investing in family homes in san francisco - Posted by AMITinSF

Posted by AMITinSF on July 09, 2003 at 11:54:01:

good ideas- at this point all i need is some handy info, and my sunday section of the SF chron has it. cool…

investing in family homes in san francisco - Posted by AMITinSF

Posted by AMITinSF on July 08, 2003 at 01:16:11:

i own a condo in SF with alot of equity (+$400k) and i’m thinking of taking a home equity loan, buying another home for myself, and renting out the condo. i’ll positive cash flow on my condo by $1000/month. i’ll also look for a new home w/a 1 bedroom inlaw, which i can rent for $1000-1200, to help with the new mortgage payments (significant, as the new property will cost me $650 to 700,000.)

i’m interested in feedback from investors in the SF/bay area (or other expensive urban centers.) my questions:

  1. i did real well with the condo on appreciation (brought in '94 for $160k; value in 03 is ~ $600k.) if i plan on holding both properties for the long term, i hope to bemefit from appreciation, is appreciation a good thing to bet on? i’m thinking that cities like SF will always be in demand, and that good houses in good 'hoods will appreciate nicely in the future.

  2. what are the strategies investors in places like SF employ, especially with single family homes or duplexes? i.e. given the high purchase prices, it’s hard to get them to cash flow unless you put (it seems) 30%+ down.

i got lucky with my condo purchase, so i’d like to leverage the equity and buy another property, one i can live in and also rent out an in law unit. when i pay them both off, i should have a nice net worth and some strong cash flow. is this a common strategy? any suggestions or words of caution? thanks in advance!

thanks for all the feedback folks… - Posted by AMITinSF

Posted by AMITinSF on July 08, 2003 at 15:01:56:

some good suggestions here. please see my detailed response to ron starr below. curious what others think. basically (i think) it boils down to a units vs. single family investment strategy. with uints i shoudl get great cash flow in the future, but with good homes in SF, appreciation could be very strong.

please see my response to ron starr below, and let me know what your take on my situation is. thanks guys!

Re: investing in family homes in san francisco - Posted by John (Rome)

Posted by John (Rome) on July 08, 2003 at 13:12:15:

Hi,

good going on the appreciation - I have a similar situation though mine didn’t appreciate as much (paid 150 in '96fmv approx 400k today) - my father lives in the property and as home equity loans here aren’t easily obtainable I am pursuing this route - am negotiating to get another home under cfd (not quite - but closest definition I can think of) payable in 5 years for 450 k.I will then sell the original property and use the cash to invest in auction properties (to start) as we need to put down 30 to 35% of base price if we want to participate (50 to 100k just to plaly ball each time) - there are many I’ve found that will go on auction from here to end of october and on which there’s a possible margin of at least 100k a piece (not to mention all the smaller ones which are gadzillions)- won’t win them all but who cares - and will obviously continue to pursue motivated sellers but the market being as it is they are hidden a bit better these days :slight_smile:

I had the possibility I’d keep the property - but as of today I can put the cash to better use and leverage it a 100 fold over the 5 years (not to mention the rental laws here).

Cheers

J.

Re: investing in family homes in san francisco - Posted by Alex F. (CA)

Posted by Alex F. (CA) on July 08, 2003 at 09:51:21:

AMIT,

Here in southern Cali we are seeing the same thing, but obviously not in comparison to the Bay Area prices. If you play your cards right, you can become well off. With my first house, I bought 6 other properties just with the equity alone and being creative. I’m highly leveraged which is a good thing, but some may otherwise disagree as it is too risky.

If I were you I would consider:

  1. Investing elsewhere

or

  1. Rent out your condo if you can, at minimum, break even. I’m suspecting that you can get positive CF based on the price from $160K and it has appreciated to $600K in a great neighborhood in SF. If so, then do it. This would be my first choice and you will now have 2 appreciating assets compared to just selling your condo and exchanging it for another property.

