All Forum Posts by: Jay Y.

@Steven Lacy As @Account Closed mentioned, I'm an investor who own properties in both the Bay Area and out of state.

When it comes down to it, I think there can be a place in one's portfolio for both types of rentals. But if I was going to place a bet, and I have, I would put the bulk of my investment capital into the Bay Area. I've got 5 properties in the Bay Area, and 3 out of state. If you want to look purely at property values, over $2MM in the Bay Area, and about $450k out of state. So, about 80/20 split, which is what I'm comfortable with...

Yes, you can go out of state and get better cash flow on Day 1. But as Minh mentioned, one thing that often gets overlooked (and I overlooked this myself), is the crazy rent appreciation we get locally. Day 1 numbers don't tell the whole story and just like with dividend stocks, you want to find the right companies/properties that have a high GROWTH rate; that's the key to future wealth, and I believe you will be hard pressed to find a better market than the Bay Area for that.

Also, people will say that appreciation is just icing on the cake... if that's the case, I got a serious sweet tooth. I'm a big fan of appreciation. You only need to get lucky once (or preferably a few times) in the Bay Area to become a future millionaire/early retiree.

That's my get rich (relatively) quick plan, anyhow. Sure, drip cash flow works too, but it'll take a lot more effort, and a lot more time, especially if you're managing from afar. One major expense will easily wipe out cash flow for a year... If you have both cash flow and appreciation, you create a greater margin of error for yourself. Again, maybe that's tough to accomplish on Day 1, but if you can get to that wonderful place say in Year 5, you'll be on easy street... Then you can: sell, 1031, refi, or just hold and jack up rents. Either way, you win!

@J. Martin 

I just closed on a property recently and am currently rehabbing it. Aside from that, no new deals in the pipeline. As usual, the market is getting bid up like crazy in the South Bay and most everyone I know is looking to buy a house now... Too many stock options and RSUs sitting at ATH now!! Makes me scared...

I'm good for now and am content with taking a breather. If I do get the itch again, I'll probably have to look outside South Bay. Maybe Oakland?!? LOL I would have to hit you up for your expertise on that one....

Yeah, I went out of state for some cash flow deals, which while good, don't bring along many of the benefits of Bay Area real estate. I was naive in underestimating Bay Area real estate and thought it was getting overpriced... Next thing you know, I did a cursory glance around summer 14' and discovered cash flow still existed... b/c local rents had surged by like $400+/unit!!

So, I made a mistake... should have bought more... I especially missed out by never getting any multifamily deals. I don't get the economy of scales from insane rent appreciation like you do :) 

Can deals still be found today? Of course... I learned to stop underestimating the local market... it's a goldmine out here.

@Steve B. All I'm trying to say is that numbers can be deceiving so don't just input them into an Excel spreadsheet and expect what you see on screen to mimic reality.

There's a lot of things that go on behind the scenes, things that I had to learn over time by actually doing... and did not initially account for when running my cash flow numbers. For example, 0% vacancy in the Bay Area is not a pipe dream and actually something that does happen! I didn't know that on Day 1... but everytime I list a property for rent on craigslist, there are 5+ offers by the end of the night... This is simply a byproduct of an appreciating market. On the other hand, I didn't know how expensive an eviction is, and how often it can happen in a pure cash flow market, more geared towards working class tenants... who are also higher maintenance.

A lot of local investors have no way of knowing these things in advance when they first run their numbers so they naturally assume that vacancy/maintenance reserves will be the same for both sets of properties. In reality, they won't be.

As @Matt R. pointed out, cash flow increases at a faster rate in an appreciating market. If you only follow the numbers blindly, you will be misled by the seduction of perceived greater cash flow on Day 1, which will be left behind in the dust in Year 5.

Appreciation happens for a reason. You always hear that appreciation is just speculation, so it's better to go with cash flow... But what do you get when you buy into appreciating locations?

-Excellent schools

-Plethora of skilled jobs

-Solid infrastructure (first rate: shops, restaurants, public transportation, entertainment, etc.)

-Wonderful pool of high quality tenants

- Aggressive competition from both homeowners and investors (both foreign and local) trying to get into the market... further driving prices up

Work backwards. Look for areas that give you all of those bullet points, and the odds are very good that you've just found yourself a market that will appreciate in the future.

Properties/markets are expensive for a reason... But as mentioned above, it doesn't have to be either/or. You can have BOTH cash flow and appreciation... that's my plan anyway.

