for all you who think the bay area is going to crash read this.
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesfor all you who think the bay area is going to crash read this.
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Johnson H.Pro Member
Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votesIn 2017 and 2018 there were sensational articles about the exodus of folks leaving the Bay Area. This year is this one self called "data" agent that was written about in the NYT and now in this article about the all of the IPO money will drive up property prices. Dissecting this article there is no new news here. The top areas where these software developers have purchased, Mission Bay, South Beach, SOMA, Yerba Buena are all areas with significant new condo developments in the past 5 years. Young people with significant incomes and want the easy/cool downtown lifestyles and have purchased these properties. Tech companies that were not in SF before this cycle have leased up significant amounts of office space. The demand for this office space lead to one tech company signing a lease even before entitlements of an office building have been approved which is unheard of. So due to these companies moving in, there are a lot more tech workers working and now wanting to live in San Francisco.
Where do the post IPO families want to live according to the article? In districts that are majority SFH. SF is hardly building anymore new SFH so the long term trend of the value of these properties will continue to appreciate.
I continue to see multi-million dollar properties sell for all cash. I have been beaten out on my offers for SF apartment buildings for the past few years as investors continue to pay up for buildings. The last building, it was listed for $1.8M, needs $300-400k in deferred maintenance and soft story retrofit, went for $2.1M and I was surprised it didn't go higher. When folks complain about rent control and having no cash flow on buying in SF I chuckle because you build wealth owning in this city. Last year I saw a 15 unit property sell for $12 million, that's $800k a unit in a prime part of town. That is what the wealthy are investing in.
I agree with the posters above, it is all about supply and demand. I'm sure there will be some correction some day and in other parts of the nation, there does seem to be a slight pull back. It seems like every other day for the past two years there is some article from some investment professional/economist saying that there will be a recession 18-24 months. All I know is that if you purchased property in SF at the top of the market in 2006, you may have had a bad time in 2009-2012 but now you would be sitting pretty with some great gains and high rents. There was a slight chill in our market in Oct/Nov last year but things picked up after Thanksgiving and now with these lower rates, it is looking like a great spring again. Although there have been articles about supply increasing, what the articles don't mention are the months of supply which is still very low and even lower if you remove condos out of the equation.
66 Replies
- 7yJonathan PfluegerPro MemberBen Lomond, CA · Member since 2016 · 338 posts · 337 votes
I could not agree more. People tend to underestimate or fear what they do not understand - the Bay Area being on of these things. Granted, the Bay Area is not recession proof and will have its fair share of dips and blips - but the forces driving it are far from standard, requiring an evolving perspective and altogether informed investor type.
Lots of people believe the San Francisco Bay Area and the term "speculation" are one and the same - this only goes to show the depth of understanding those people have for the market and its driving forces. Armed with the right knowledge and understanding, high cost markets become gold mines for the investor savvy individuals - this is anyone and everyone who is willing to put themselves out there to learn and network - thereby mitigating the mental and emotional aspects these unique markets tend to bring out in otherwise uninformed investors.
Great post Jay.
Locally here there are mixed opinions on how significant the ipo effect will be. That article mentioned a study that showed a minor effect in the past. In truth we won’t know until next year (after the stock selling restrictions expire, and people have time to execute on home purchases.) And of course what happens with the general economy, stock market, interest rates, etc. and their more national effects overlay.
Personally I think that this spring and fall will show improving sales results in specific neighborhoods. The higher end (> $3mil) has softened the last couple years, so that will be a real test- to see if those homes go back up. I’m more skeptical on that, but I think the bread and butter $1-2mil condos and starter homes will do well.
Overall I do expect a positive overall effect, but I don’t think we’re going to have a blow out of +10% appreciation this/next year.
That’s my2c.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Amit M.:
Locally here there are mixed opinions on how significant the ipo effect will be. That article mentioned a study that showed a minor effect in the past. In truth we won’t know until next year (after the stock selling restrictions expire, and people have time to execute on home purchases.) And of course what happens with the general economy, stock market, interest rates, etc. and their more national effects overlay.
Personally I think that this spring and fall will show improving sales results in specific neighborhoods. The higher end (> $3mil) has softened the last couple years, so that will be a real test- to see if those homes go back up. I’m more skeptical on that, but I think the bread and butter $1-2mil condos and starter homes will do well.