BTW, you mentioneded to pay off your properties free & clear. I personally cannot wait 15 or 30 years to receive the income that I want, therefore I leverage to accumulate more properties and will shorten that time period significantly.

Good luck,

Alex F. (CA)

What I would do in your situation - Posted by JD

Posted by JD on July 08, 2003 at 07:55:43:

I’d sell the condo and either rent or move. I’d invest the money in something other than bay area real estate.

Re: investing in family homes in san francisco - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 08, 2003 at 04:39:57:

Amit–(CA)-----------------

Nice to meet you.

It could work out well and as you plan.

Would your condo be subject to the rent control law? If so, I’d suggest you sell it rather than keep it for a rental. Owning properties which are subject to rent control is a very bad plan unless there are clear signs of a change in government policy.

Have you done a thorough analysis of the cash flow for the condo? Many beginners subtract their mortgage payment from the rent and think that that will be the cash flow. Not true. There are a lot of expenses to consider. Condos have less maintenance because of the HOA doing work. However, you cannot control the size of the HOA dues. Do a very careful analysis of the expenses.

Usually it is better to rent out lower priced properties if you want cash flow. However, you say you are holding the condo for appreciation. Given that goal, renting it makes sense.

You might consider, however, selling the condo and using the money to buy one or more multi-family properties in the Central Valley or in the foothills. I expect good appreciation there over the next 20 years, if the population projections for CA come true. And you will probably have a positive cashflow there. You are also diversifying a little, not having all of your eggs in the earthquake-prone San Francisco basket. If you rented it out for a couple of years, you could then do a 1031 tax-free exchange from it into other rental properties.

Good InvestingRon Starr***

what part of CA are you in? - Posted by Nancy

Posted by Nancy on July 13, 2003 at 11:41:38:

Hey Alex,
what part of CA are you at? I’m planning to move to Los Angeles at the end of this year or beginning of next, and is hoping to start getting familiar with the area now through the internet ads. I’m hoping to invest in lower-middle income neighborhood in LA, buying upper fixers, any suggestions on location?
thank you!
Nancy

Re: investing in family homes in san francisco - Posted by AMITinSF

Posted by AMITinSF on July 08, 2003 at 14:53:01:

thanks for the great feedback ron. your idea of doing a 1031 exch for another property is an idea worth considering.

it sounds as if you own property in central/foothills of CA- if so, perhaps you could offer some advise on the following scenario:

a) i assume that i would have to convert my condo to a rental property (is it for 2 years minimum??) in order to qualify for a 1031 exch- like-for like property. i can do this, as i plan to buy and move into another home in SF. otherwise, i could sell the condo now, and use the profits to buy a renatl property, but won’t i have to pay cap gains??

b) assuming i do the 1031 exch as mentioned above. 2 years from now, instead of having the condo with a $1000 cash flow/month, i would sell it, close my loans on it (my first, as well as 2nd- which i used to buy my new home.) i would have between $250-300,000 to invest with. what could i do with that amount of $$ as far as investing in centra/foothills, etc. in CA? i assume i could buy some units. of course i would need to have it managed by a firm locally. bottom line question to you: with a $250-300k down payment, could i buy an attractive units property that would give me a greater than $1000 cash flow (incl. external mgmt of the property)??

if so, that may be a wise investment. BUT, if i cannot generate a great cash flow, am i not better off keeping my condo (remember, it gives me $1000 cash flow/mo.)? also, as far as appreciation goes, i assume that a condo in noe valley in SF would have higher appreciation than a units bldg. in central CA. (but i’m not sure.)

any tips/thoughts/ideas you have on my situation would be appreciated.

btw, i’ll share a personal note: years ago my folks moved from CA back home (israel.) my dad kept his home here and asked me to manage it for him. how i hated it! i dealt with bad tenants, the tenants from hell, realtors, repair people, etc. i’ve been managing it for over 10 years now (a single family residence in orange county CA.) ironically though, it has now given me the impetuous to invest in real estate on my own! (guess it’s one of those times when dad knows best.)

looking forward to your feedback.

amit

Comment regarding overpriced markets - Posted by randyOH

Posted by randyOH on July 08, 2003 at 19:55:19:

amit,
If I were you, I would sell the condo and put the money in a market with more upside potential than SF. I think it is a mistake to assume that a market will keep going up just because it has been going up for a number of years.

