Back in the Bay Area (March 21, 2017)

by FI Fighter on March 21, 2017

in Real Estate Thoughts, Real Estate Updates, Updates

Hey everyone! Although I arrived back in the Bay Area late last Tuesday (March 14), it took me a bit longer than expected to get settled, so hence the lack of updates as of late…

Anyway, I’m happy to report to you all that I’ve gotten most things squared away and should be back to ranting and raving now! And I assure you, I’ve got a ton of opinions and thoughts on various subjects that I feel are worth discussing at this time…

To get started, here’s a recap of the last week or so…

Shortly after landing in San Francisco International Airport (SFO), I made it my first order of business to check out my recently vacated and vacant rental property (Rental Property SH #3). Unfortunately, one of my best tenants had to move out due to life circumstances that were beyond her own control…

So, I’ve been busy trying to locate a new tenant and get the unit leased up before April…

Luckily for me, the unit was returned back in excellent condition.

Over the years, I’ve certainly learned that my preference as an investor is to snatch up and own as many high quality tier 1 assets as I possibly can… A lot of people (and bloggers) out there are hellbent on fixating on Day 1 cash flow (come hell or high water), but I’ve come to the realization that if you really want to sustain early FI for perpetuity, you will probably make it to the Promise Land a whole lot quicker (and easier) by concentrating the majority of your investment portfolio on the Creme de la Creme assets.

Honestly, if I could do it all over again, I never would have bothered wasting my time investing in overpriced turnkey properties and dividend growth stocks, and would have tried to focus a lot more of my investment capital on my own local real estate market (Bay Area)… That, or I would have tried to hone in on Class A rentals out in the Midwest, or say Portland and Seattle…

For anyone who thinks REITs are a suitable replacement/substitute for owning Class A tier 1 rental properties, hah! You have no idea how grossly mistaken you really are!

Anyway, what’s done is done…

Live and learn, as ALWAYS.

With Class A rentals, it’s just so much easier to locate high quality tenants who: pay on time every month, take wonderful care of the unit, and are just a pleasure to deal with (on the rare occasions you even need to interact with them), etc.

If I didn’t know any better, I wouldn’t even had known anyone had been living in my rental for the last two years…

One noteworthy point — We first started renting this unit out for $2,700/month. Current market rent is about $2,900/month. The property was purchased for $470,000… Today, the market value is probably on the order of ~$620,000.

Cash Flow Growth + Massive Appreciation = Winning formula for Early FI.

I am extremely adamant about the importance of utilizing appreciation in the early FI game plan… I don’t give a shit what everyone else is doing or recommending (and you shouldn’t either)! I know from experience what worked best for me and helped me retire from my corporate engineering job at the age of 31.

With rental properties, in particular, you will seldom (if ever) go wrong targeting after assets that are highly coveted and sought after by EVERYONE! Trust me, you want to own something NICE that will incite insane bidding wars by eager homebuyers, not junk properties that your only hopes of selling are to present “lowball” offers to other investors, hoping someone bails you out of Hotel California.

When in doubt — Location, location, location.

Prime real estate ALWAYS has appreciation potential! And it attracts the very best, highest quality tenants. The synergies go hand in hand… It’s the best of all worlds.

Further, appreciation gives you a ton of options/flexibility (e.g. refinancing and pulling equity back out) and exit strategies (e.g. bidding wars, 1031 exchanges, etc.)… things you will NEVER get with just cash flow alone!

The proof is in the pudding.

The dilemma with Class A tier 1 rental properties is that they seldom go on clearance sale… The buying “opportunities of a lifetime” are few and far between… So, when opportunity comes knocking, you had better not fucking blink or you will miss the train for good… like so many of my old co-workers who lacked the conviction to pull the trigger when Bay Area rentals were selling for 50% less than where they are today!

Such is life…

Nobody will ever ring the bell for you at the market bottom (or top)… Market valuations… that stuff is your own responsibility to figure out and properly assess!

That’s all for now, but don’t worry, I have many more thoughts and articles planned for the future to discuss the above topics in more details… It’s so important for us to not only learn from our mistakes but to also appreciate/realize what we did that really worked best and paved the way to our successes.

My next order of business was to FINALLY reintroduce my taste buds to a burrito… I went with a good buddy of mine to the nearest Chipotle.

I let the staff know that I had been away in Asia for a good nine months, so they were more than happy to “supersize” my order, at no extra cost!

Oh baby, how I have longed for thee…

This burrito was so massive, I made two meals out of it, but probably could have stretched out three if I didn’t indulge so much…

The first few days were pleasant, but I gotta say the inflation out in the Bay Area is absolutely INSANE! I know I’ve only been gone for nine months, but holy moly, talk about experiencing extreme sticker shock!