Overall I do expect a positive overall effect, but I don’t think we’re going to have a blow out of +10% appreciation this/next year.
That’s my2c.
I love it starter homes at 1 to 2 million.. when a starter home in INdy is 150k.. LOL. but then you have to live there LOL
- Palo Alto, CA · Member since 2017 · 230 posts · 200 votes7y
During last downtown, medium bay area housing prices in a number of cities did drop 40%-70%, but recovered very fast after 2014. I live in Palo Alto, one of more expensive areas in the bay area. Between 2008-2010, medium prices in many parts of Palo Alto dropped by 40-50%. You could have brought an 1+ acre Palo Alto Hills mansion for $1.7M in 2010 (one of my friends brought one in 2010) and some of those properties sat on the market for 6+ months. In 2008, those homes cost $3-$4M.
Despite all the IPOs, in the end it is still supply and demand. There are less and less people who can afford the bay area prices, so long term appreciation will be lower. I know a professor/doctor in Stanford University Medical school who earns nearly $500k per year - the house he brought/can afford is a 2 bedroom 1200 SqFt with 6000 ft lot that costed $2.2M. His family of 4 is squeezing into this $2.2M 'starter' home in Palo Alto.
In the bay area, the market for $3M+ homes has clearly softened. Homes between $1.6-$2.5M has a ceiling of $2.5M-$3M as someone who can afford $3M+ homes will never buy these small homes that cost a fortune. Only thing that still has leg is condo/townhouses around $1M - still affordable for dual income tech industry working families. However, these will likely have biggest price depreciation during downtown.
- 7yJohnson H.Pro MemberInvestor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
In 2017 and 2018 there were sensational articles about the exodus of folks leaving the Bay Area. This year is this one self called "data" agent that was written about in the NYT and now in this article about the all of the IPO money will drive up property prices. Dissecting this article there is no new news here. The top areas where these software developers have purchased, Mission Bay, South Beach, SOMA, Yerba Buena are all areas with significant new condo developments in the past 5 years. Young people with significant incomes and want the easy/cool downtown lifestyles and have purchased these properties. Tech companies that were not in SF before this cycle have leased up significant amounts of office space. The demand for this office space lead to one tech company signing a lease even before entitlements of an office building have been approved which is unheard of. So due to these companies moving in, there are a lot more tech workers working and now wanting to live in San Francisco.
Where do the post IPO families want to live according to the article? In districts that are majority SFH. SF is hardly building anymore new SFH so the long term trend of the value of these properties will continue to appreciate.
I continue to see multi-million dollar properties sell for all cash. I have been beaten out on my offers for SF apartment buildings for the past few years as investors continue to pay up for buildings. The last building, it was listed for $1.8M, needs $300-400k in deferred maintenance and soft story retrofit, went for $2.1M and I was surprised it didn't go higher. When folks complain about rent control and having no cash flow on buying in SF I chuckle because you build wealth owning in this city. Last year I saw a 15 unit property sell for $12 million, that's $800k a unit in a prime part of town. That is what the wealthy are investing in.
I agree with the posters above, it is all about supply and demand. I'm sure there will be some correction some day and in other parts of the nation, there does seem to be a slight pull back. It seems like every other day for the past two years there is some article from some investment professional/economist saying that there will be a recession 18-24 months. All I know is that if you purchased property in SF at the top of the market in 2006, you may have had a bad time in 2009-2012 but now you would be sitting pretty with some great gains and high rents. There was a slight chill in our market in Oct/Nov last year but things picked up after Thanksgiving and now with these lower rates, it is looking like a great spring again. Although there have been articles about supply increasing, what the articles don't mention are the months of supply which is still very low and even lower if you remove condos out of the equation.
@Jay Hinrichs yeah I forgot to write pun intended ;)
@Edward Liu I think your friend’s great deal in Palo Alto during the last recession was more of a one off then the norm. Prime San Francisco only dropped 15-20%, and same with prime Silicon Valley towns like Palo Alto. It’s the lesser areas that fell more...the less prime the more it fell. But -40-50% was not the norm in prime areas.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Amit M.:
@Jay Hinrichs yeah I forgot to write pun intended ;)
@Edward Liu I think your friend’s great deal in Palo Alto during the last recession was more of a one off then the norm. Prime San Francisco only dropped 15-20%, and same with prime Silicon Valley towns like Palo Alto. It’s the lesser areas that fell more...the less prime the more it fell. But -40-50% was not the norm in prime areas.
correct 40 to 50% was central valley.. I can tell U Napa did not..
right after the big quake and the first gulf war.. prices dropped 50% in higher end peninsula props. I had a loan on a big house on Green st. that had just ahd a 500k reno.. I had a mai appraisal at 2mil in 87.. it went to sale on court house for 980k and no one bought it..
by 97 ish back to 2mil and I am sure now 4 to 6.. its 6 thousand Sq feet..
