We have recently bought 2nd property in Bay Area and looking for options for our current primary home. We were lucky to buy our primary home in 2010 @700K which is worth around 1.35M today. Given our interest rates are really low, if we rent our property we can get around $800 cash flow per month. Home is currently in Willowglen/Cambrian area. Should we keep this property if we do not need cash in next 5-7 years ? If google open san jose campus, this area may get high appreciation.
While above picture look rosy, other part of me thinks we will be heavily invested in Bayarea/Tech as most of our equity in tech as well as primary source of income is Tech. Current salary and equity value in compensation seems really high and not sure if it can be sustained for long time period. If that happens, current home values will become unaffordable for lot of tech worker.
on side note - Do you guys see next wave of IPO - Uber/Lyft/AirBnB will further fuel the local housing market?
Your worry is valid and is a possible scenario. The usual advice by most people is if you can’t sleep well, get rid of it. I sleep well even if prices drop by a significant amount so I will take the risk But your risk appetite might be different.
That was my other thought. If we ever need to downsize for some reason we have a locked in taxes and lower payments with our current home.Given where the prices are even if we want to downsize to same home in 10 years it will cost us more than our current home.
What are your though about buying in different market increase cashflow and payoff new home faster. we currently have a home in Oklahoma city with good cash flow, but I’m worried that it has zero to none appreciation.
I like the idea of doing out of state rental, but finding right market and a team who can help is difficult. We currently have property in Oklahoma city which is 190K (2018 built) renting at $1600, it cash flows at $400 month on 55K investment. While it is pretty new, I do not have enough track record to be confident. Also appreciation is very low in that market. I will be happy if it gains 1-2% yoy in next 10-15 year. With principle payment and 1-2% appreciation my ROI will be around 9-10%.
My situation I stay in Bay Area, owned rental in Bay Area and in Austin. So have no issues with owning out of state rentals.
You have bought the house so cheap with such low mortgage interest in a State that has Prop 13. So you have to be very sure in your assessment in your out of state rental to sell the house to buy those. In investing, minimal transaction is usually wiser. Sell one and buy another are two transactions, you have to be right twice. Hence I would just rent out the house.
@SmallBasil7, tech momentum is still going full speed. At a recent gathering, I polled a bunch of high tech workers about the bonus/RSU/hike they got this year. All of them got 6 figures and they all work for FAANG type of companies that are already public. My point is that Uber and others are not the only ones that are adding to the prosperity of the region.
If I understand correct both Austin and Phx market has gone so high since 2008 and not sure if $1000 on single property is possible in those market unless you put really high downpayment. I would prefer B+ neighbourhood in out of state investment to avoid all the hassel. Do you have any example property where you can get $1000 cash flow in Austin without paying high price ? Also the taxes in Texas eats up lot of the cashflow.
I don’t buy in B+ neighborhoods. There are many B+ in Austin & its suburbs. Cashflow depends on your mortgage. My best yield (gross rent/ market price) is 9-10% in Falcon Pointe & Black Hawke of Pflugerville. Cashflow is > $1000 per month (for my case) and purchased at $260k-$330k. I think other parts of Pflugerville can get better yield but I don’t like the neighborhoods.
If you can comfortably afford both, I don’t know why you’d sell really. Just make sure you have a safety margin for a downturn. IF you look at this as the top, and you say “ok where’s the bottom, can I make it through that?” and the answer is “Yes”, then keep the place.
With above statement, you are too good to hold this home as rental.
Selling BA home and buying multiple homes will be a hassle, even if it is better cash flow as lot of headaches on maintenance of the remote homes.
The best is to hold as is and Sell only when you need money or you need money to retire. If you locked with 30 year fixed, never sell it.
If you have locked with ARM, feel free to sell (if you feel so), get tax benefit and invest money in stocks through retirement account like Roth 401k/IRA or after tax 401k through your and spouse company plan.
You can maximize retirement account by 54k/year + backdoor 5.5k/year for each person, depending on your company plan.
In short max tax benefit or appreciation, maximize your appreciation go through tax advantageous retirement plan or buy/hold appreciation (w/o selling).
We are putting max in our 401K. My current employer does not provide After tax 401K so I’m not able to utilize backdoor IRA but there is hope in near future. Recently I’m seeing drop in rents as well so keeping 800K in equity to get $600 monthly cashflow seems not a good return. I do not need cash right now but want to retire in next 10 years. With my new home purchase my saving rate will go down so I’m afraid I won’t be putting much in after tax account next 10 years. With two homes in Bay area my NW will be 50% in Realestate and 50% in stocks and will have 7 digit debt. I’m medium risk taker so having a thought of two large amount of realestate going down make me nervous. My job skill is in demand so hopefully I can maintain my employment in downturn.
Our cap rate is 8.5. Calculated based on Gross Rental of $19,140 with 10% Operating expenses. Its brand new home. Property price 192K, Rent $1595. It is in one of the best school district in OK. (Deer Creek school).
My job skill is in demand so hopefully I can maintain my employment in downturn => As long as you have this confidence, holding two mortgages is not an issue.
You can not say “$600 monthly cashflow is not a good return” as this is only cash flow like dividends, but your appreciation for next 10 years (future potential) should also be considered. It is 5% easily with bay area. If $600 monthly cash flow over your PITI (including principal portion), it is too good cash flow. You have hidden appreciation (5%) at your holding years.
Normally, home value doubles in 10 (7% growth) to 12 (6% growth) years in bay area.
Since you maxed 401k, this appreciation and monthly cash flow (with depreciation no tax) is an additional income/savings.
In short, IMO, never sell any property which anyone bought before year 2012, hold it until you need that money badly.
“With two homes in Bay area my NW will be 50% in Realestate and 50% in stocks and will have 7 digit debt.” => If this is 30 year fixed, you need not worry except your future jobloss (if any) for that you need to hold 6 months of cash expenses in savings/reserve.
Are you having 30 year fixed mortgage on rental or ARM? what rate?
Yield is what you get as such before expenses. Cap rate is after expenses? Cap rate 8.5% or Yield 8.5% on your rental?
With 5% annual return in next 10 years put 1600 sqft Cambrian home to 2M price. It just make me think what salaries needs to be to support that level. Will inflation take care of it ? Based on the past performance it seems right but past performance is not guarantee. I see technology changing world in future and SV being tech hub it may be possible. I do not see any big unicorn becoming next Facebook / Google in coming future. Do you think Uber can be that ? Tesla may change the valley but its got its own problem and not sure if Margins will be as high as software/internet companies.
For cap rate I have not included P&I in calculation. My P&I + Tax + Insurance is $1100. Property management is $125 for the property which rents @ 1595. Expecting near term capex and other expense to be low. If I keep $1000 for expense, I get about $3500 CoC, which is about 6.8 % . It is on 30 year fix @5.125