Rent and buy investment property in Bay Area. Good idea?

Question

I have owned 2 houses that I lived in at different points in time, in the last 8 years and have seen the appreciation and success of owing real estate in bay area.

Fast forward to now, I'm going through a divorce and in the process, had to sell our primary home. Im currently renting, on lease for 6 months.

Having seen the appreciation potential in Bay area, with the house sale proceeds, and putting some of my savings, Im intending to buy a home in Bay area as i do plan on staying here for 5 more years. But would love to get some advice. Here are some options I would need tips on..

Option 1. Rent in the area I am used to living in for the last decade(as I am doing so currently in Mountain view) and buy an investment property SFH in Hayward/Fremont and give it for rent

Option 2. Keep renting (money down the drain?) in Mountain view and invest out-of-state, as buying a SFH with single income in this area can be daunting.

Option 3. Buy a condo/townhome with HOA in Mountain view as primary residence.

Please advise.

I would appreciate people being nice, as I am still trying to find my financial footholding on my own.

Lance Trezona · Answer

@Swetha Ramaiah have you thought about househacking? Buying a Duplex or Tri in your area and renting out the other units and living in one. You could use an FHA loan to do that. You could also buy a SFR and house hack that by renting the rooms out. That wasn't an option you listed so I am assuming that roommates aren't your thing? You can buy OOS and use the cash flow to help pay your rent in the bay area, but if you can get into a property in CA using an FHA loan and house hack it, you will see greater appreciation.

Patrick Drury · Answer

@Swetha Ramaiah I would recommend investing out of state in the Midwest to get the most for your money. Those markets will have better cash flow. Out of the Midwest, I would recommend Columbus OH in particular I live and invest here!

Lane Kawaoka · Answer

San Francisco, Hawaii, Los Angeles, Seattle, Boston are examples of primary markets which are NOT ideal for cashflow investing.
It could appreciate but I consider that gambling. Sophisticated investors invest on cashflow where the rents exceed the mortgage plus expenses (and enough money to pay for professional property manage to do our dirty work). A lot of this concept is explained in the Keynesian Beauty Contest theory where only the top competitors get the most notoriety but the best picks are hidden in the field. So part of the game is staying away from the "dumb" amateur money.
Sophisticated investors look at the Rent-to-Value Ratio and look for at least 1% or more to be able to cashflow after expenses. You find the Rent-to-Value Ratio by taking the monthly rent dividing by the purchase price. For example a $100,000 home that rents for 1,000 a month would have a Rent-to-Value Ratio of 1%. Most people I work with live in primary markets (as opposed to Birmingham, Atlanta, Indianapolis, Kansas City, Memphis, Little Rock, Jacksonville, Ohio, or other secondary or tertiary markets) where the Rent-to-Value Ratios are under 1%. Plus we invest in red states so we have good landlord laws on our side too.

Remington Lyman · Answer

I know a lot of people that have gone with option 2. They invest in places like Columbus, Ohio.

Susie Wyshak · Answer

I'm sure you know Palo Alto has historically been a good place for appreciation between the university, schools, and the tech scene. Not sure if about that building and unit, with that HOA....and those cabinets! So Euro style. :) Happy to introduce you to a local realtor there if you like.

Henry Clark · Answer

@Swetha Ramaiah

Run the numbers

1. Where your at.  Primary residence. No taxes on gain as long as you live there 2 of 5 years.  Change figures. Say $80,000 gain no taxes on $400,000 condo?2.  Buy OOS.  Cash flow $200 per month. Income tax?  Gain $80,000 in Ohio on a $150,000 property? Less tax. Change numbers as needed.  Risk on each?  Probability it happens?  Stress level?  Is this a one time deal or are you going to ramp up, thus ok on learning curve investment and building team?

Darius Ogloza · Answer

Personally, I would do No. 3.  I would put my money on further growth in Mountain View than in Hayward and on California than in some other location.  I would bet on what I know (California) rather than throwing darts at a map, any day.  If I had a specific, analytically sound reason to invest in a specific OOS location ("it's cheap" does not count as an analytically sound reason) then I possibly would consider something OOS.  My two cents.

Bruce Woodruff · Answer

Of course we'll be nice, this is a nice forum :-)

I would use whatever money you have to invest OOS. More bang for your buck and you won't have to deal with any of Cali's current  (or future) crazy laws that are tenant friendly.

And maybe a change of scenery would be good for you as well?

Just my .02

Brian Garlington · Answer

Remember the old axiom........"Live where you want, buy where it is most profitable". I own rentals out of state, as well as in Oakland.....did a lot of research and realized that for positive cash flow in the East Bay you have more options in Oakland for duplexes, triplexes and fourplexes then all the rest of the East Bay combined.

Rent and buy investment property in Bay Area. Good idea?

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