Buy-and-hold strategies in high priced areas
Member since 2018 · 20 posts · 26 votes
Buy-and-hold strategies in high priced areas
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Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
7yHi Phil,
Be very careful if you want to go out-of-state (OOS). There's a high chance you're going to be buying yourself a lot of headache and grief in the hope for faux cash flow. As Master Oogway wisely said "One often meets his destiny on the road he takes to avoid it." I have two friends, one went through this painful experience and another one is swearing up and down right now. One bought 2 duplexes through someone on this thread. He paid $155k and $185k for the duplexes with $2,200 and $2,400/month in rent, respectively. What could go wrong right? Well, he sold both of them this year and took a $200k loss after several years of owning them. If you're interested in reading the full story, check out fifighter dot com. I hope you can connect the dots...
Real estate is about control and leverage. By going OOS, you're giving up control. Saj is killing it in East Oakland while my partner and I are doing it in San Jose. 1% rule is not possible at purchase for our market, but we get there in 2-3 years with our strategy. No one is going to hand you their cash cow money minting machine. You have to work and earn it. Once you get there, do cash-out refi, get your capital back, buy more, rinse and repeat. We're up to 76 doors on multifamily, and that doesn't include the single units we own separately.
Unlike others, we don't have anything to sell so there's no hidden agenda. We just want our fellow Bay Areans not having to suffer the pain and grief others who got suckered into. Everything in life has a price. Something is expensive for a reason so is something cheap. It's a rewarding journey if you can break the code. The barrier of entry is high so are the rewards.
Have fun figuring it all out.
93 Replies
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
The only real way to create cash flow in SF or other high-priced areas is to put more money down on the property. Doing that can give you cash flow, but it won't increase your returns any. The more money you put into something, the lower your cash-on-cash return is.
The price-to-rent ratio matters, but that's not what I look at when shopping for properties or looking around. It's a moot point in relation to the actual cash flow. As is the 1% rule. Both of those are fine guiding things, but ultimately what matters is the actual dollar amount of cash flow. So instead of looking for particular price-to-rent ratios (I've never even heard of ratio number guidelines actually), I just go straight to the cash flow. Obviously if something cash flows, the price-to-rent ratio on it is good, but it's really the cash flow that matters.
Not sure if that's helpful at all, as it doesn't offer any guidance on how to find either the price-to-rent ratios or cash flow places, but just some perspective on what to look for.
I'm also in California (LA) and I've mostly bought out-of-state for cash flow purposes. I bought this year in LA (Venice) but it wasn't fully a cash flow play.
- Member since 2018 · 20 posts · 26 votes7y
Thanks @Ali Boone. Yes, my use of price-to-rent or the 1% rule is simply a quick and dirty way to assess cash flow potential of an opportunity or area. How did you choose the places you've invested in out of state? Any tips or tricks for finding geographic areas where cash flow is easier to achieve?
- 7yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Phil Sharp Price-to-rent can be elusive...it varies neighborhood to neighborhood and it's impossible to pin down without a local expert....and it's deceptive- I could put you on 3% properties all day, but you'd hate yourself for doing it because of the hassle...there are lots of declining cities like Cleveland where paper returns are really high...but there is a tradeoff. Most of our clients are willing to trade hassle for stability...and price-to-rent really isn't that important...and honestly it's hard to figure if you are stabilizing assets through renovation to force rents higher...
- Member since 2018 · 20 posts · 26 votes7y
@Brandon Sturgill yes, I agree - each area (and street) is unique, and there's no value in mechanically applying a price-to-rent ratio or 1% rule without considering broader factors. I certainly don't want to buy-and-hold a headache that looked good on paper but in practice is a mess.
Let me try to clarify my question: if I am looking to buy-and-hold positive cash flow properties (in decent areas that aren't a headache to manage), where can I realistically do this? It seems to me that I can't do it at all where I currently have roots (the SF bay area) - structurally, it is off the table from a buy-and-hold perspective, as prices are just too high, even for fixer-uppers. And that I need to find some other area of the country to do this type of investing. Or am I missing something about how to find cast flow positive buy-and-hold properties in areas like mine?
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
Hi Phil,
Cash flow SFRs in the Bay Area is pretty much non-existent. You will need to put a large down 50% or pay cash. I have seen some good 3-4 units in the East Bay that can work. Value-add is very tough right now because of the demand for construction. The cost of rehabs have skyrocketed and the timetable to finish has doubled.
The best deals I see are flips in the East Bay that are recently done and now the seller can't sell because the market softened. Now you get a finished product without going through the hassle of doing the work yourself. The flipper is now taking the loss and you get the gain.