A market that is badly overpriced is actually less likely to continue to appreciate rapidly or appreciate at all than a market that is not overvalued.

When the NASDAQ was at 5000 a few years ago, most people assumed it would keep going up. Same thing with gold in 1979. But these markets were badly overpriced and they did not keep going up.

How do you know when a real estate market is overpriced? Look at the affordability factor. This measures the percentage of households that can qualify to buy the median priced house. The national average is around 60%. As of March 03, the affordability factor for SF was 12%. And that is based on extremely low interest rates. I have to wonder what the affordability would be in SF if mortgage rates would rise to, say, 7%.

So, based on affordability, I see very little upside for prices in SF. My guess is that 10 years from now, SF prices will be about where they are today.

Just something to think about. Good luck,
Randy

Re: investing in family homes in san francisco - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 08, 2003 at 15:23:21:

Amit–(CA)---------------

Everything you say is true and makes sense. I do not worry about you. You seem to have a firm grasp on reality and will probably do just fine.

Yes, if you sell the condo, you will have a capital gains tax on the amount of the gain above the $250K exemption from capital gains for you personally. If you have a wife and she is a part owner, you can exclude $500K in capital gains from taxation. But, I assume that there is no wife as you did not mention one.

I own properties in the Sacramaento area and have enjoyed good appreciation of late.

I can’t answer whether you could get better cash flow in the central value or the foothills than you would in San Francisco. You could talk to real estate sales people and property managers in those areas and ask them for figures on rents and sales prices of such properties. As far as the difference in cash flow in the future goes, that is just speculation on everyone’s part.

In general, you get a higher rate of return on lower-priced properties than on higher-priced properties. The condo I categorize as higher-priced. The inland rental units may be catergorized lower, so may well have better cash flow.

I expect good appreciation in the lower-priced parts of CA as people move there from the higher-priced areas of CA. Whether there may be as good appreciation in the Coastal area in the future as inland, I do not project. I feel that there is no way to know what the future brings in that matter. If you can produce your own projections, fine, do so, and use them for your decision making.

Now, do not just look at the difference in cash flow when you compare investments in two different areas. Also consider the appreciation and the tax benefits. The three sumed together represent your total return. If you sell the condo and invest in a greater amount of property than you sell you will have more property to appreciate. So even it it appreciates at the same rate as the SF condo, the multiunit property could make you more money in appreciation. Also, greater property value means more depreciation which can reduce your income taxes more, if you are eligible for passive losses. If your taxable income is greater than $150K a year, you are not eligible for immediate tax benefits from the passive income losses of rental properties, although you can accrue them for the future.

There is nothing in the tax code that specifies how long you must own a property to consider it converted to investment properties. A tax adviser could give you some suggestions and perhaps tell you what other people think of the issue. My impression is that holding the condo for a couple of years then exchanging into properties held for many years would pass the IRS with flying colors. But I am not part of the IRS, so my advise is not official in any way.

Good Investing*********Ron Starr***************

Randy…a little more light on the factor… - Posted by Mike(NY)

Posted by Mike(NY) on July 09, 2003 at 09:14:59:

Randy,

I was wondering if you could go a littl edeeper into the affordability factor? I recently have read and article stating that on Long Island NY there was a great distance between the average household salary compared to the average home price. The article mentioned 30%. This sounds like the same thing. The point of the article was to show how the feds may need to move in a create more ‘affordable’ housing. Could you explain the calculation?

Thanks for the insight.

