The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: duanemark on May 02, 2014, 01:47:36 PM
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Hi all - I'm a complete novice, so bear with me on this.
We have a rental property in a very popular neighborhood of San Francisco. We purchased at the bottom of the recent recession for $1.1MM. We have a first and second mortgage. The first has a balance of $675K at a 3.375% interest rate. The second has a balance of $180K at prime. We pay about $13,500 a year in property taxes and about $1000 in insurance premium. We previously used the property as our own, but moved out and are currently renting it out at $5600 per month. It seems like we should sell, but here's the kicker...the real estate market in SF is frenzied. With facebook, twitter, google, etc. in the bay area, we are home to many millionaires who want to live in San Francisco (as opposed to Silicon Valley) and are willing to plunk down a lot of CASH for property. Indeed, many homes go for hundreds of thousands over asking - all cash. Especially in my very popular neighborhood in SF. We're a 7 mile by 7 mile pocket of land surrounded by water - there's only so much supply. Currently, zillow values our house at $2MM.
Should we keep the house for the investment of further appreciation or sell now and use the $1MM equity to invest elsewhere?
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Too many unknowns in your post. But you can start with what is you best guess estimate on appreciation of the property in 1, 3, 5, 10 years? If you do cash out what are your investment options and what is your expected return on those investments.
Once you have some rough numbers then you have to take into account some intangibles like how would you fell if SF goes through a housing down turn similar to the early 2000s because of a down turn in the tech industry, ect. How would you feel if your property goes from 2 million to 1.8 or 1.5 million? Can you handle the mortgage payments if you can't command the same rent or you can't find tenants?
Some things to consider. They have a saying on Wall St., bulls make money, bears make money, but pigs get slaughtered.
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If you have a lot of income to write off (besides the property) I would keep it for the tax benefits. sounds like renting it shouldn't be a problem.
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I'd sell it. Monthly rent of 1/4% of the market value? Ouch!
If you have a crystal ball and just know that you're going to see a ton more appreciation, sure, hang on. But you are just gambling, basically. If you're comfortable with that, great. Assuming you lived in the place relatively recently (the 2 of last 5 years rule) you'll be able to get a big chunk of your gains tax free if you sell, though, so that might also be a factor - if you hang on past the time limit to sell it as owner occupied, you'll take a 15% hit on $500/250k (are you married?)
Honestly, that's a big enough chunk of change that you can probably FIRE on just selling the house in many parts of the country. Don't get too greedy.
-W
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I don't have a comment for this particular scenario.
Owning a very low yield property for appreciation is not in my investing model, but some people do really well with it.
You may want to contact those sort of investors and get some advice.
I prefer getting a high cash on cash return on my money, and standard appreciation (i.e. inflation level).
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If you don't have experience in being a landlord in SF, beware. I hear from our friends who cashed out of their SF tri-plex ten years ago that rental laws are ridiculously in favor of tenants.
I know this having watched Pacific Heights, the film. haha. But pretty scary stuff.
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It sounds like you have a very nice, large SFH in a well-regarded neighborhood.
If you really want to make money on rent, you might consider splitting it into several units. There is legislation at the BOS right now that will make it easier to do this.
Of course, you'll lose the SFH exemption from rent control unless the building was constructed after 1979.
Or, perhaps you could do a 1031 exchange for a 3-4 unit building in another neighborhood. The rent/value relationship will be closer to normal, but again you would lose the SFH exemption from rent control.
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This is clearly a personal decision that will depend on your own circumstances, risk tolerance, other investments, and lots of other factors. But for me, that's a lot of money in one asset, and I would sell and invest the approx. $1 Million in more diversified assets (that could include some other lower priced and better cash flow real estate somewhere else in the country). Seems like now is a very good time to lock in your substantial gains, and not hold out for more later. Especially if you consider yourself a novice as you've mentioned, I'd get out and enjoy that nice gain.
One thing that might help you make the decision is thinking of the negative side of things. That is, which would you regret more if things go against your decision?
- If you keep the house, but its value goes nowhere or even down a few hundred thousand over the next few years while you've been paying all those expenses to hold it, how unhappy will you be with that decision?
