negative cash flow in the bay area

[Steve C.]

I am trying to find rental property in the bay area, especially south San Jose area. 

I am planning to buy 2bd/2ba property priced at around 450-550K, 

so I am mainly looking at Blossom Valley area of south San Jose. 

https://www.redfin.com/neighborhood/65588/CA/San-J...

https://www.zillow.com/blossom-valley-san-jose-ca/

I analyzed one property I am interested in, which I think will have an estimate of -$1182.99 cash flow.

Purchase Price	550000
Down Payment	120000
Mortgage	430000
Mortgage Rate	5%
Mortgage	2309
Tax	550
HOA	408
Vacancy (5%)	125
Cap Ex	115.99
Insurance	50
Property Management
Repair (5%)	125
Total Cost	3682.99
Rent	2500
Cash Flow	-1182.99

As many of you know, the Bay area is very expensive and it's difficult to have positive cash flow. 

But I think appreciation plays big role here compared to other area. 

I think houses in the Bay area will continue to appreciate greatly as companies recruiting many people

and more people flooding in every year. 

If I can somehow managed to sustain negative cash flow, then is it worthwhile trying to survive with negative cash flow?

I know that negative cash flow is generally not recommended in principle, but trying to understand 

whether it is worthwhile to take a risk in the Bay area. 

Also, with similar price range, should I target better area (say near Cupertino) with 1 bedroom unit?

I also think 1 bedroom unit is generally not recommended, but trying to understand whether there can be exceptions with great location. 

For example, this 1 bed cost is listed at $479K. 

https://www.redfin.com/CA/San-Jose/4681-Albany-Cir-95129/unit-143/home/1695726

Any advice is greatly appreciated. Thank you very much in advance. 

[Andrew Johnson]

@Steve C. Playing devil's advocate, I could see someone saying "well, I'm offsetting that negative cash-flow with mortgage pay down". However, when I look at an amortization table, it doesn't look like you'll get to break-even on that until 2032. So you basically lose annual "net" money for the next 14 years. Maybe rents go up, I'd hope they would go up, but nothing in life in guaranteed. While I don't think there's a "crash coming" in 2 months, 12 months, or in any defined period of time...well...I'd wager there's some pull-back over the next 14 years. So your value will drop, rents (that you have increased) will likely drop, and you'll be back to losing "net" money. That's a really, really, tough road to hoe. And, by the way, you have to assume that rent growth outpaces insurance, HOA payments, etc. Hopefully it does outpace those but you can't count on those categories being completely static. Building equity through appreciation is great but how do you plan to pull it out of the property? Let's assume that the property value keeps going up, that probably means the economy is still strong as well, which increases the change that when you refinance mortgage interest rates will be at 6%, 7%, etc. So when you pull out money (yippee!) the new balance will be at a higher interest rate.

That's not to say this idea is materially bad.  If you had banked on appreciation 3 years ago (when plenty of people said the Bay Area was overheated, unsustainable, etc.) you'd probably be pretty happy about now.  Maybe the best way to look at this is how you'll feel if things stay flat.  Are you okay losing $12K per year for the next 30 years?  If your life changes and you want to "stop the bleeding" are you okay paying $33K to sell the property?

And, hey, if you believe in the market go right ahead.  Some of us invest other places.  Plenty of people don't invest at all.  You'll only figure out if you were right in 10+ years.