Mike

Re: Comment regarding overpriced markets - Posted by AMITinSF

Posted by AMITinSF on July 08, 2003 at 23:53:28:

randy- i think you can make good argumetns both ways, which of course is why it’s never a ‘no brainer!’ as for SF appreciation, i don’t think the market is overvalued. it’s very expensive, but that is different. people that can afford SF and want to move here, do so. as in NYC, Paris, London, Hong Kong, etc. a destination city, especially where large expansion is not possible (i.e. SF & NYC vs. Houston) the prices will just keep increasing- unless the city looses it’s charm, prestige and business base. basically, more and more oars of the city are going out of reach to average salary families, but are being replaced by moneyed people who want to live here. the wrinkle is rent control, which allows tenured tenants to stick around- bad for landlords but good for diversity (and sole) of the city and it’s people.

so i think the interesting question is more one of how much SF will appreciate vs. upcoming suburbs or new development areas in inland CA. and here i think that astute knowledge of the area in question, and one’s comfort factor plays a large role. as example, i know whcih 'hoods in SF are upcoming, something i do not know about in other parts of CA. i also know which streets are better than others. i get the feeling people invest in areas they know and are comfortable with. yet on the other hand, you can be comfortable in an area that is not a good investment! so that is why i’m keeping an open mind to other areas in CA, before i make my decision. comments?

Re: investing in family homes in san francisco - Posted by AMITinSF

Posted by AMITinSF on July 08, 2003 at 23:36:24:

thanks ron. is there an agent in the sacramento area that you could recommend? i’d like to get some info on rental units in the area. thanks.

Don’t know all the details - Posted by randyOH

Posted by randyOH on July 09, 2003 at 12:07:19:

Mike,
Sorry, I cannot tell you exactly how this factor is calculated. As stated above, it is the percentage of households that can qualify to purchase the median priced house. I assume there are three sets of calculations necessary.

  1. The median price.
  2. The amount of income needed to qualify to buy the median priced house.
  3. The percentage of households that earn this amount of income.

I have seen this factor published in regards to a local market, a whole state and the whole country. When the factor is calculated for a local market, I assume they use income data for that market.

As stated above, I believe this factor can tell you a lot about the upside potential of a local market. When a market reaches the limits of affordability, then any future appreciation must come from either lower mortgage rates or higher incomes.

I think SF has reached the limits of affordability (11% for April 03). Maybe it has even gone beyond the limits of affordability ala NASDAQ 5000. And I do not see mortgage rates getting much lower. So the only way SF prices can go up from here is if incomes go up (IMHO). And incomes probably will go up.

So if the affordability factor holds at 11% and mortgage rates do not rise, then SF prices will increase in proportion to incomes.

But my guess is that the affordability factor will increase at least a little and mortgage rates will increase at least a little in the years to come. And these two factors will at least offset any increase in incomes. So I think the best you can expect in SF is flat prices in the foreseeable future.
Randy

You may be right, but… - Posted by randyOH

Posted by randyOH on July 09, 2003 at 19:35:30:

amit,
I think a market is in trouble when you have to come up with theories like that to support your case. I recall hearing that sort of talk about the Tokyo market in the late 1980s.

But, hey, you may very well be right. Maybe there are enough multi-millionaires that want to move to SF to keep prices rising. I doubt it, but anything is possible.

Only time will tell for sure.

Good luck,
Randy

Re: investing in family homes in san francisco - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 09, 2003 at 09:11:30:

Amit–(CA)----------------

I’d recommend that you look at the Sunday edition of the Sacramento Bee newspaper. There are a couple of people in Sacto that specialize in apartment complexes. I don’t know if there is an online version.

You could also look in the Sunday real estate section of the S.F. Chronicle newspaper. There are usually and ads in there for sacramento investments.

Good InvestingRon Starr******

Re: agent in Sacramento - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on July 09, 2003 at 24:20:54:

Amit–(CA)-------------

Sorry, I can’t help you with that one.

Good Investing*********Ron Starr************