- Or say you sell for $2M now, but the house goes up a couple hundred thousand in the next few years. Meanwhile, the $1M equity you took out and invested has conservatively increased by $150k in those same few years, so you maybe lost out on $100k or so of potential gains. How unhappy are you with that choice?
Like I said, for me I would regret keeping the house and having it go down a lot more than I would regret missing out on an "extra" $100k or so. YMMV.
I would relegate any ideas of it selling for anything like $2.5 - 3M in the foreseeable future, solidly into the "wild speculation" camp.
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Thanks for your posts. I am quite torn about the situation.
Part of me wonders if SF is the new Manhattan...I have seen brownstones sold for $1MM 20-30 years ago now worth 8 figures. Could SF be next?
I know - pigs get slaughtered. I shouldn't be too greedy.
I think I would more inclined to regret selling now in the off chance there is huge appreciation in the next ten years than regret not selling if the property value remains stagnant. I am not inclined to believe the market will go down in this particular area of SF - even during the 2009 bust, property values in my neighborhood remained the same. In fact, it was the only neighborhood in all of SF not to dip down.
Thank you for your posts - I realize we are in a lucky situation, and I am just being greedy.
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I don't think SF is the new Manhattan or even the new New York City. The entire world is awash with cash right now looking for a place to plant itself. I do think a lot of Asian money has chosen the more desirable areas of California and actually the entire West Coast as a safe hiding place and that plus the tech boom has driven prices up. Nothing lasts forever, and eventually prices and rents will level off and even decline. The market won't decline like a Phoenix, Las Vegas, or Miami, but it will weaken and decline.
Look at how much things have gone up in the last four years and ask yourself if that is sustainable over a long period of time. As others have said, your decision should consider your other investments, your income, your risk tolerance, etc. Make some conservative assumptions and see how you feel about the result.
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You might also check the IRS rules on taxation of the sale of property. You used tobe able to profit $500,000 tax free if you lived in the home 2 of the last 5 years....but I do not know the current rules.
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I'd sell immediately and retire.
When things are "frenzied", it's time to bail.
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Are you cash flow positive? I'd hold onto it. At $5.6k in rent, you're not getting any losers as tenants, so your headaches should be minimized.
Your cap rate is low, but remember that the lion's share of real estate earnings are from the cash flows (except when a wild run up like this happens).
$50k/yr in free cash flow is nothing to sneeze at (after $13k taxes and 1k insurance).
If you have something specific you want to invest in that will provide a better risk/return, then go for it. But if you don't have a plan and just want to take gains, then I'd refrain until you come up with a plan.
Regardless of whether prices don't go up too much in the next 10 years, that's > $500k in rent you will collect.
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You might also check the IRS rules on taxation of the sale of property. You used tobe able to profit $500,000 tax free if you lived in the home 2 of the last 5 years....but I do not know the current rules.
The tax benefits of selling soon rather than renting out and selling later pretty much negate any benefits of waiting. You should read this link http://www.irs.gov/taxtopics/tc701.html (http://www.irs.gov/taxtopics/tc701.html)on the homeowner exemption My understanding is that California law follows Federal law but you should double check.
I am going to make a guess that the year you sell the house puts you in the top Fed bracket and near the top for California (above $1 million)
$500,000* 20% capital gains rate = $100,000 federal tax saving
$500,000 * 10.3%- 12.3% = $51,500 to $$61,500 California saving
By owning your new home you are still participating in the crazy SF real estate market. The sooner you sell the rental the sooner you can start the clock allowing you to sell your current house and take advantage of the $500k exemption on your current house.
California
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When things are "frenzied", it's time to bail.
I'm inclined to agree. If the value is $2mm, and the rent $5,600, that works out to like a 2% yield. To me, this makes your property a tulip bulb, not an investment. Maybe you find a greater fool to sell it to, or maybe the second tech bubble bursts and all this property goes bid-out. Who knows. But when the value isn't justified by the fundamentals, I'd sell if pressed for choice.
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When things are "frenzied", it's time to bail.
I'm inclined to agree. If the value is $2mm, and the rent $5,600, that works out to like a 2% yield. To me, this makes your property a tulip bulb, not an investment. Maybe you find a greater fool to sell it to, or maybe the second tech bubble bursts and all this property goes bid-out. Who knows. But when the value isn't justified by the fundamentals, I'd sell if pressed for choice.