@Jay Hinrichs yes the late 80’s to early 90’s were different in the area. I lived in Palo Alto then, and it was expensive, but not insane. It’s from 1997 onwards that prime Bay Area and San Francisco real estate jumped the shark- which is when the internet really started to dominate the globe.
The first place I brought was in 1994, a flat in a 2 unit bldg a buddy and I brought together and condo converted. I paid $160k for my flat in Noe Valley. I sold it in 2005 for $705k (and yup, used the $500k tax exemption to full effect :). It’s reselling now, listed at $995k and quickly went pending. I’m quite sure it will go over $1.1mil. Nuts!
- Milan, MI · Member since 2015 · 2 posts · 1 vote7y
As an outsider, the bay area looks like it's in a bubble, but at the very least it's an extremely fragile market. I see it as an artificially inflated market for 2 simple reasons.
1.) Chinese money avoiding taxes, so even a neutral or bad deal is appealing. (Artifical Demand)
2.) Relatively low density due to local regulation (Artificial Scarcity)
- Santa Clara, CA · Member since 2018 · 100 posts · 71 votes7y
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
The Bay Area has a true housing shortage and a high demand for homes. Buyers are lined up in every price bracket. Unless there is a black swan event that forces all the major employers to cut jobs on a massive scale I don't see the market repeating 07-09. Truly a once and lifetime opportunity at that time. When you see prices break over 06 highs and not look back that is so bullish. Could the market dip? Yes absolutely. Prices fluctuate but saying crash, hmmmm a lot has to happen for that. As for the Bay Area being a bubble, yes it's in its own little world unique to itself.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Account Closed:
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
as I said earlier I don't think we can even fathom what the next great part of tech will or could be.. who would have thought of self driving cars in the 2020's back in 1990.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
as I said earlier I don't think we can even fathom what the next great part of tech will or could be.. who would have thought of self driving cars in the 2020's back in 1990.
I'm still waiting for my hoverboard and trash powered flying car, tyvm.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Chris Mason:
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
as I said earlier I don't think we can even fathom what the next great part of tech will or could be.. who would have thought of self driving cars in the 2020's back in 1990.
I'm still waiting for my hoverboard and trash powered flying car, tyvm.
about 6 years or so ago when Realty shares was just getting going .. they worked in an incubator in Mt. View.. I went down and had a meeting with Nav Athwal.. I was actually his first provider .. the very first loans they did were for me LOL.
so he toured me on the incubator floor.. about 20 or so kids and their inventions.. there was some skate board thing.. and of course a ping pong table.. lots of red bull and mtn. Dew.. LOL
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Chris Mason:
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
as I said earlier I don't think we can even fathom what the next great part of tech will or could be.. who would have thought of self driving cars in the 2020's back in 1990.
I'm still waiting for my hoverboard and trash powered flying car, tyvm.
about 6 years or so ago when Realty shares was just getting going .. they worked in an incubator in Mt. View.. I went down and had a meeting with Nav Athwal.. I was actually his first provider .. the very first loans they did were for me LOL.
so he toured me on the incubator floor.. about 20 or so kids and their inventions.. there was some skate board thing.. and of course a ping pong table.. lots of red bull and mtn. Dew.. LOL
Ping pong... a couple of the guys in my office have a bit of a rivalry going on:
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Chris Mason:
Originally posted by @Jay Hinrichs:
Originally posted by @Chris Mason:
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
I work in a big IT Tech co, however in Finance. I do Financial & workforce planning. We've had a lot of attrition to other tech companies, why? people are getting paid a lot better than what my co pays. We are unable to retain Managers & Sr Managers at $175K. A lot of the new talent we are hiring is at $190K. And these are just Managers, once you start hiring stellar Engineers, their pay is a lot higher. And this doesn't even include stock options. My neighbor is an Engineer at Google working on self driving cars & makes $500K a year (with bonus & stock options) & guess what, he has gotten a better offer from a Chinese co set up in the Bay Area (in Milpitas!)
