All Forum Posts by: Steven C.

I was asking about long term buy and hold returns on the SF Bay Area!  Not short term gain examples.  Anyone can point to some example of a real estate deal here or there that resulted in huge gains, or a stock that showed huge run ups.

Hi David - Good points.  Thanks a lot for the info.  You are correct in that one must add value and not buy a turn-key property.  I just can't make the numbers work on what I am seeing. There are some fixers were the numbers I think would work out.  But they are few and far between.

It's not that I assume negative cash flow.  The purchase price and rental income achievable dictate the cash flow - I'm not sure I understand what you mean by buy at retail.

Hi David - the reason 4% appreciation leveraged 4-1 doesn't bring 16% return is due to the negative cash flow.  What would your estimate be for rent increase if not 2%.  The point of my post is to get feedback on the assumptions.  Thanks for the help.   Mortgage paydown is already incorporated into total return, although I agree that tax incentives/deductions are not considered since in many of the situations, there is no taxable gain to be deducted since the properties are cash flow negative both from an absolute standpoint and from a taxable income standpoint

You guys are correct.  I mistakenly said 1.04% when I mean 1.04x, which is 4%.  

So the assumptions are 4% appreciation and 2% increase in rent/costs

My current home has appreciated actually 6% over the past 7 years since the bottom, but over 10-30 years, 6% appreciation is not likely.  A reason estimate in my opinion is 4% which is about 1.5x appreciation in 10 years.

Actually, to be exact, I assume 1.04138% appreciation, which yields 1.5x appreciation in 10 years.  There is a big difference between 1.04% and 1.05%.  The former yields 1.48x and the latter yields 1.95x in 10 years

i live in Fremont and bought my house near the bottom in 2010.  I'm just at 1.04% appreciation from bottom to near top.  I don't think you can assume better than 1.04% unless it is super exclusive, which would cause you to be very cash flow negative, or ex-burbs and you buy at bottom and sell at top.

If I plug in $480K purchase price into my spreadsheet and reduce the appreciation to 2%, it is a little better.  At 10, 15, and 30 years, the annualized returns are 12%, 11%, and 9% respectively.  The low appreciation is knocking down the long term return.

By the way, in my numbers above, total return means how much money I have after selling the place and paying off the loan.  So my $292K investment at year 0 would be $585K after 10 years, which would be a 7% annualized return.

I'm new here and analyzing the economics of buy and hold real estate here in the bay area.  In most of my calculations, the best return I can achieve is about 6-9% annualized return for a 10-30 year period which is quite similiar to the S&P 500 return.  Please let me know if I missed anything in my analysis.

Real Estate Assumptions:  

1) 25% down - most banks seem like they will not loan more than 75% on investment properties I am finding - since appreciation, not cash flow is key in the bay area, the more leverage you can get, the better your return.  Unfortunately, 25% down will limit the return then

2) 1.04% annual appreciation 

3) 1.02% rental rate increase

4) 1.02% expense increase (property tax, maintenance, insurance, vacancy)

In one bay area city I am looking at, these are the numbers I am seeing:

Property cost:  $1.1M

Down:  25% = $275K + $16K closing = $292K investment

30 year fixed rate @ 4.5% 

per month costs : $3K interest, $1K principle, $1.8K other (insurance ($500/yr), HOA($250/month), maintenance ($1000/yr), vacancy ($2400/yr) = $6k per month in costs

rent:  ~$4.8K

Based on the above numbers and expected appreciation/rental increase/cost increase, after 10  years, this is the return if you sell the place, pay off the loan:

After 15 year:

After 30 years:

As you can see, unless you can get more than $4800 rent today, or leverage up, or get a better price, real estate is not returning any more than the historical average of the S&P 500.  Just wondering whether it is better to invest in real estate in the bay area or the S&P 500.  Please let me know what you think of the analysis.

The home in question is a 4 bedroom town house in the bay area.