I agree with selling but as much for the reason I outlined above, than because I think the bubble is going to burst.
It is worth noting that Silicon Valley/SF prices have been crazy high by the standard of the rest country for at least 30 years and NYC probably 100 years.
For instance I bought my first house in Silicon Valley for $153,000 back in in 84 I could have rented a similar house for $700/month. That gives rent/price ration of 5.5% compared to 3.4% for the SF house. So it more expensive today than 30 years ago, but there has always been a SF price premium. The rent/price in some place is crazy by the standards of the rest country, but there is a limited land. So somehow they have found greater fools for 30 years.
Zillow/Trulia tell me my house in Honolulu, is worth just under $1 million, and I could rent it out for $2700. Which is almost exactly the same rent/price ratio as San Francisco. My house in Vegas would be lucky to get $200K even with decent size lot in a good neighborhood. There just isn't that much land available in places with perfect weather, and gorgeous views.
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Tough position to be in. I've only lost money when I got greedy, so perhaps best to sell and lock in gains. Then take your original investment and put it in an index fund or something safe and you can speculate with the profits from the sale of the property.
But only speculate with money you can affor to lose...
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Prices in the Bay Area became unaffordable starting with World War II. There were more jobs than places to live during the War. San Francisco has had a housing shortage since then. Once the "secret" was out, everyone wanted to move here. So many people were on the GI Bill after the war, you couldn't rent or buy a place near Berkeley. Vacancy was zero. My parents lived in someone's basement for the equivalent of a house payment anywhere else while my father went to school.
Real estate is still cyclical, even here. In the wealthiest enclaves of San Francisco, prices don't go down as much because the folks that buy there are much less affected by the economy and the job market. There is never enough inventory and always lots of demand. The OP won't likely be hurt as much as a suburban homeowner in a downturn, but the real question is whether this is the best use of the net equity in this property.
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Hi all - I'm a complete novice, so bear with me on this.
We have a rental property in a very popular neighborhood of San Francisco. We purchased at the bottom of the recent recession for $1.1MM. We have a first and second mortgage. The first has a balance of $675K at a 3.375% interest rate. The second has a balance of $180K at prime. We pay about $13,500 a year in property taxes and about $1000 in insurance premium. We previously used the property as our own, but moved out and are currently renting it out at $5600 per month. It seems like we should sell, but here's the kicker...the real estate market in SF is frenzied. With facebook, twitter, google, etc. in the bay area, we are home to many millionaires who want to live in San Francisco (as opposed to Silicon Valley) and are willing to plunk down a lot of CASH for property. Indeed, many homes go for hundreds of thousands over asking - all cash. Especially in my very popular neighborhood in SF. We're a 7 mile by 7 mile pocket of land surrounded by water - there's only so much supply. Currently, zillow values our house at $2MM.
Should we keep the house for the investment of further appreciation or sell now and use the $1MM equity to invest elsewhere?
Is your rent below market? Maybe you could be getting $6.5k in rent once the lease is up? That would change your choices a bit.
Is there anything preventing you from taking a home equity loan for $500k and using that to invest elsewhere? It looks like your total LTV would be ~71% (1.355/1.9 million... let's shave a little off the Zillow value).
I would say you have two ideal options:
1) Take a home equity loan and use that $500k to do whatever you need right now.
2) List it on the market for something ridiculous which you would take right away, maybe $2.3 million?
If it sells, great. Take your gains from the new Google VP who bought it and be on your way. If not, then go back to option 1. Thoughts?
Aside: You didn't mention anything about the rest of your financial situation. If you own another $2m in real estate, and have a net worth of $6m, then I would advise you to sell and take your gains since you have a heavy amount in real estate. Do you have other debt? What is your age? How would you feel if the property was all equity in 10 years and providing $60k+ in cash flows?
It's tough to really make a call without considering how it fits into your overall financial picture. By itself, sure, take the gains.
Generally speaking, you would make more money on 4 $500k rental properties than you can on one $2m property. Is that in the cards for you?
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Thanks very much for the posts! I think the overwhelming majority of you folks say we should sell.
