In the San Francisco Bay Area, we’ve been pretty active in two places: the East Bay and the Peninsula. What we’ve found is a market inefficiency that has allowed us to make at least a million bucks on the Peninsula!

Is this a trade secret that we’re spilling? Maybe. We’ve certainly made good money, but we’re not the type of people to keep everyone in the dark. It’s only a matter of time before the market catches on and eradicates this inefficiency, and we’ve made our living as real estate investors finding and exploiting the market inefficiencies before anyone else. We’re confident that when the market inefficiency here changes, we’ll be ready to move on to the next one.

So what is this market inefficiency we’ve been referencing that’s made us a million bucks? It’s made up of two things: location and our approach to construction. Everyone knows about the next trendy area that’s going to explode, the Brooklyn to Manhattan, the Oakland to San Francisco. These areas usually gentrify over the course of years or decades in a highly visible way. Numerous think pieces are written about them, lots of media attention is focused on them, and prices invariably rise. The easy way to take advantage of this type of location is to buy early, sit back, and watch your asset value rise in your sleep.

But we’re more active investors here. We don’t want to rely just on the vagaries of the market. We want to find other avenues of monetizing that asset value increase faster than simply waiting on the market. So how in the world can we go about doing that? That’s where our approach to construction comes in. In this overheating market, there are segments of the market that are not sufficiently filled, where you can get a greater price per square foot than you would in other market segments. For instance, if there was a glut of large houses in a gentrifying neighborhood, take a huge house and cut it up into multiple condos. This is a time-honored tradition among developers—maximize your price per square foot by maximizing the number of units in the building.

This however, is not the case in the market sweet spot that we’ve found. We’ve found a method of development that basically gives us a 100% return on investment for every dollar we put in. So where are we doing this—and what are we doing?

So where are? We are doing it in San Carlos. San Carlos is the crest of the huge wave that is the real estate market on the Peninsula. If you have a house anywhere on the Peninsula, your home values have increased significantly, but if you’re in San Carlos you’re in a special place.

Palo Alto, Atherton and Menlo Park have long been the places to be on the Peninsula, with the best schools and some of the most expensive real estate. But as their real estate gets even more expensive, people have been searching for other neighborhoods that are very nice, but not quite as expensive. This search has lead them to look for a similarly-sized community nearby. They want to keep the short commutes and fun downtowns, but where are they going to be able to find that? East Palo Alto is still viewed as dangerous. Mountain View is big and suburban, and right next to San Jose. Redwood City has parts that are undesirable. So where are they looking? They’re looking at Belmont and San Carlos.

Belmont and San Carlos maintain the two most important things that these wealthy home-buyers are looking for: vibrant downtowns and convenience. Belmont and San Carlos are conveniently located close to 280, 101, and have a Caltrain station as well. Transportation is convenient by multiple means, whether to San Francisco or towards San Jose.

Not only that, but Belmont and San Carlos both have a nice stretch of downtown restaurants near El Camino Real, which serves as the main thoroughfare through the area. It’s a vibrant, walkable area that is rather rare on the Peninsula. These homebuyers are finding that they are able to enjoy many of the amenities of Palo Alto in the downtowns of San Carlos and Belmont.

Belmont and San Carlos have been enjoying the benefits of these transplants from Palo Alto, seeing some of the highest growth in home values since the recession. But of the two, we don’t work in Belmont very much. Why is that, when both have seen tremendous growth? The reason lies entirely with the building departments.

For what we’re doing to get our amazing return, we’re going to need permits. And the city of Belmont can be quite a hassle to deal with. On the other hand, the process for the city of San Carlos is much smoother and has allowed us to successfully flip many properties there. This is why I recommend sticking with San Carlos, and not venturing into Belmont as often.

So what in the world are we doing that we are going to need these permits? This is where our value proposition lies. San Carlos was a sleepy suburban town that became really built up during the post-war boom in the 1950s and 1960s. Because of that, most of the houses that were built are on the smaller side. There is not much existing stock that has a significantly larger square footage in the way that the transplants from Palo Alto would desire. This is where our building permits come in. We've found out that by adding square footage to existing houses in San Carlos, we can take advantage of this under-supplied market. Our larger houses fetch a premium, giving us something along the lines of 100% ROI for each dollar we invest into adding square footage.

So what do you need to do in order to successfully add square footage to a house in San Carlos? There are a few things that you need to keep in mind as you add on square footage. First, when you’re purchasing property, look for flat lots. Building on a flat lot is substantially cheaper than building on a slope, and much easier and quicker as well. The second item is making sure that you have the room to expand. Building out is cheaper than building up, and most jurisdictions have a 40% maximum building footprint, meaning that your horizontal space your building occupies on the lot can only be 40% of the lot size itself. Third, which might seem contrary to what was just said, is build up as well! It’s generally cheaper to build out than build up, but if you’re already building out, you can generate some cost savings on square footage by building up at the same time. It’s a great way to squeeze even more profit out of an addition. And lastly, make sure you’re using immaculate finishes! All your appliances should be gourmet or commercial grade, and your finishes should belong in a magazine.

Phew! That’s enough to get you started on your own path to taking advantage of this market inefficiency in the Bay Area. Buy a house, add on some square footage, and reap the profits. It’s not quite that simple, but if you’re in the business, you know how it goes. So what are you waiting for? This market inefficiency might close at any time! Who knows how many other hungry people are out there, ready to build large, opulent houses or add on lots of square feet? This is your chance! I hope to see you out there with me, investing in this fabulous market.

Cheers!

Juan Diaz

San Francisco, California

5 Votes