Remember it is a trade off buying in the Bay Area. You are trading cash flow for scarcity and demand. The market is also much more stable than other parts of the country. Love the Bay Area for long-term wealth appreciation and growth. Investors must accept that this is not a cash flow play.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
Originally posted by @Phil Sharp:
Thanks @Ali Boone. Yes, my use of price-to-rent or the 1% rule is simply a quick and dirty way to assess cash flow potential of an opportunity or area. How did you choose the places you've invested in out of state? Any tips or tricks for finding geographic areas where cash flow is easier to achieve?
Honestly the best trick I use is to ask everyone where they are buying. It's easier to start there than to try to sift through 50 states' worth of potential information. There's that and then if any particular area stands out to you for some reason and people aren't talking about it, you can go in yourself and see how the numbers look. But for the most part, I think asking around or reading about where other people are investing is easy. There's a million forum chains on here where people asked for location recommendations. Search for keywords related to that and you'll be able to find them. I know folks I work with are buying in Chicago, St. Louis, Cleveland, Indy, KC and Philly right now.
- Rental Property Investor · Oakland, CA · Member since 2014 · 730 posts · 1k+ votes7y
@Phil Sharp cash flow (and the 1% rule) is definitely possible in the Bay Area, even today’s market. There are several of us on BP doing that currently.
BUT... they were all value add plays. You need to find something you can add value to. Maybe a run down property.. or large units where you can add a bedroom. Or a rent controlled city that you can re-position and increase rents significantly.
You won't find a deal on MLS with current rents. (Well maybe in Sacramento/Vallejo) but in prime Bay Area, you gotta work for that cash flow.
- Member since 2018 · 20 posts · 26 votes7y
@Account Closed would you mind sharing an example or case study that has worked for you? It seems like in my corner of the bay area, the land itself is worth way more than makes sense for buy-and-hold, and you just can't command rents that will come anywhere near covering expenses, even if you found a dump and fixed it up. It seems like an ideal place for flips, but not positive cash flow. But if you have an example or two of how the numbers worked out for you, I would be very grateful!
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes7y
Hi Phil,
Be very careful if you want to go out-of-state (OOS). There's a high chance you're going to be buying yourself a lot of headache and grief in the hope for faux cash flow. As Master Oogway wisely said "One often meets his destiny on the road he takes to avoid it." I have two friends, one went through this painful experience and another one is swearing up and down right now. One bought 2 duplexes through someone on this thread. He paid $155k and $185k for the duplexes with $2,200 and $2,400/month in rent, respectively. What could go wrong right? Well, he sold both of them this year and took a $200k loss after several years of owning them. If you're interested in reading the full story, check out fifighter dot com. I hope you can connect the dots...
Real estate is about control and leverage. By going OOS, you're giving up control. Saj is killing it in East Oakland while my partner and I are doing it in San Jose. 1% rule is not possible at purchase for our market, but we get there in 2-3 years with our strategy. No one is going to hand you their cash cow money minting machine. You have to work and earn it. Once you get there, do cash-out refi, get your capital back, buy more, rinse and repeat. We're up to 76 doors on multifamily, and that doesn't include the single units we own separately.
Unlike others, we don't have anything to sell so there's no hidden agenda. We just want our fellow Bay Areans not having to suffer the pain and grief others who got suckered into. Everything in life has a price. Something is expensive for a reason so is something cheap. It's a rewarding journey if you can break the code. The barrier of entry is high so are the rewards.
Have fun figuring it all out.
- Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes7y
Investing Out of State does not have to be a bad experience - however, you need to educate yourself to the market/neighborhoods etc of where you invest.
For example I took 6 months to drive around and figure out where I wanted to invest - in my case I moved to my chosen area, but i could of stayed in the Bay Area, but i wanted to control my assets.
I think I made a good investment - i get about 7% CAP rate on my investment (it was a 1031 situation ) and the property is appreciating each year so it is a win for me.
What I see others doing is investing in crap without doing any research. That to me is a recipe for being taken advantage of.
- Member since 2018 · 20 posts · 26 votes7y
@Account Closed thanks for your advice. I agree that OOS requires great caution to do wisely. With regard to your investing in San Jose, if you are not in a positive cash flow position at purchase, how do you get there in 2-3 years? Are you saying that the rents rise enough in those 2-3 years to cover PITI, maintenance, etc? And if so, you purchase those properties with the goal of having rents rise enough to cover everything in a certain number of years? Would love to see an example of your numbers on a case study, if you're comfortable sharing.
- Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes7yForget about it. Any gain will come from principal pay down of mortgage. Toronto has been like this for years with excellent appreciation. Market slowed down a bit but is slowly kicking back up. Prices are so high that you need to put down the minimum down payment just to get in but that will likely result in negative cash flow. This may work in a hot appreciating market but who is willing to roll the dice today.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
Originally posted by @Phil Sharp:
I have lived in the San Francisco bay area for the last 15 or so years, and am anxious to start doing some buy-and-hold investing. However, it seems that price-to-rent ratios are solidly over 30 in my area, and generally high anywhere in coastal California it seems. For example, the house I own in Sunnyvale currently has a price-to-rent ratio of 34. My understanding is that, as a rule of thumb, buy-and-hold investing doesn't make sense unless you can get a price-to-rent around 8 or below (which roughly correlates to the 1% rule). Assuming that's roughly true, is there any way for me to do buy-and-hold investing in my area, or do I simply need to find other places in the country to invest? If so, what is the best/simplest way to find places where price-to-rent ratios are in line with buy-and-hold investing?
So had you bought a property where you are 15 years ago, you contend you would be in a worse position now?
District Invest Group545 Reviews - Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes7y
My dad bought a bunch of stuff in SF and orinda. Many years ago. They never ever “cash flowed” - he used them for his business and broke even on them.
I wont bore you with the details about when we sold in 2015, but will say sometimes cash flow is secondary ;)
- New to Real Estate · Bay Area, CA · Member since 2018 · 11 posts · 4 votes7y@Saj Shah I’m in the Bay Area as well and am looking to buy a multi-fam property. I’ve had to extend my search to Solano County/Vallejo because the prices are so high!
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes7y
@Mary M., Congrats! That was very wise of you for scoping things out 6 months and moved there. You didn't give up control, which is critical in real estate investing. Some of our buildings are also doing better than 7 cap after stabilized. We didn't get 7 cap at purchase though. It takes some work to get there, but that's where the value-added and earned equity came in. No one here is going to hand a 7 cap asset to us here in the Bay.
@Phil Sharp, let me make you an offer and see how serious you want to learn this stuff. If you have time, come to my market (downtown San Jose) next week. I'll give you a ride in my Tesla and show you all the buildings we own. This way, you get to understand why certain assets are priced the way they are. I've given a tour to at least a couple handfuls of local BP members here. One BP member actually rents 3 units from me and runs his AirBnB biz. He's been traveling the world for the last 2.5 years while managing these units in addition to another 16 units in the Bay remotely.
If you want a copy of our P&L statement for the buildings, I'll give them to you too. They come directly from our property manager so we're not fudging anything. I hope you will walkaway with a different mindset about Bay Area real estate after our conversation before you decide to take the path of least resistance and buy OOS.
Happy Hunting.
- Investor · Napa, CA · Member since 2016 · 97 posts · 62 votes7y
@Phil Sharp I agree mostly with what @Account Closed wrote they're are 1% rule deals all over the bay area. Yes some require work, some require paint carpet and evicting a tenant and reloading but many do not. I purchased 2 duplexes in Napa both for $350,000 both well over the 1% rule. I close on 7 doors in Vallejo on Monday that exceeds the 1% rule without doing any work all rented on day one. I am a real estate wholesaler and sell most of my deals to bigger fix & flip guys, I also fix & flip on a small scale but sell a large amount of my deals to landlords too. I only work in Sonoma, Napa & Solano counties so I am hyper focussed. I do keep 2-3 properties per year for my own portfolio and all exceed the 1% rule and yes right here in the Bay Area. But it's rare I have the capital to hold on to more than a couple deals a year.
By the way Vallejo is probably the best investor market in the entire San Francisco Bay Area, prices are low, rents are high. It is one of the only cities that has daily ferry service to San Francisco, Mare Island the former Naval yard is being converted to breweries and movie studios (Netflix & Paramount) and the average income is rising while the average age of residents is declining along with the crime rate. It has a bad reputation but for those investors who take the time it by far has the best rent ratios and best chance for substantially upside price appreciation. Especially the waterfront district.
- Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes7y
@Account Closed
I'm in agreement with Minh and Russell.
For some reason, this forum has a number, if not the majority of people who live in high appreciating areas who want to invest in non-appreciating areas where they MAY likely to get some small cash flow.
I'm sure those of us who have invested heavily in our Appreciating Markets are just killing it.
Over a ten year period of buy and hold investing in Brooklyn, my Partners and I have made over $10 Million in unrealized profits from Appreciation and a LOT of cash flow (which is completely realized) due to rent appreciation.
In my personal experience, those who don't buy their first home in an appreciating market are in danger of being priced out in the market they really wish to live in for the long term.
I know a LOT of friends and relatives that are currently priced out but was not 10 years ago.
I know of a specific investor who loved Manhattan and rented a really nice apt 20 years ago. He bought cash flowing properties in a working class neighborhood in CT and cash flowed about $1k per month.
That same friend's Manhattan apt moved up from $2k monthly to $4,500 monthly.
His CT cash cows? The same value and the same cash. Today, because his rents moved up while his Cash Flow did not, his Net Cash Flow is NEGATIVE.
Funny how NOT buying where you want to live can be the biggest mistake one can make.