I agree, we are in a bubble. However, what are your thoughts that the bubble bursting will not be as dire as in 2009 because lending standards have become more stringent? In addition, a third of all transactions in SF are all cash - if prices go down, owners are less likely to sell. (Incidentally, a house very similar to mine in a less desirable street just sold for $2.5MM!! - all cash).
If we have another recession, I'm fairly certain my rental will remain at $2MM. Like I said before, property in my particular neighborhood did not go down during the 2009 recession. For whatever reason, it is a hot hot neighborhood in SF. But, if I invested the equity in say, index funds, I'm certain the $1MM equity I would buy in index funds would go down. Similarly, buying 4 rental properties at $250K each in a town like Vegas - I'm sure I'd get more rent income, but I'm very certain the FMV of those homes would go down in a recession.
As for our financials, yes, a lot is tied up in this rental. Our net worth (we are a married couple) is $2.6MM. Clearly $1MM of that is our rental home. The rest is the equity in our current home (do I even count that?!?), 401K and index funds. We are both in our late 30s.
I feel like I'm just being super greedy in holding onto this house. I just feel in my bones that SF is becoming the new Manhattan. I'm probably wrong, but VCs, private equity, hedge funds, etc. - all the traditional NYC wealth builder occupations - are slowly migrating to SF. And of course, all the tech money makes a huge difference.
Incidentally, all prospective tenants that have applied for our rental are all senior level techies who make much more money than we do. They just don't have enough to buy into the SF market - crazy. The pricepoint has definitely provided us with great renters. Never late with payments, etc. In fact, I think our renters are very scared we will evict them (I understand the tenant laws in SF quite well), so they never complain, pay well in advance of the rental due date, etc.
Thanks for all your wisdom - like I said, we're novices in all of this. Part of me really wants to get rid of the house. Part of me also wants to hold - not only for appreciation - but for the ability to pass onto our 2 children so they will have a safety net in SF. I feel like it's becoming so expensive here, my kids will never be able to buy unless they are VCs, private equity, etc.
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Hold now or be priced out forever?
I don't know that guaranteeing your children a home in SF is something I'd worry about. They will make their own way and may or may not want to live there, after all. If they do, they can rent a $2 million house for only $5k or $6k a month (or by then, maybe a $10 million house for $30k/month)!
If you feel deeply that you know what will happen with both the stock market and the RE market, then your course of action should be obvious. But being honest with yourself, if you knew those things, you wouldn't need our advice, right? I think the advice here is universally: sell the house. It is an awful investment unless prices go up a LOT (especially if you can keep some proceeds tax-free due to the 2/5 occupancy rule).
It sounds like you aren't comfortable doing that; c'est la vie. Let us know how it goes in 5 years.
-W
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I would be extremely careful here. My husband is a senior techie/business consultant. Tech has cycles, and he as well as several of his older contacts are convinced that this one is peaking. He has vested stocks in one company that we are not sure will amount to anything due to the need for the underlying company to first go public, then wait another year before he is allowed to sell. If your potential buyers are high level tech/management of tech/VC, they might not be able to buy in another year or two. A lot of companies IPO'd recently at very high valuations, creating a lot of instant wealth that will go away when the cycle turns, and is not likely to come again for quite some time. Also, SF and CA are so ridiculous that Boulder and Austin are growing at stunning rates. We live in Boulder.
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How is it possible to pay only 13k for taxes and 1k for insurance on a ~2 million dollar home? Also, why is the rent so low? You said that most of the renters that applied are senior level techies but even they can't afford to buy. Sounds like a bubble to me.
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I would be extremely careful here. My husband is a senior techie/business consultant. Tech has cycles, and he as well as several of his older contacts are convinced that this one is peaking. He has vested stocks in one company that we are not sure will amount to anything due to the need for the underlying company to first go public, then wait another year before he is allowed to sell. If your potential buyers are high level tech/management of tech/VC, they might not be able to buy in another year or two. A lot of companies IPO'd recently at very high valuations, creating a lot of instant wealth that will go away when the cycle turns, and is not likely to come again for quite some time. Also, SF and CA are so ridiculous that Boulder and Austin are growing at stunning rates. We live in Boulder.
