Posted by Ronald * Starr(in No CA) on July 13, 2003 at 10:43:18:
Thank you for the details of your thinking. This helps me talk to you better.
Given your thoughts about the situation and your thinking, I can see why you lean toward your view. And, I do not want to discourage you too much from your plans. They may work fine. The may be right on the money.
However, I think you are making some assumptions which are not the same as I make. I think, if you want to really compare your current plan with something more like what I am proposing that you should question a few of your views and test them by getting more information and data.
The truth is that I have not dug in to get exact detailed research numbers for what I say. But, I believe them because I have repeatedly heard information about what I am about to say and sometimes have seen some number in newspaper articles or other sources.
First: “i bet that there are plenty of apartment bldgs. that have not risen in appreciation, because there is more land nearby, and builders just build nicer, trendier places that rent for more, and the 70’s style places don;t rise in value.” This might be true in some places other than CA. There are a lot of places where this can be true. I think it is dead wrong for CA.
I don’t know how the appreciation will be in San Fran over the next 7-10 years. You might be right that it will be high. I’m not sure. I do have the very strong feeling that the appreciation will be high in other parts of CA over that time, and probably longer.
Look at population projects for the different states. CA has the highest projections of the absolute numbers of population increase between now and 2020 of any state. And, it has the highest RATE of population increase in projections. The number of people who be will moving into CA and born in CA over the next couple of decades is tremendous.
If there were plenty of housing being built to house the increased population, it is likely that the values of houses and apartments would not increase very greatly. However, for the past couple of decades, this has NOT been true. The number of units being built has greatly lagged the demand. There is, I believe, no sign of a great increase in building for the next five years, anyway.
I think that the trend for prices of California single family houses and apartment complexes is definately upward for the next decade, perhaps two decades.
And you do not have to buy apartment complexes, if you don’t want to do so. It is possible to get a break even or positive cash flow with some single family houses in some of the least expensive parts of CA. That is changing, as prices skyrocket these days. Look at the increases in values for single family houses in the Central Valley and in the “rim”–the foothills between about 2500-4000 foot elevation.
“i don’t really want to buy units in section 8 or depressed areas, as it just seems like a drag.” I see this as a typical middle-class prejudice and misunderstanding of lower income housing. It is not based on reality. The highest cash flow returns returns do come from lower-cost properties, for sure. And, in any one area of CA, the lower-cost properties will, over the longer term–say 10 years or more–appreciate, on a percentage basis, the same as the higher-priced properties. All statistics I have seen show this. I’ve done some analysis in Oakland. There are statistics published by the Northern CA Real Estate Research Councel for the North Bay and the East Bay that confirm this.
I have owned rental properties in the below-average neighbhoods of Oakland and the below-below average neighborhoods of Sacramento for many years. They are very good investments. Well-selected renters are not a “drag” as you put it. They do take a little more management skill than middle-income housing, I think. But it is possible to do that oneself or to find some property managers who can deal with it.
I think that investing in the “sunbelt” is probably the way to go if you want increasing property values. There is a movement of population from the colder climes in this country to the warmer. I have heard nobody claim that this trend will reverse.
For cash flow, the midwest and the southeast are the places to go for rentals. The returns there are dramatically better than for Coastal California. Combining the sunbelt and this information, I’d suggest that the places to invest, outside of CA, are the southeast and Texas. Perhaps New Mexico–the prices there are very low compared to Texas and Arizona, and I don’t know why; there may be a change in the future…worth checking out, in my opinion–and AZ and NV–which are the two fastest-growth states these days, I believe. However, there is a lot of flat land there for continued building, so appreciation may not be too good.
Now, you say that you will have about $1K a month positive cash flow on your condo if you refinance to help you buy a new property in which to live. You don’t mention how much equity you would have still in the property. However, I’ll assume that you will have about $200K after borrowing about $200K for the purchase of your new property at about $650K-700K.
In OK, which I know because I have properties there, With $200K you could buy in and near Oklahoma City four or five houses free and clear in the $40K to $50K price range. These are not the nicest houses in town, but they are far from the worst. You would achieve a net positive cash flow of about $300 a month on these properties. This would give you a better cash flow than your condo, although possibly at the expense of lower appreciation. Should you buy the properties with 20% down, you would be able to buy $1Mil in property value, or about 20 to 25 houses. Because of the loans on the properties, your cashflow would be reduced for each property. However, because you would have more properties, your cashflow would probably end up being about $3,500 to $6,500 a month. Does that look like a better cash flow than from the condo? Plus, you will still have your new property in San Fran. These houses just replace the condo.
Also, about owning and living in a very high-priced property in San Fran. I have not done the numbers for your proposed new dwelling unit, but in general, it is economically better, in high-priced areas, to rent than to own. Then take the difference in the expense of owning vs renting and invest in low-cost areas for added cash flow and appreciation. Now, with the low interest rates available these days, especially for owner-occupied properties, this disparity of cost of living may be zero or even reversed, I suppose. And, there are emotional issues related to renting a property separate for the financial calculations. They include but may not be limited to having pets, decorating in any way you see fit, and psychic rewards of “owning my own place.”
So, my advice at this time would be the following: borrow against the condo and buy your own dwelling if you want to do so. Then convert the condo to a rental unit. Sometime in the future, sell the condo with a 1031 exchange and get into some higher-cash-flow rental properties.
Now, if I am right about being able to rent at a lower price than owning, and you were to thus rent your next place, I’d modify the advice this way. Refinance or get an equity loan on the condo and buy some better-return rental properties with it. Move into a rental dwelling. Rent out your condo for a while. Then sell the condo and do a 1031 exchange into still more rental properties.
You might well have a $8-10K a month positive cash flow on the rental properties at this juncture. If you wanted to buy a house at that time, you probably do so.
You have significant assets there in the condo. If my analysis is anywhere near correct, they could be deployed to produce greater return elsewhere.
Good InvestingRon Starr****