$12/meal, that’s like the norm out here…

A dollar bill sure does not go very far at all…

Funny, when I was in Vietnam and the Philippines, $12 would feed me for about an entire day… and if you were spending $12/meal, trust me, you were eating pretty damn well!

Oh well, it is what it is… which is why I can’t see myself sticking around here for too long… Why bother just “surviving”  and “scraping by” in the Bay Area like a pauper when I can go and travel the world out in SE Asia and live life like royalty while having the time of my life?

Geographic Arbitrage — The best way to maximize and sustain early FI!

Anyway, many more thoughts on Geographic Arbitrage in a future article as well!

But something definitely worth thinking about, especially for anyone who is currently living anywhere that is obscenely expensive.

Next up, I had to locate and pick up my trusty old ride from “storage”…

Still in working order, which was music to my ears…

Nope, no more $0.50 Uber rides for me across Ho Chi Minh City… sigh… I miss that dearly!

But with my whip in hand, I decided to go out and indulge in some more local eats…

Erik’s Deli ALWAYS hits the spot!

The Rio Grande with Onion Roll

It’s been awhile since I had a really good sandwich!

And I’m usually in the mood for some good Pho Kim Long.

Just as I remembered it, but man, like I mentioned above, everything has gone up in price…

I’m feeling the pinch…

Then I walked around town and observed the following signs being displayed…

And then it really hit me that I’m no longer out in SE Asia anymore…

Damn!

To survive out in the Bay Area, I don’t know what to tell you guys, I’m really starting believe that you need to make ~$150,000/year (if you’ve still got a mortgage/paying rent) to not feel piss poor…

Kudos to anyone out there who is grinding away and trying to make it all work out…

For me, I try and be a realist so I accept upfront that I just can’t hack it here… for now.

But to come full circle, here’s again that geographic arbitrage opportunity (summarized one last time here to further hammer home the point) I’m taking advantage of that I’m certain not many people ever think about:

Make a shit ton of money working in an expensive area… Invest in rental property there (ideally more than one unit), making sure to lock up 30 year fixed low-rate mortgages… Get yourself cash flowing and situated well enough where you can leave said area and thrive somewhere else where the cost of living (COL) is way, way, way, way more affordable… Live it up like royalty and enjoy your life to the MAX! After 5-10 years, should you decide you want to move back to the Land of Expensive, go ahead and test your might…

In 5-10 years, your monthly mortgage (principal + interest) payments will be EXACTLY the same as they are now… But your rental income will keep pace with inflation…

Meanwhile, each year that you are far away from “home”, you can use that SAME inflation (i.e. rental cash flow) to your advantage by exploiting geographic arbitrage to its maximum extent (make a lot of $$$ somewhere EXPENSIVE while spending as little of it as possible living somewhere CHEAP)! This arbitrage strategy, in essence, allows one the ability to outpace inflation.

When you finally decide to settle back “home”, live in one of your rentals, and keep renting out the other units… With a fixed rate mortgage, your affordability index will only improve drastically over time.

This is how you beat the system.

 

That’s my own plan anyway…

 

One day, I will return to the Bay Area and live like a king non-peasant… Now is obviously not that time… But it’s comforting for me to know that I have the following mortgages locked up:

30 year fixed rate Principal + Interest + Taxes (Prop 13 in California greatly helps limit yearly increases which is a HUGE boon for investors) + Insurance; total PITI:

*Rental Property #1: ~$2,000/month
*Rental Property #2: ~$2,000/month

 

*Please Note: Monthly PITI expenses shown above are the consequence of a cash out refinance for EACH property, NOT the original monthly payments! The cash out refi allowed me the opportunity to pull out ~$100,000 for each rental property… So, my original downpayment (and then some) have all been returned back to me. I essentially have “zero skin in the game” with Rental Property #1 and Rental Property #2. Despite the refinancing event, each unit still cash flows very well, and the compounded annual growth rate (CAGR) of the income streams have been stellar up to date. Appreciation — The gift that keeps on giving!

 

Original Purchase Price:

Rental Property #1: $315,000
Rental Property #2: $290,000

 

Original Day 1 Rental Income:

Rental Property #1: $2,090/month
Rental Property #2: $2,150/month

 

Current market rate rents: > $2,600/month for EACH unit.

From Zillow (probably not the most reliable source for estimates, but shown below for entertainment purposes only).

Rental Property #1.

Rental Property #2.

You don’t think an extra $100-200/month (or a lot more) in high inflation hedged Bay Area cash flow will make a GINORMOUS difference in a low inflation region (relative to super expensive areas such as the Bay Area) like Vietnam, or the Philippines?!?

 

Not to mention 500-600% leveraged returns due to robust appreciation that you can put to good use (ideally more than just one time)!