Absolutely -- my feeling is that the next crash won't be housing per se (OP mentioned strict lending), but tech crash or drying up of all the extra cash coming to SF from tech and China (China is now really overleveraged as a population).
I've been trying to convince a friend to sell a vacation property in SF now... he's on board but is taking a lackadaisical attitude towards it (finally listed it, but turned down a pre-listing offer). He has a similar mentality as OP (well, what if my kids want it? It's a shame to give up this low interest rate and low taxes). But the real question, as mentioned here is: what else can he do with the equity? Plus, he works in tech so he's double exposed to the tech market gyrations.
*of course, it's always possible tech will defy gravity for another decade or more... who knows? But if that happens, life is great, and maybe you don't keep up with your coworker's wealth but you're still decades ahead of those migrant farmers -- I'm more of a hedge your bets kinda guy these days.
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How is it possible to pay only 13k for taxes and 1k for insurance on a ~2 million dollar home? Also, why is the rent so low? You said that most of the renters that applied are senior level techies but even they can't afford to buy. Sounds like a bubble to me.
We bought the house for $1.1MM. The taxes are based on the purchase price - not the FMV. As for insurance, the cost is based on rebuild. The land is what is worth a lot in SF.
As for the rent being $5,600 - it is below market. Likely $6500 is the market rent price. I will raise the rent once the lease expires. Since the home is a single family home, we are not subject to rent control in SF. I do feel bad about raising the rent since they are such great tenants.
I appreciate all the comments. Definitely food for thought! We put $220K down on the house when we purchased it for $1.1MM, and it has gone up $1MM in 5 years. I think we got very lucky, and I know, I'm just being greedy. When we bought the house at the near bottom of the recession - so many people told us we were being stupid and risky b/c the sky was falling. We took a risk and we just got lucky.
Thanks again for the comments - I'll let you know what we decide.
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I just can't stop posting...
Here's another thought, tell me if I'm way off base.
Even if there is no further appreciation in the next 10 years, my initial investment of $220K would have yielded a $1MM profit in 15 years. This is an overly simplistic assumption, but the mortgage, insurance etc. is cancelled out of the by the rental income.
Would I have ever seen a profit of $1MM if I invested $220K in the stock market for 15 years?
Thus, I don't view this property as a cash flow traditional real estate investment. Like I said before, I know that model doesn't work. I see this as, what the moderator of this forum stated, a low yield property for appreciation.
Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
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Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
Yes, someday of course it will (I don't know if it's even a bubble yet, but tech will someday correct... could be in 50 years). No, of course equity won't be wiped out. Historically, SF fares very well in downturns. How much did that neighborhood lose between the 2005-2007 peak and the 2009-2012 lows? Anyways, it just seems like you are making an emotional decision rather than a financial one.
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Yeah, ok, you are way off base. Stop thinking about what you bought the house for. All that matters now is: what would you get if you sold it, and what do you think will happen to it's value going forward. The decision is: leave my gains tied up in the house and hope that it appreciates enough to wipe out the tax hit I'm going to take if I hold onto it AND outperforms alternative investments, or not.
Essentially you are betting that the SF real estate market will *significantly* outperform, say, the S&P 500 (or whatever investment alternative you're into) over the next X number of years you want to hold on. Real estate is expensive to buy and sell, and you'll pay capital gains on your profits if you don't sell soon. So I think most people would not make the bet you want to make. But it's your money.
-W
I just can't stop posting...
Here's another thought, tell me if I'm way off base.
Even if there is no further appreciation in the next 10 years, my initial investment of $220K would have yielded a $1MM profit in 15 years. This is an overly simplistic assumption, but the mortgage, insurance etc. is cancelled out of the by the rental income.
Would I have ever seen a profit of $1MM if I invested $220K in the stock market for 15 years?
Thus, I don't view this property as a cash flow traditional real estate investment. Like I said before, I know that model doesn't work. I see this as, what the moderator of this forum stated, a low yield property for appreciation.
Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
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It will be interesting to see what effect the high speed rail will have on property values in San Fransisco if it's built. If we are speculating on real estate on a timetable of 10-15 years, it might be wise to buy land near one of the proposed hub sites in another city.
