Hello from San Francisco! Is the Bay Area right for me?

[Max Maloney]

Hi everyone, 

I'm hugely impressed with the quality of information I've found here so far, so I wanted to say hi and introduce myself. My name is Max, and I'm a San Francisco native. I'm in my late 20's and a Mechanical Engineer at Apple. 

I'm here for 2 reasons: 1) I bought my primary residence in San Francisco in late 2014 and I caught the "bug" of real estate - I just can't stop looking at properties! I find it hugely entertaining. 2) All of the successful folks I've known in life have owned several rental properties, and really enjoyed the rental incomes as a retirement cashflow later in their lives. 

So, I'm interested in learning more about purchasing rental properties. 

I have a little over $325k in the stock market right now and I'd like to diversify my overall investments by moving a hefty portion of this into a rental property downpayment. My struggle is this: Ideally I would like to buy my first rental property within driving distance so that I can manage it myself - but as we all know, the Bay Area is quite expensive. Is the Bay Area really only a good deal if you're looking to make money on raising property values? Is it not a good cash flow environment? Would I gain a better cash return if I look in other markets, possibly out of state? 

Or, if investing in a place in the Bay Area is possible for someone with my amount of free cash, what sorts of properties / areas do you recommend looking in? 

Another question is: If I look in a cheaper out-of-state market where I would have enough for all-cash (or at least much more than 20% down), is this even an option you would recommend? It seems to me that with interest rates so low, I'd be a fool to put more than 20% down on a place no matter where it is. Am I missing something? Why DO people make all-cash offers? Related to this question is - would it be a better overall investment to pay down my current mortgage in big chunks over the next few years so that I can own my home outright within the next ~7years, and THEN start looking at rental properties?  (I realize that this is more of a question for a financial advisor, but just curious if anyone else has been in the same boat!)

I realize these questions are a bit broad, and I'll look forward to narrowing my focus (and my questions) as I learn more. 

Thanks!

-Max

[Alex Vidal]

Originally posted by @Account Closed:

@Max Maloney

I generate 12%+ Cash on Cash and 20%+ Internal Rates of Return on every out-of-state investment.  Investing locally means you will likely loose money for several years, before you're able to raise rents sufficiently to cash flow.

My belief is that investing for appreciation is speculation.  You cannot predict appreciation.

Jon - You do realize that IRR calculations/forecasts are heavily weighted to the exit price? Therefore you're blatantly contradicting yourself saying that you get 20%+ IRRs, but you think investing appreciation is speculation and you can't predict appreciation.

I find it very hard to believe that you can find a stabilized out of state property (like one Max would hypothetically be investing in) that can generate a 20%+ IRR. The only way you're going to get to a 20%+ IRR, is through value add short term investing or unrealistic assumptions. Any one can throw out claims like you have above, but I'd be very interested to see your financial models and assumptions to see how realistic they really are.

Additionally, you need to realize that no matter how high prices currently are in the Bay Area, they have only just now reached pre-recession levels. There's plenty of room for the Bay Area to continue this upward trend because of land scarcity, much more difficult lending practices than 2005, job growth, income growth, and pent-up demand from the Millennial generation. Many out of state markets have had a huge run up in recent years and have now greatly surpassed their pre-recession levels and that throws up a big red flag for me. 

Additionally, there are plenty of properties locally that can cash flow day 1. I purchased an A+ located $1M SFR this year, that generates a 9% cash-on-cash return in the East Bay. Real estate is an industry built upon inefficiency, all it takes is a little digging and work to find a truly good deal.

Over the past 20 years (which includes 10 years of the worst market in recent history), SF home prices have increased 3.5x and SJ homes have increased 4x. Rather than simply saying appreciation is speculation, I challenge you to show me any market in the US that has experienced appreciation anywhere close to that. Additionally, although there's no rental data going back that far in history, I also guarantee that rents have experienced similar (or quite possibly more) exponential growth. 

Are you telling me that you'd rather buy something turnkey in the Midwest that will most likely increase in price 2x over the next 30 years and maybe see rents increase 2x, rather than property in the Bay Area that will not only make you a multi-millionaire in 30 years or sooner when the loan's fully paid off, but will also be spitting off more rental cash flow than you know what to do with? Also what do you think is going to happen when turnkey investors eventually start exiting the popular out of state markets en masse?

The majority of out of state investing is shortsighted and built upon unrealistic assumptions and inflated numbers. Invest in solid property that pencils out, in a market with strong fundamentals, lock a loan in for 30 years and you'll kill it in the long run.