 

When an arbitrage opportunity presents (gifts) itself to you, why not exploit it to your benefit!?! That’s what I’ve been trying to do these past nine months. I firmly believe that you can have a good time anywhere on Planet Earth. There’s good food, company, entertainment, weather, etc. to be found EVERYWHERE! The Bay Area is AWESOME (don’t get me wrong), but it isn’t EVERYTHING!

 

The world is too AMAZING and too big a place to just ignore. Don’t go through life with blinders on!

 

Early FI was made possible for me thanks to picking up tier 1 assets in Class A neighborhoods that were able to offer both wonderful cash flow and appreciation growth potential.

 

You really need both cash flow AND appreciation to turbocharge your progress to early FI… Without the combination of the two (mostly appreciation, though, I will confess), nothing that I have accomplished up to date would have ever been possible!

 

I’m speaking truth here to you… Don’t fall for the trap, hype, bullshit, and all the other garbage that is routinely being spewed out there!

 

The path to early FI is paved by deep value and hyper growth opportunities… NOT high viscosity, overpriced, painfully slow-trickling DRIP cash flow investments that will never move the needle much for you!

 

Cash Flow Growth + Massive Appreciation = Winning formula for Early FI.

 

Don’t settle for less!

 

Fight On!

{ 16 comments… read them below or add one }

1 MikeNo Gravatar March 21, 2017 at 5:28 pm

Welcome back FI!

Regarding non-SF Bay Area properties, will you be exiting out of those?

Reply

2 FI FighterNo Gravatar March 21, 2017 at 5:51 pm

Mike,

No plans to exit my out of state properties which provide good/decent cash flow. Allocating a portion of the portfolio to this mix is ok with me, but with the benefit of hindsight, I would have stuck to higher growth areas like the Bay Area that offer a better mix of both cash flow and appreciation growth potential.

The out of state properties were “cheap” so not much to regret there… Just making mental notes now and sharing it on the blog with everyone… If there’s another downturn in rental properties, absolutely I will stick to tier 1 Class A/B rentals that are in owner occupied neighborhoods and have potential to appreciate a lot on the rebound.

Cheers!

Reply

3 JamesNo Gravatar March 21, 2017 at 5:41 pm

Prime real estate in SF, LA, or NYC area is always good to have if you can get in on them at a decent price since they’ll always appreciate over a long term. That said, if some actually knows what they’re doing in securities market, have the right contacts, they can make so much more money quicker than real estate with options, private equity, venture capital investments, and other investment vehicles without huge upfront capital investment.

Reply

4 FI FighterNo Gravatar March 21, 2017 at 5:53 pm

James,

Yup, lots of ways to make money. i’m in mining stocks now for the huge potential upside. Securities are great for a good trade… For Buy and Hold Forever model, though, I think most people will gravitate towards dividend growth stocks and rental properties… Knowing what I know now, I would stick to Class A tier 1 rental properties 100 times out of 100…

Best of all worlds, especially if leveraged properly… Easiest, quickest, and probably most reliable path to early FI and to sustain early FI for perpetuity.

Take care!

Reply

5 ANo Gravatar March 21, 2017 at 6:36 pm

Welcome back.

I agree with you. I own a home in California and the appreciation and rent increase was amazing. I also bought a place in Indy which was class B. My tenant is actually pretty good and is even paying well in advance. I think this is due to the area but the only problem is rent doesn’t rise or if it is it’s slowww. I’m still open to Midwest like you and agree you have to go with higher class properties.

A

Reply

6 FI FighterNo Gravatar March 22, 2017 at 8:52 am

A,

Yeah, California properties have been a huge win for investors over these last few years. Indy is great too and I’ve had good cash flow from my rental, but like you said, the rents and property value don’t quite rise enough to make it a better proposition than Bay Area properties (with the benefit of hindsight of course).

Higher class, Tier 1 is the way to go for the majority of the portfolio, IMHO.

Cheers!

Reply

7 BrettNo Gravatar March 22, 2017 at 7:23 am

“But your rental income will have far outpaced inflation (most likely)… ”

I don’t know about the truth of this statement…..rental prices (or real estate, in general, for that matter) can’t really sustain growth at more than the inflation rate for a given area for an extended period of time. If it did, then the percentage of income people spent on housing would eventually consume their entire income and they wouldn’t be able to eat!

Of course….if you time the market well (like you did), you can purchase at a low point and realize a higher rate of return than inflation, but over the long term, housing prices can’t increase more than people’s incomes do…..or they would eventually not be able to afford to live there anymore.