Yeah, ok, you are way off base. Stop thinking about what you bought the house for. All that matters now is: what would you get if you sold it, and what do you think will happen to it's value going forward. The decision is: leave my gains tied up in the house and hope that it appreciates enough to wipe out the tax hit I'm going to take if I hold onto it AND outperforms alternative investments, or not.
Essentially you are betting that the SF real estate market will *significantly* outperform, say, the S&P 500 (or whatever investment alternative you're into) over the next X number of years you want to hold on. Real estate is expensive to buy and sell, and you'll pay capital gains on your profits if you don't sell soon. So I think most people would not make the bet you want to make. But it's your money.
-W
I just can't stop posting...
Here's another thought, tell me if I'm way off base.
Even if there is no further appreciation in the next 10 years, my initial investment of $220K would have yielded a $1MM profit in 15 years. This is an overly simplistic assumption, but the mortgage, insurance etc. is cancelled out of the by the rental income.
Would I have ever seen a profit of $1MM if I invested $220K in the stock market for 15 years?
Thus, I don't view this property as a cash flow traditional real estate investment. Like I said before, I know that model doesn't work. I see this as, what the moderator of this forum stated, a low yield property for appreciation.
Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
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If you are planning on keeping this property without counting appreciation, then virtually any other investment is likely to perform better. Renters are already being priced out. The tech cycle could easily take 10-15 years to get back to this point, and that is just looking at historical trends. Remember all the sayings about "But it's different this time!". Are you seriously ready to be stuck with this property for 10-15 years. You don't seem like the type to be ready to cut losses and run when the market goes against you. The golden goose can turn into an albatross very quickly. Do you really think that tech will double *from here*? That's what I'm asking. I, by the way, would be delighted if it did. My husband and I would be Fire'd in about 5 years in a far more comfortable style than what we are planning now.
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It's not at your figures, but I have a rental house (former home) in a good part of London UK with similar issues: big price inflation since I bought it, great tenants, seemingly unstoppable rise in property prices in the area generally. It generates a relatively low return looking at rent against current value, a better than stockmarket return looking at rent against initial investment plus renovations, and currently has capital appreciation over 10% per annum.
I'm going to keep it. I don't need the capital for anything else, and I don't see any point in going through the hassle and expense of selling something I'm comfortable with and know how to deal with and which is giving me great returns, just to have to buy into a different investment which may or may not give me the same benefits. All investments need money spent on managing them: I'd rather my management money went to tradesmen maintaining my house than to financial types in the City. It's possible I'll want to move back to London at some point in the future, or I may want to let it to friends or family.
Which all boils down to "I'm happy with things the way they are, for a lot of reasons, some of which are mustachian and some aren't". I think you should do whatever you are most comfortable with. Past a certain point (and you are past that point) it's not about maximising financial returns (unless that's your thing) but about living life in the way that makes you feel good while not trashing the planet.
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If you are planning on keeping this property without counting appreciation, then virtually any other investment is likely to perform better. Renters are already being priced out. The tech cycle could easily take 10-15 years to get back to this point, and that is just looking at historical trends. Remember all the sayings about "But it's different this time!". Are you seriously ready to be stuck with this property for 10-15 years. You don't seem like the type to be ready to cut losses and run when the market goes against you. The golden goose can turn into an albatross very quickly. Do you really think that tech will double *from here*? That's what I'm asking. I, by the way, would be delighted if it did. My husband and I would be Fire'd in about 5 years in a far more comfortable style than what we are planning now.
I'm not saying there will be no appreciation in the next 10-15 years. Of course there will be assuming the bubble continues. I'm saying even if there is a burst, I don't think the property value in my neighbhorhood will go down - it will just stay the same; homes in my neighborhood tend to be bubble burst resistant, as evidenced by property values remaining the same during the 2009 bubble burst. And thus, I would have still gained quite a bit from my initial investment of $220K even assuming the bubble bursts. I don't think I would have made $1MM in the stock market with a $220K investment after 10-15 years.
On the other hand, if the tech bubble bursts and the housing bubble bursts - wouldn't the rest of the economy burst as well? Wouldn't any of the equity I would place in an index fund, or other rental properties go down?
Maybe it is an emotional decision. I don't think it is for me, I really believe SF is, like London and NYC, a unique place where property values consistently rise.