I was listening on NPR how with software being an important part in cars, German, Chinese automobile co's are now setting up shop in the valley and cars are being test driven in San Jose & not Stuttgart.
I can totally understand how to an outsider this is all a bubble. However unfathomable innovation is happening in Silicon Valley and you need top talent to make that happen & top talent commands top pay hence the crazy real estate.
as I said earlier I don't think we can even fathom what the next great part of tech will or could be.. who would have thought of self driving cars in the 2020's back in 1990.
I'm still waiting for my hoverboard and trash powered flying car, tyvm.
about 6 years or so ago when Realty shares was just getting going .. they worked in an incubator in Mt. View.. I went down and had a meeting with Nav Athwal.. I was actually his first provider .. the very first loans they did were for me LOL.
so he toured me on the incubator floor.. about 20 or so kids and their inventions.. there was some skate board thing.. and of course a ping pong table.. lots of red bull and mtn. Dew.. LOL
Ping pong... a couple of the guys in my office have a bit of a rivalry going on:
when I had my real estate brokerages the agents were more interested in sneaking porn.. my system was forever infected LOL
- Developer · Austin TX - San Jose, CA · Member since 2016 · 66 posts · 45 votes7y
The question I always have with this is how can you afford to own with no cashflow? I continually hear of people that buy hoping to cash in on appreciation, which seems to have worked for some people but at the same time I wonder how the numbers work. If you're looking at a monthly payment of $10,000+ every month and you know that rent won't cover all of it how do you do it(especially if you have multiple properties)? Or is it just that people that can afford to invest this way simply have enough income from their W2 or other investments to be able to cover the difference every month.
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
You don't buy in the Bay Area for cash flow. The only play I see at the moment is asset preservation. You have to go out of state for cash flow.
As an investor buying at these prices and taking a negative cash flow loss each month and praying for appreciation is not investing its gambling. I read a post of the lady takes a -$2,000 loss each month for Mtn View property. Ouch! That's painful. Real life money leaving your real life checking account.
Please don't show me a chart about how CA prices go up in next 10-20yrs. LOL. Can you hold that long for your exit? Say that you can and it took 10yrs. That means you had to change your life and take that negative loss each month. Forget that! Life is short, I am not eating top ramen for the next 10yrs I want sushi. =)
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Amit M.:
God when I moved here in 1984 for college, I had no idea this area would be so much fun!
...top ramen investing...ping pong millionaires...only in the Bay Area ;)
or that when I bought my first home in Milpitas a new construction for 79k in 78 that by 1980 I would sell it for 150k and snow ball my real estate career.. bay area been very very good to me. !! what does the future hold though
I mean I bought in Milpitas because homes had hit 100k in Cupertino were I was raised and I though NO way no how could those go higher ever..
or when I sold in Palo Alto in 91 for 500k.. NO way that could go higher.. I paid 183k for it in 83 ish.. I could have kept it would have been 300 a month negative to start out but in 5 years probably would have been 500 to 1000 positive. and well last sold a few years ago for 2.2... who would have known
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
The Bay Area is the technology epicenter of the entire world. Computers, smart phones, apps, artificial intelligence, robots, etc are all predominantly created from the Bay Area. The talent base and infrastructure to support this cannot be replicated anywhere else over night. Just like China is the technology manufacturing epicenter of the world and it is hard to replicate that elsewhere. I say hard to replicate, because it was built up over 70 years.
On top of that there is crazy money in the Bay Area, mostly fueled by high salaries and stock options. Cash pours into there from around the world. You buy an Apple phone or do a Google search in Kentucky and it pads pockets in the Bay Area.
I am not a Bay Area resident or fan boy, just looking at this logically and as someone who has done business in the tech field for 20 years. I have traveled the country and no place is like the Bay Area.
