Buying a condo in the bay area as an investment

[Ryrob Thomas]

I was thinking of buying a condo as a rental property in the bay area ( fremont, san jose, milpitas area). I spoke to my realtor about it and he advised against buying a condo due to the following reasons:

1) HOA associations can place curbs on the number of units that can be rented out

2) Rental rates will go down as newer condos come up in the same area

3) HOA fees eats into the cash flow

4) It has poor appreciation compared to single family homes in the area

I did the math for a single family home in the alum rock area and it came out to a negative cashflow of 600 bucks a month ( 800k purchase price)  which is not something I can afford at the moment, so I would like to start off with a condo if possible.I am hoping that there will be some appreciation (better than most markets outside the bay area) long term. Thoughts on it?

[Brian Sparr]

Hi @Ryrob Thomas -

Here's my take on it...

1) Yes, but that's a good thing. When the owner-occupancy levels get too low in a complex, lenders stop providing funding for those deals ... if financing becomes unavailable for a complex, values will plummet - I saw this happen in a Walnut Creek complex back in 2009. Understand, though, that if there are no rental restrictions when you buy and you immediately rent it out, you will be allowed to continue renting it if/when the HOA institutes a rental restriction down the road. (At least, I've never heard of an HOA not allowing you to continue renting it out...)

2) Not always true.  A number of the East Bay towns have seen significant increases in new apartment and condo complexes being built, yet rents have continued to rise for all of the rentals.  Sure, the newer units will rent for more, but it doesn't imply the rent will drop for older units.

3) Absolutely - and this is where the Bay Area, in particular, gets hurt. I've got a client, similar to you, looking to invest in the Concord market - as of two days ago, the median age of active condos on the market was 1972 and has a $400+/mo HOA fee. Compare that to the other market I work in (Raleigh, NC metro) where we have a client just offer on a unit built in 2016 with a $75/mo HOA fee.

4) Yes, it's true that single-family homes tend to appreciate more than condos/townhouses do in the same market; however, that shouldn't matter to you.  If the single-family market numbers don't work for you, then it doesn't really matter how much they appreciate.  Focus, instead, on what you can make work ... that might be condos in the Bay Area versus single-family homes in a different market.  And, in that case, you're not just looking at appreciation of single-family vs condo ... instead, you're looking at appreciation of single-family in market X vs condo in Bay Area.  And all of that just turns into a big guessing game, anyways!

Unless you've got a lot of cash, your numbers are going to be tight (if not negative) in most parts of the Bay Area - the idea of putting 20-25% down and getting it to cash flow on day 1 is very unlikely ... it's why we're working with a lot of Bay Area people looking to invest out of state right now.