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Also, SF and CA are so ridiculous that Boulder and Austin are growing at stunning rates. We live in Boulder.
Yes, SF and CA are so ridiculous. But that is never going to change. Too many people want to live here. That's like saying everyone is going to move out of Manhattan or London. Not going to happen ever.
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I just can't stop posting...
Here's another thought, tell me if I'm way off base.
Even if there is no further appreciation in the next 10 years, my initial investment of $220K would have yielded a $1MM profit in 15 years. This is an overly simplistic assumption, but the mortgage, insurance etc. is cancelled out of the by the rental income.
Would I have ever seen a profit of $1MM if I invested $220K in the stock market for 15 years?
Thus, I don't view this property as a cash flow traditional real estate investment. Like I said before, I know that model doesn't work. I see this as, what the moderator of this forum stated, a low yield property for appreciation.
Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
First of all you haven't made the money until you sell.. If the 2007/8 housing taught us anything it is that housing price can plunge just as much as stock prices even in California. My niece bought a house outside of Palm Springs in 2010 for 150K,that previous owners paid $500K. Even in the Bay Area price have been known to drop 30%. You also do need to take into account the transaction cost which will likely be $130K or so on your $2 million dollar house.
So the actual profit on your $220K assuming A. that your rental income covers your expense mortgage, taxes, insurance, and B. The house sells for 2.1 million will be 870k.
If you had invested the 220K into the S&P 500 years ago it would be worth $521K and if you had put in some more aggressive like a small cap index funds it would worth almost $600K. Over the last 15 years most small cap index funds would have turned 220K into something near $870K
I am curious aren't you concerned about losing the home owners exemption?
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I just can't stop posting...
Here's another thought, tell me if I'm way off base.
Even if there is no further appreciation in the next 10 years, my initial investment of $220K would have yielded a $1MM profit in 15 years. This is an overly simplistic assumption, but the mortgage, insurance etc. is cancelled out of the by the rental income.
Would I have ever seen a profit of $1MM if I invested $220K in the stock market for 15 years?
Thus, I don't view this property as a cash flow traditional real estate investment. Like I said before, I know that model doesn't work. I see this as, what the moderator of this forum stated, a low yield property for appreciation.
Based on what you folks are saying, the tech bubble will burst. Does that mean all my $1MM equity will be wiped out? Like I said, I don't think that's true. I just don't think there will be further appreciation.
First of all you haven't made the money until you sell.. If the 2007/8 housing taught us anything it is that housing price can plunge just as much as stock prices even in California. My niece bought a house outside of Palm Springs in 2010 for 150K,that previous owners paid $500K. Even in the Bay Area price have been known to drop 30%. You also do need to take into account the transaction cost which will likely be $130K or so on your $2 million dollar house.
So the actual profit on your $220K assuming A. that your rental income covers your expense mortgage, taxes, insurance, and B. The house sells for 2.1 million will be 870k.
If you had invested the 220K into the S&P 500 years ago it would be worth $521K and if you had put in some more aggressive like a small cap index funds it would worth almost $600K. Over the last 15 years most small cap index funds would have turned 220K into something near $870K
I am curious aren't you concerned about losing the home owners exemption?
Hate to argue details since I agree OP should be very careful here, but there is some justified optimism about SF prices. Yes, suburbs and exurbs can crash, but SF is an international city that garners interest from abroad. So I can see why OP thinks the party can continue (at least go sideways) even in poor local economic conditions. But as I've noted above, I wouldn't personally count on it and would probably take money off the table.
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I am in a similar position to the OP with a rental property in Brooklyn. The appreciation of the last few years has been head-spinning and it is very difficult to know what to do. I have been living on the cash flow for about 15 years, and that had been just great, an amazing blessing -- now, though, it's looking like a bad investment because the income relative to the (suddenly crazy high) value is so low. And my asset allocation is totally out of whack.
I'm trying to get ducks in a row to sell in the next couple of years. I am attending to some deferred maintenance and trying to figure out the best exit strategy (HUGE tax bite with capital gains and depreciation recapture). I stress about this damn building more than I can say, and yet it is hard to let go of, partly for emotional reasons -- last ties to NYC, wanting my kids to have a NYC experience and not knowing how they will ever be able to, etc. Plus, I have those same kind of great tenants you have had. I don't know where else I would achieve that. Argh. I know it's a good problem to have, but it's hard to find good advice.
