3-6%+ Avg Appreciation Forever?!? Maybe!

[J. Martin]

How can people pay ever-increasing prices that exceed their income growth (buying or renting)? Why wouldn't they just build somewhere else? Before anyone hurls rocks at me!.. Here's the premise:

High-demand areas and changing neighborhoods can allow for elevated long-term increases in rents and prices that consistently and significantly exceed national, or even local trends in income increases. Phenomena such as gentrification can allow for this long-term "outpace" trend - because tenants aren't paying more of their income - it's a different tenant with more income, who moved from an even more expensive place!

I don't COUNT on this for the deals to work, and make good cash flow returns on my property (and LOTS of appreciation so far). But I don't think it's a crazy idea for this to happen, on average, over the long term in my area. I own several apartment units and houses in some of the most affordable (low-income) areas in the San Francisco Bay, within a 35min commute to SF and close to Oakland. Any buildable land at a reasonable cost is more than an hour away from most employment centers (each way). There is lots of spillover from local areas that are priced at multiples of these areas.

So is this a crazy idea? Can average rents and prices outpace increases in median incomes (nationally or locally) for a lifetime? (this leaves out the question of the MIX in buyers). Thoughts? Criticisms? (while being civil please!.. I know "coastal" ideas, that depart from conventional cash-flow-at-purchase thinking, can ruffle feathers on BP!) And of course, with about 30% leverage, 3-6% asset returns would be about 9-18% return on equity..! IF it happens..

[Account Closed]

J and @Amit M.

I don’t know about 6% annual appreciation, but 3% - 4% is very doable going forward in my opinion.As you know, the SFBA is home to over 7 million people.Based on the 2013 population report from the California Department of Finance, the Bay Area is the only region in California where the rate of people migrating in from other areas in the U.S. is greater than the rate of those leaving the region.

San Francisco is surrounded by water on three sides. The city squeezes over 800,000 people in 47 square miles making it the most densely populated major city in North America after New York City.

South of San Francisco is the Peninsula and the South Bay, aka Silicon Valley, which is home to many notable tech companies like Apple, Google, Yahoo, Facebook, Oracle, AMD, Adobe, Intel, Netflix, Cisco, HP, EBay, Marvell, Altera, Ericsson, IBM, Hitachi, Kaiser Permanente, KLA Tencor, Qualcomm, Quantum, Xilinx, Tivo…… I could go on and on, but you get the picture. I haven’t even mentioned many other start-up companies that are worth billions and tens of billions like Square, Pinterest, Twitter, Linked-In, Go-Pro, etc. If you add up the market cap of these companies, they’re in the trillions. My point is that there's tremendous wealth in the Bay Area.

Since the 1980’s, the Bay Area has experienced rapid growth. To limit urban sprawl, planned communities were laid out to control growth. The purpose was to protect the remaining open space from development. Yeah, there are a lot of NIMBYs in the Bay Area. Therefore, most new growth has been in-fill development in the form of high density housing.

The old saying “cashflow pays the bills; appreciation makes you rich” has ringed very true for the Bay Area. With limited buildable land, high appetite for real estate from the locals and foreigners, and many new millionaires from start-up companies, appreciation is almost a guaranteed. Again, it's just my opinion.

@Account Closed , did I get it right, or am I too conservative with my appreciation estimate?