@Account Closed Something interesting I've observed, and maybe you've witnessed the same thing yourself:

In the Midwest, my properties all experienced the highest CoC returns in Year 1. Over time, maintenance repairs started to become more of a factor, and the rents don't scale nearly quick enough to offset those added expenses.

In the Bay Area, vacancy has been 0% and maintenance... I think I've spent $5 total in the last 2 years on a single bottle of Drano. I've heard from others (as well as from my own experience), many tenants will service minor repair items themselves b/c they don't want to disturb the landlord... Why not? It's a TOTAL seller's market right now and every tenant's biggest fear is an increase in rent!

I'm not saying that the above will always hold true... It more just illustrates what a perfect storm we've got going on in the Bay Area right now. Well, over the last few years... Tech is exploding again... Appreciation, cash flow, low vacancy, low maintenance, easy exit strategy, wonderful location (good schools + lots of jobs), perfect weather... What more could an investor possibly be looking for?

I'm an engineer, but I've learned not to be a numbers guy... If you fixate too much on the math, you might miss out on some "once in a lifetime" opportunities!

I also own properties on the coast and the Midwest and I'll elaborate a bit on my own experience...

I don't think it's as straight-forward as to say it's purely cash flow vs. appreciation, pick one or the other. In the Bay Area, yes, I've seen a ton of appreciation, but not just on the value of the home, but the rent as well. So, even if you start off Day 1 in the Bay Area and the property is  break-even, it won't take long until the cash flow picks up. I bought a Santa Clara property in 2013 and at the time market rent was $2150. Today, it's about $2600.... and climbing.

I also picked up a home in Indianapolis in 2013, and it was leased up for $1075... Today, it's renting for... $1075... Where will rents be in 2-3 years time? Maybe $1100? So, even though the cash flow appeared more solid on Day 1, it took little to no time for my Bay Area property to catch up and outperform. Not to mention way better tenants, and much easier exit strategy...

What I've really learned is you can't beat location. If you buy in the right areas, you can have it all... 

@J. Martin 

You are killing it sir! I'm just a small potato but got back into investing into the Bay Area summer of last year, well after many were saying cash flow was done and there was little reason to continue buying in the Bay Area.

Those two stadium deals we won are doing very well... No, I don't get the 1% rule, and I don't care. Rents have continued going up, tenants ALWAYS pay on time, and a nearby comp is currently in contract for about $40k more than what we paid, and it's only been six months...

In regards to cash flow, we are positive and collecting $400+ each month. Units are rented out to high-tech professionals all making $100k+, so no worries there.

Just recently closed on another property and yup, still think I can find cash flow there! In a great location as well. I went shopping during the holiday season when there was a lot less competition. It's a 3 bedroom townhouse for under $500k. That's been my bread and butter play for awhile now. The 2 bedrooms are now being listed for the same price... most likely they will sell for even higher. A  4 bedroom nearby comp is now a "hot home" on redfin and coincidentally a buddy's friend of mine is trying to win it... His offer? $80k more that what I paid... 

Instant equity.

Cash flow + appreciation + wonderful low maintenance and super high income tenants? I'll take that any day of the week. 1% Rule, 2% Rule, etc. never were a factor in my decision to buy in the Bay Area; they don't apply here. Then again, if I just wanted to play by the rules, I never would have even tried for those stadium deals...

Barrier to entry is high, which is why I started using partners. It may or may not work out, who knows? 

If it doesn't, at least I'm spreading the risk across other high income individuals... who can all chip in to help weather any storms...

If it does work out, well, then we all win! Imagine if you had a 25% equity stake in ANY home in Palo Alto back in the 80s or 90s... 25% doesn't seem like much... until it is.

@Jessica Skupien Welcome from another Bay Area investor! You're right, cash flow is tough to locate here, but not impossible. Might be trickier with less than 20% down though... but maybe you'll get lucky.

Best of luck!

Welcome @Sharon Tseung  from a fellow Bay Area investor! Are you looking to buy locally, or out of state? I invest in both, so feel free to message me if you have any questions.

Not sure which part of the Bay you are in, but there are some great meet up groups all around that you should check out.

Best of luck!

@Leo Qu Yes, I have experience working with them and own a few properties. Although my primary focus is to stay local and invest in the Bay Area.

Since you are located in Cupertino, perhaps you would be interested in chatting more over lunch sometime. Some REI folks and I meet regularly in Cupertino for lunch. Or even better, come out to the monthly meet ups hosted by @Johnson H. in SJ. Interestingly enough, I met @Dooreuhn Cee at the last meet up and he also invests in Chicago... Give him a shout.