Reply

8 FI FighterNo Gravatar March 22, 2017 at 8:54 am

Brett,

Thanks for the feedback! I think I got ahead of myself there… Meant to say “keep pace with inflation”…

The “outpace inflation” has more to do with geographic arbitrage… If for instance you are investing in premiere world class cities such as: San Francisco, Hong Kong, London, NYC, Vancouver, Singapore, etc. then your rental cash flow and income should “outpace inflation” relative to more affordable COL areas… which is pretty much almost everywhere else…

Or in my example: “You don’t think an extra $100-200/month (or a lot more) in high inflation hedged Bay Area cash flow will make a GINORMOUS difference in a low inflation region (relative to super expensive areas such as the Bay Area) like Vietnam, or the Philippines?!?”

So, that’s what I meant to say, and I should probably go back and re-edit that portion of the post to avoid any confusion moving forward!

Thanks again for the feedback!

Reply

9 FI FighterNo Gravatar March 22, 2017 at 8:57 am

Brett,

Here’s the revised edit:

“In 5-10 years, your monthly mortgage (principal + interest) payments will be EXACTLY the same as they are now… But your rental income will keep pace with inflation…

Meanwhile, each year that you are far away from “home”, you can use that SAME inflation (i.e. rental cash flow) to your advantage by exploiting geographic arbitrage to its maximum extent (make a lot of $$$ somewhere EXPENSIVE while spending as little of it as possible living somewhere CHEAP)! This arbitrage strategy, in essence, allows one the ability to “outpace” inflation.”

Hope that clarifies things a bit!

Reply

10 mikeNo Gravatar March 22, 2017 at 8:00 am

To clarify, there is nothing wrong with painfully slow DRIPs. The caveat is that is the ends not the means.

The reason real estate is vastly superior to a REIT is because of 1 word: Leverage.

4% of $100k = $4,000. For most people with $100k in savings, 4k a year is nice but as alluded to is not moving the needle.

4% of $1M = $40k/year in truly passive income. now we are talking. As i’ve experienced, I do really value truly passive income and I am willing to surrender a few basis points to get it. Even if you give it to a property manager, you still need to manage them. A good REIT, set it and forget it.

The point is put your money in a REIT when you have $1M not at $100k. Obviously assuming the market is at a good stage, not at the peak.

Reply

11 FI FighterNo Gravatar March 22, 2017 at 9:11 am

Mike,

Absolutely, there’s nothing wrong with slow DRIP, fully passive cash flow! In fact, this is something that I myself might gravitate towards in the future, once valuations get back in line to reasonable and not insanely overpriced. 😉

I think you hit the nail on the head there — There is a fundamental difference between trying to get to early FI and then being in early FI and trying to sustain it for perpetuity.

In your first scenario, yup, slow trickle DRIP cash flow doesn’t really help move the needle much… In the latter scenario, with $1 million in the bank, the early FI aspiree has pretty much gotten to the end game… At this point moving forward, sustaining early FI should be the main focus… Growth is no longer that important, as much as securing a reliable/stable/consistent passive income stream that will be there rain or shine.

These key but subtle differences are worth dissecting in more details by anyone attempting to get to early FI.

Like most things, there is a right time and place.

All the best!

Reply

12 PonNo Gravatar March 22, 2017 at 2:06 pm

Welcome back –to the rain. The Bay Area sure is expensive.

Reply

13 FI FighterNo Gravatar March 24, 2017 at 10:21 am

Pon,

Haha, it sure does rain a lot here… or at least this past winter season I guess.

Will email you shortly for a meet up!

Cheers!

Reply

14 PeterNo Gravatar March 23, 2017 at 10:23 pm

Welcome back to the Bay!

You mentioned that you think the RE is in a bubble here. What are your predictions for the next few years on RE prices in the area and what neighborhoods are you bullish on?

Reply

15 FI FighterNo Gravatar March 24, 2017 at 10:24 am

Peter,

Thanks! Good to be back. In regards to housing, yeah it feels like bubble territory to me… Some 2/1 condos that I used to research in Berryessa area selling for $230k (around 2012 or so) are now going for $400k plus… an the HOA dues have gone up astronomically… I just can’t see the appeal to buy, whether for owner occupied or as a rental… the numbers simply don’t work with a conventional downpayment… Nothing really needs to be said for the higher end merchandise as those prices are even more absurd. In general, I’m quite bullish on all the Bay Area: SF, Oakland, South Bay mostly since that’s where I’m most familiar with.

Haha, just the life in the Bay I guess… so, better get used to it or not bother playing I guess… I’m a patient guy… I’ll wait out for the next cycle but if I don’t get that opportunity, I have no problems with taking my investment capital elsewhere where I can locate deep value and/or hyper growth opportunities (i.e. mining stocks).

All the best!

Reply

16 Financial SamuraiNo Gravatar April 1, 2017 at 3:30 pm

Welcome back! It seemed like a long time, yet it also seemed pretty quick yeah?

Now that it’s been a couple weeks, do you miss being in Asia or would you rather be here?

Sam

Reply

Leave a Comment

 

Previous post:

Next post:

Copyright © 2012 FI Fighter