What an awesome turn out we had last night at the Bigger Pockets meet up at Whisphers Cafe and Creperie in San Jose! To my knowledge, we haven’t had many of these events in the past (in the South Bay Area), and it was great getting the chance to network with other local real estate investors. I always get a kick out of these type of events because I know there’s always going to be so much more for me to learn.
I came prepared and brought my notepad to jot down notes! There were lots of experienced investors out there… many much more successful (and hungry) than myself.
Here are the key take-aways I got from the meet-up:
- The local market has dried up big time. Whether you’re investing in San Francisco, East Bay, or South Bay, the good deals floating around are just no longer a dime-a-dozen. For those of us who lucked out and were able to purchase properties during the downturn (2009-2012), we remain most grateful and appreciative of that “once-in-a-lifetime” opportunity. Many of us got nostalgic when we reflected back to those “good ol’ days”.
- With that said, there will always be good deals out there. There will always be sellers, and distressed owners who need to offload property in a timely manner. Of course, if you are in position to buy all cash (or can quickly raise up a ton of capital), you’ll always be at an advantageous position. In general, it’s slim pickings out there, so if you want to find something especially good, you’ll have to be patient and persistent in your search.
- When it comes to the local market, I’m hearing that the East Bay (Oakland in particular) may have some hidden gems. This mainly pertains to duplexes, triplexes, and quadplexes, which still cash flow pretty well in the Class C neighborhoods. Single family homes are all but out since the rents aren’t enough to justify the high purchase prices. Oakland can be very hit-or-miss, so you’ll definitely need to scope out the area when you’re performing your due diligence. Like South Chicago, you have to be careful to avoid the bad pockets, which can vary greatly from block-to-block. Trying to locate a home on a decent block in an otherwise bad neighborhood seems to be the strategy.
- There’s a lot of interest from investors in out-of-state investing. This is mostly due to the fact that the barrier to entry into the Bay Area is so high (you need a lot of capital), and the cash flow returns are so low. The subject of turnkey investing got brought up, and I did mention that I owned a few out-of-state turnkey investments. Not surprisingly, I got a few looks of scorn from the locals (can’t blame them), as those who haven’t done it remain pretty skeptical. Since I’m just closing in on Year 1 myself, I’m still taking the “wait and see” approach. I remain cautiously optimistic, as always… but so far, my out-of-state experiences have been positive. With that said, it was interesting to hear about the different markets people are investing in. Tennessee, Phoenix, Dallas, Houston, San Antonio, Pittsburgh, etc… All over the place, really… even Spain, although this particular investment hasn’t been panning out so well for the investor. Apparently, the rent/purchase price is pretty bad out there, and the unemployment rate is staggering right now… 25%+.
- Naturally, the never ending debate raging between cash flow vs. appreciation took place… This one is always tough for me to answer because every investors’ strategy (and timeframe) is so different… If you want to retire in 30 years, then going the appreciation route (especially in the Bay Area) might be a more suitable long-term strategy. Since you’ll continue to be employed, you might not need instant access to cash flow and can afford to wait many years for the rents to catch up. By the time you retire, you’ll most likely be sitting on a ton of capital gains because the Bay Area market has historically been shown to go up drastically. No one can predict the future, but as long as the jobs remain here, people will want to continue to live here. Yes, the weather has a large part to do with that as well…
- On the other hand, if you’re like me and want to exit out of the rat race in the very near future, then at some point you must address the cash flow. Appreciation is wonderful, but until you sell, it’s all paper gains… Appreciation will never make you feel richer unless you find a way to tap into that equity. For instance, I have co-workers who live in $1MM+ homes, but still need to slave away at the 9-5 everyday to make ends meet. That $1MM does NOT make their lives easier in any way. And it never will unless they sell the place, or pull out some of that equity to invest with. Also, if you decide to do nothing and the market crashes again, all that appreciation will vanish in an instant… So, you can’t ignore the importance of cash flow completely!
- For the most part, I believe in building a balanced portfolio that helps you accomplish both. For instance, I rely heavily on my Bay Area properties for appreciation, and the out-of-state rentals for pure cash flow. Yes, in a perfect world you would be able to get both with each property that you purchase… and this is entirely possible in a downmarket. However, in today’s environment, it’s much, much more difficult to come by. Chances are, you’ll have to choose one or the other, or make a compromise and meet half way…
- Always remain dynamic and open to fine-tuning and re-working your strategy. Life isn’t binary, so don’t treat investing that way either… Here’s an example — During the downturn, I stayed local and invested in properties that I knew would appreciate substantially when the market recovered. By staying local, I was able to lock-in both cash flow and appreciation, the best of both worlds. As the recovery started to take place, I realized that my risks were going up… Cash flow and Cash On Cash Returns were rapidly diminishing, and appreciation had already done the bulk of its work. My own personal philosophy is to never invest in cash flow negative properties… So, in an upmarket, I changed course and went the cash flow route… I focused on cheap out-of-state properties that cash flow much better than anything found locally. Will this pan out? Ultimately, time will tell… I just find it funny how a lot of local investors refuse to invest out-of-state, crying out how risky it is… but is investing in cash flow negative properties locally any less risky? Everyone seems to have short-term memory these days! How soon we forget about the financial crisis of 2008-2009 that wiped out a ton of investors! Not only out-of-state investors, but many local folks who just kept thinking, “prices will ALWAYS keep going up!” Supporting a cash flow negative property that has ZERO equity when you lose your job is not a position I ever want to find myself in…
- Closing on a local note, so what’s the best way to invest in the Bay Area these days? Well, if you’re able and willing to live in your investment property, going the FHA route and getting a 4 unit seems to be a pretty decent bet. That massive barrier to entry in the Bay Area gets remedied with just 3.5% downpayment (thanks to FHA), and you might even luck out and get decent (minimal) cash flow, since you’ll have 3 rent checks coming in. Probably a pipe dream, but who knows? Given the strong potential for rent increases and appreciation in the Bay Area, this is something I would consider doing myself if I can find the right, affordable 4 unit… Most likely, any fourplex deal will be easier to locate in the East Bay, but if anyone knows of such a deal in the South Bay, I’m all ears!
Thanks to everyone who showed up. I’m looking forward to many more future meet ups! 🙂