Does it make sense to invest in the bay area?

[Jonathan G.]

I wanted to have somewhat of an open discussion on this topic with the forum and see if I can get some solid feedback here on whether it make sense to invest in lower cap rate areas such as the SF and the Bay area. I'm mostly interested in feedback and motives of people who are already investing or have been invested in the bay area, if possible.

The reality here is that multifamily properties are selling at 4% cap rates. People here (sellers and buyers) anticipate market recovery in 5-7 years, gradual decrease in unemployment rate, and return to continued slowed appreciation in 5-7 years. Also, people have a lot of equity and wealth so multifamily pricing does not go down as I would expect it to be....

I know a lot of people in the forum wont even consider looking at poor cap rates like this but this is the reality here. I can come up with my own analysis and my required return but it wont help me much. The market will eventually dictate the price and as long as sellers have multiple offers, have enough equity and not really motivated, it wont help me analyzing the deal, show how poor my c-o-c return is and bring it to the table as a negotiating factor. This is how the market is here in general. There are still a lot of people who believe in long term appreciation in the bay area.

Has anybody who has been investing in the bay area can share some of his experience when negotiating their multi family deals deals here? How strong these sellers really are nowdays?

[Jak Dadi]

It really depends on where in Bay Area you are investing in. I started looking at San Jose/Sunnyvale/Redwood city...and ended up buying 5 fourplexes in East Bay..the cap rates range from 9% to 18% and GRM is 4-5. My focus is on cash flow and I am assuming that when the market does recover, East Bay would appreciate slightly more than South Bay, since the decline in prices was worse in EB. And of course, I would recommend you hire a property manager and also be open to having Section 8 tenants. The minimum cash flow return I look for is 20-25% on these properties.