He eventually got priced out and moved to a different State. Imagine that it can happen to anyone who does not secure their home where they really want to live first.
Now, if you think about it, over the long term, why would you not want to do this as an investment strategy if you DON'T depend on the Cash Flow?
- Member since 2018 · 20 posts · 26 votes7y
@Russell Brazil I would have loved to have purchased something 15 years ago, but I was in grad school and was not in a position to buy back then. I understand the power of appreciation, but the advice I read about on BP and in other places is that (when doing buy-and-hold investing) you should consider appreciation icing on the cake, and not go into deals banking on it. I am sure some would disagree, but I'd like to do my best to ensure cash flow from the start. (I own a home in Sunnyvale that has has appreciated well over the past couple years, rents out at $5,650/mo, but is no where near cash flow positive.)
@Account Closed It is good to hear there are 1% opportunities to be found. I guess I am jaded by the prices in and around Sunnyvale. Vallejo certainly isn't out-of-state, but I guess for everyone there's a driving radius beyond which the opportunities might as well be considered out-of-state. Vallejo isn't quite there for me, but you've made me realize that I need to think more about my personal radius, the dividing line between local investing and remote investing.
- Member since 2018 · 11 posts · 1 vote7y@Ali Boone hi Ali, where in Chicago are your folks currently investing right now? Having trouble finding any good deals outside the south and far west areas.
- Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes7y
@DG A., except Monday, all other days are open next week at the moment. Let me know which day works best for you and I'll meet you in downtown San Jose.
@Phil Sharp, let me know whenever you're back in the Bay. To follow up on the point that Llewelyn mentioned above and let me borrow a saying from Wayne Gretzky "A good player goes where the puck is while a great player goes where the puck will be." Let me give you an illustration.
If you look at high appreciation markets like the Bay Area, how much has your property appreciated in value MONTHLY since you bought it? If history is any guidelines, an asset that rents for $2k/mo today would appreciate more than $2k/month over the long-term.
You mentioned cash flow from day one. We don't care if an asset is cash-flowing from day one. Our question is how long does it take for us to get it to cash flow positive? 3 months or 6 months? How much reserves do we need to set aside to get there? How much equity would we gain once we got there? How much equity would we gain once we've fully stabilized the asset? Does it worth our time and efforts?
We have a building where we were cash flowing negative $5k/month. Within 8 months, it went from negative $5k to positive $4k while the value of the building increased by $800k. The $5k/month negative mainly went into principal pay down. When we restructured the loan and did a cash out refi, we got all of that principal back.
We don't have millions to deploy to work for us, and it takes a decade or even few decades to save $1M bucks. So we need the value-add, forced appreciation, BRRRR approach in order to acquire more assets. If history is any indication, A unit, that rents for $2k/month today, would likely rent for at least $3k/month in a decade. All things being equal, that $1k/mo/unit is purely cash flow as most of your expenses and debt service would likely stays the same.
Here's the kicker, $1k/mo of cash flow can service $200k worth of debt all things being equal of course. This means you can do a cash out refi on this building in 10 years and pull out $200k if you want to. That's 16.5 years worth of cash flow that you're taking upfront tax-free/deferred. Year 11, you repeat on building #2. Year 12, you repeat on building #3. You never have to sell these cash cows. For this reason, most multifamily buildings in our market don't hit the market every generation. You read that right, every to 30-40 years, or they get suckered into selling by Marcus & Millichap agents/brokers.
At $200/month of faux cash flow per door on OOS stuff, how many doors do you need to own to achieve your financial goal? Where would rent be in those low to no appreciation markets in a decade? How much would those assets worth in a decade, or two, or three?
We're living in one of the most profitable markets, and seeing our Bay Area folks take their hard earned money and squander it in no appreciation and even declining markets is heart breaking. Some of us try to save as many souls as we can, but it seems like everyone has to learn his/her own lesson unfortunately.
You have a chance to build multigenerational wealth with Bay Area real estate. Figure it out and jump in as soon as you can. Your kids will thank you later when they sell it off and collect the money tax-free. ;-)
Happy Thanksgiving to everyone.
- Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes7y
@Account Closed you are blowing my mind! Where can I read up on the methods you use? I have free and clear assets and some capital sitting around and am chomping on the bit to get it working for me.
I am kind of kicking myself now for taking my toys elsewhere, but at the time I didn't have the cash on hand (or experience) to kill it here in the bay. I got VERY VERY lucky when I sold my bldg on Bryant (bet 2nd & 3rd) but I cant even imagine how much it has appreciated since 2015 when I sold - I got scared that I didn't have the experience to play with the big boys in the SoMa explosion..... live and learn, but that was a once in a lifetime situation.
I AM lucky that I found a solid area to invest in.... but there definitely is $$ to be made in the Bay Area! You just have to have the resources to be able to carry a zero or negative cash flowing asset.
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