welcome. Got that one from Builder Online, which links to a lot of affiliate articles.

Michael Harris · Answer

Great article, thanks for posting it.

J. Martin · Answer

I got in by buying a 4plex with an FHA loan in the East Bay, although I ended up having to go up to Richmond to get into my first property (and had better cash flow). But wait until the market turns down! Condos don't tend to cash flow well.

The lower-end properties tend to have better cash flow (here and elsewhere). I like them. (I have properties in Richmond, West Oakland, East Oakland.) Others don't. They tend to be more volatile in price, and the tenant management is different.

I'm also doing a bunch of short-to-mid term furnished rentals. That produces a lot more cash flow if you're willing to put in some learning and effort. (and @Al Williamson even has a course on it!)

Anyway, that's my 2 cents from having been in the same situation. You'll have to figure out what works for you. But condos tend to have volatile prices, and you are buying near the end of the economic cycle. So if it doesn't have much cash flow either, don't get too excited! What goes up, must come down!:

https://www.biggerpockets.com/forums/311/topics/262973-unemployment-analysis-and-charts---sf-bay-area-and-us---any-better?page=1#p1723219

J. Martin · Answer