Negative Cash Flow for Appreciation (Bay Area)?

Question

Hi, I live in the Bay Area and like many, am priced out of most markets here. With that said, I'm exploring a townhouse in San Leandro for about 450K. It's a 3/2.5 and probably can rent for about $2500/month. I may be able to obtain a conforming loan with about 5% down at 4.75%, and running the numbers, I'm seeing about a negative $400 cash flow per month (which I can tolerate for a few years, I'd guess). This, of course, isn't ideal but given the small down payment and likelihood of appreciation, is this a good play? The other consideration point is, this may be one of the few remaining opportunities for me to buy in the Bay Area the way things are going. I'd say it's an investment first, but also an option to be a primary residence if needed in the future.

Appreciate the input, thanks!

Russell Brazil · Answer

If you are talking about 5% down then you are looking at owner occupant loans and not investment property loans. You should then be analyzing this property as a home and not as a rental

Doug Woodville · Answer

Don't bother with El Cerrito. Home prices here go for 105% + of asking price all day long. But you could probably find several places in Richmond, El Sobrante and San Pablo for around that same price but those areas will probably be C and D neighborhoods.

Aaron Kaplan · Answer

Ben-- i used to live in Rockridge and worked in Castro Valley-- are you sure that San Leandro is a great place for putting one's hard earned investor dollar?? I seem to recall SL as being a bit rough around the edges and not finding values rise like a other east bay regions...(? its been a couple of years so i could be way off...)Seems like the hot transitional east bay places like Downtown Oakland, Temescal or even emeryville might be better play as there are more folks with jobs and landing a townhouse or house hack a duplex with FHA loan (3-5% down vs full 20%) might do real well...Good luck!Also remember you have to figure on a PROBABLE correction of RE prices coming likely in 12-48 months... bay area prices are already essentially at or slightly above 2007 max prices and rents are silly-high as well... so something has to give... if you are -400 now, are you going to be okay if negative equity happens and its another 5-10yrs to slowly recover lost value? be cautious.

Account Closed · Answer

I would never buy a property with negative cash flow...Did you consider out of state investments? Not only you can buy properties with positive cash flow, but also laws and regulations in many states are landlord friendly and tenants friendly as in CA.If you want to learn more about investing out of state and especially multifamily apartments complexes feel free to check out this meetup:meetup.com/Los-Gatos-Real-Estate-Networking-Meetup

David Thompson · Answer

Hi Ben,If you are accredited and looking for cash flow, agree w/Boris that you may need to take your show on the road and that would be taking a hard look at markets that still cash flow and have upside. Specifically, we like to recommend passive investors looking for a total return (distributions from cash flow plus forced appreciation through value add large apartments) still works in some strong markets where population and job growth continue unabated. Here's an article on why I like investing in large apartments and something you may want to consider. My concerns are like the others w/your comments of accepting significant negative cash flow at a time rents and values may be topping out (too much risk on the downside vs upside) IMO. https://www.biggerpockets.com/blogs/9145/53820-why...

Aaron Kaplan · Answer

Have u also considered north of Oakland?? El sobronte or El Cerrito? Reportedly even Richmond (!) is getting to be doable!?? Might sneak a peak in those regions too...also what about near lake Merritt ? That used to be decent bang for your buck? Good luck Ben... The good part you have to realize is, even if it's near the peak, you know Bay Area real estate prices will always, go stratospheric and the next peak in 8 to 10 years will be larger than the current peak etc. etc.You could also try out in east bay further out like Concord or Pleasanton ... Danville /Walnut Creek likelyWay too pricey....

Ben Kwan · Answer

Thanks all for your input. Noted on gambling on appreciation as well as considering a possible correction coming in addition to vacancy.@Aaron Kaplan - I completely agree with you in Downtown Oakland, Temescal, or Emeryville being better options in terms of demand, but they may already be too hot. I've looked at Oakland and had it been a few years back, I'd definitely be able to buy, but not anymore; that's one reason I looked at San Leandro as it's starting to get "hot" as a lot of the surrounding cities may have peaked.

Brent Coombs · Answer

@Ben Kwan, how would your outgoings differ from your CURRENT rent outgoings, if you were to make it your primary NOW rather than (maybe) later? Less (FHA) deposit required too, if that helps?I concur with those who say: don't count on its value continuing to go up in a straight line, or at all!Welcome to BP. All the best...

Robert Wright · Answer

Oh yea never ever ever gamble on appreciation from a home

Robert Wright · Answer

Never get a negative cash flowing house and don't mess with single family homes cash flow is the holy grail in this real estate game and if you do get a single family home let's say the family moves out then your stuck trying to find more tenants while paying the mortgage it's better to start with 4 units and up that way if anybody moves out you still will have some type of cash flow while trying to replace the tenants hope this helps 💯