All this being said, realize in a down economy that technology companies suffer. Companies like Google or Facebook survive on advertising, which is one of the first expenses that companies cut in difficult time. Consumers wait to update electronic gadgets when the economy is down. As a result the tech companies have less revenue and since employees are a large expense, that means layoffs. The net effect trickles into real estate. Less people moving into the area needing housing and lower demand effects prices. A down turn doesn't mean a market crash. It could be a price flat line or small dip but will be followed by recovery.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Joe Splitrock:
The Bay Area is the technology epicenter of the entire world. Computers, smart phones, apps, artificial intelligence, robots, etc are all predominantly created from the Bay Area. The talent base and infrastructure to support this cannot be replicated anywhere else over night. Just like China is the technology manufacturing epicenter of the world and it is hard to replicate that elsewhere. I say hard to replicate, because it was built up over 70 years.
On top of that there is crazy money in the Bay Area, mostly fueled by high salaries and stock options. Cash pours into there from around the world. You buy an Apple phone or do a Google search in Kentucky and it pads pockets in the Bay Area.
I am not a Bay Area resident or fan boy, just looking at this logically and as someone who has done business in the tech field for 20 years. I have traveled the country and no place is like the Bay Area.
All this being said, realize in a down economy that technology companies suffer. Companies like Google or Facebook survive on advertising, which is one of the first expenses that companies cut in difficult time. Consumers wait to update electronic gadgets when the economy is down. As a result the tech companies have less revenue and since employees are a large expense, that means layoffs. The net effect trickles into real estate. Less people moving into the area needing housing and lower demand effects prices. A down turn doesn't mean a market crash. It could be a price flat line or small dip but will be followed by recovery.
that pretty much sums it up..
in the 60s silicon valley was Locheed aerospace and it went through a lot of gyrations as you describe.. But with Silicon valley taking off the only real dip was 89 to 91 and that was pre google and facebook and uber and all sorts of other companies.. even when it does constrict a little bit it seems to come roaring back..
the culture of tech is just off the charts for most anyone from the mid west rust belt manufacturing sector.
I got to make a quick presentation at Google headquarters on real estate investing.. and was given the tour of the campus.. one just cannot comprehend the perks and working environment not to mention the creaming of the top minds coming out of collage..
- 7yJohnson H.Pro MemberInvestor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
Originally posted by @Andrew Brewer:
The question I always have with this is how can you afford to own with no cashflow? I continually hear of people that buy hoping to cash in on appreciation, which seems to have worked for some people but at the same time I wonder how the numbers work. If you're looking at a monthly payment of $10,000+ every month and you know that rent won't cover all of it how do you do it(especially if you have multiple properties)? Or is it just that people that can afford to invest this way simply have enough income from their W2 or other investments to be able to cover the difference every month.
For 5+ multifamily buildings, lenders usually require enough down payment to have the building cash flow at a minimum of 1.15-1.25x debt service coverage ratio (DSCR). For these types of buildings in the Bay Area, this will take anywhere from 30-55% downpayment or more. Also, if you buy a building with all cash, it should cash flow on day one :) But you are right for 1-4 family buildings and only put 20-25% down, you probably won't cash flow on day one if you get a regular loan. However, I know investors getting interest only loans for 3-10 years with 35% down and great rates and they have breakeven cash flow. I think its safe to say in 10 years we should see higher rents and they can refi and be in a better cash flow position, especially if they are buying mismanaged buildings with below market rent. I agree you need holding power and proper reserves when you invest, but that is true if you invested anywhere.
You have to buy right and see past day one numbers and employ value add strategies. The successful investors that I know are minting cash flow in the bay area. There are a lot of strategies being employed to get this cash flow and create value. No one will hand you a deal in the bay area unless you are a known player that has a track record of being a closer. You have to go out there and find it yourself.
Here is a great example of what my investor friends and I have been talking about recently. There was a 20+ unit building with very low and less than half market rents in a rent control city sold early last year. It's now listed on the market fully rehabbed fully occupied with market rate rents for almost double the price. There is a lot of money to be made if you can figure out how they operator did this.
Folks say there are no deals in the bay area including myself in the past but I have been proven wrong time and time again so I no longer say this. I've sold all my out of state properties to invest in the bay area. You can make money anywhere by buying right but you get rewarded over and over again by buying and holding in the bay area even if you didn't buy right or mismanage the building, I've seen it very often.
I think the only way at this point that it crashes is we have a world even, like 2008, or a sort of tech bust like 2000. And even then, unless it is catastrophic, I don't see it crashing - as in 20%+ There will be dips and bumps but SF is its own animal with its own rules. Don't buy there for cash flow, unless you're getting creative with it. Buy to live, buy to park money
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