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I am in a similar position to the OP with a rental property in Brooklyn. The appreciation of the last few years has been head-spinning and it is very difficult to know what to do. I have been living on the cash flow for about 15 years, and that had been just great, an amazing blessing -- now, though, it's looking like a bad investment because the income relative to the (suddenly crazy high) value is so low. And my asset allocation is totally out of whack.
I'm trying to get ducks in a row to sell in the next couple of years. I am attending to some deferred maintenance and trying to figure out the best exit strategy (HUGE tax bite with capital gains and depreciation recapture). I stress about this damn building more than I can say, and yet it is hard to let go of, partly for emotional reasons -- last ties to NYC, wanting my kids to have a NYC experience and not knowing how they will ever be able to, etc. Plus, I have those same kind of great tenants you have had. I don't know where else I would achieve that. Argh. I know it's a good problem to have, but it's hard to find good advice.
Can't the proceeds subsidize your kids rent for a few years easily?
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I feel this way about my primary residence in Brooklyn. I bought it only 2 years ago but the appreciation has been insane. I feel like I should sell and invest the gains, but then I feel if I do I won't ever be able to afford to live in Brooklyn again, so emotionally it's hard.
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As for our financials, yes, a lot is tied up in this rental. Our net worth (we are a married couple) is $2.6MM. Clearly $1MM of that is our rental home. The rest is the equity in our current home (do I even count that?!?), 401K and index funds. We are both in our late 30s.
I might have missed if you said somewhere what your primary residence's value is -- but if the value is anywhere near the rental house, then you have an extremely large percentage of your assets tied up in a single, volatile asset class that you have repeatedly described as a "bubble." Can you sleep comfortably knowing you have so much of your wealth in a "bubble" investment? Or would you sleep easier knowing you had more diversification?
Yes, SF and CA are so ridiculous. But that is never going to change. Too many people want to live here. That's like saying everyone is going to move out of Manhattan or London. Not going to happen ever.
I really believe SF is, like London and NYC, a unique place where property values consistently rise.
Okay, with all due respect, I think you are venturing into Polyanna thinking here, and that's only two of many similar quotes. And I'm from Northern California, so I have no regional bias against the area. You need to know that cities do sometimes decline, and property values do not always consistently rise. Detroit was a kick-ass, desirable place when they built cars there -- now, not so much.
You are aware, for example, that earthquakes have been known to strike in California, and SF in particular? If an 8.0 happens to level the city, do you think it will continue to be such a desirable place to live? Sure, IF you have earthquake insurance (and that's a big IF), you will be paid a paltry amount to rebuild -- so maybe a couple hundred thousand at best. But you would likely never, ever recover even your original purchase price, let alone the current value. Who is going to pay you anything for a piece of property in a disaster zone? While this may sound somewhat doomsday-ish, it's not that outlandish. Earthquakes are an absolute reality there, and it could wipe you out both literally and financially. Anyway, that's one scenario where property values will not always consistently rise.
But like others have said, it's your money, and you may be right in the end.
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I think that keeping all your eggs in one basket is too risky. Diversify! You didn't exactly spell out how much of the other net worth is divvied up between your house and the investments, but clearly this house has been very, very good to you and comprises a large portion of your net worth.
I'm a real estate agent, so my take is a little different--why not maximize the value, now!
If the house down the street went for so much more, why not spend a little time/money/effort packaging up your home to increase its value, then step back and see what happens when you put it on the market. You, too, might be on the power end of a bidding war. All those folks with money burning a hole in their pocket that DIDN'T get the house down the block are ready, willing and able buyers who just might swoop up your house. Nothing motivates a buyer to get serious like losing a house that they wanted. It gives you a huge psychological advantage... a hot sellers market is an intangible... the buyers are motivated and worried. They are ready to spend money. In a few years, the income might be the same, but the mentality might change...
Further... how much of a killing do you need to make to you feel good about selling? It seems like your big worry is that if prices go from the sky high clouds to the stratosphere, you want to be along for the ride. How much is enough?
On the other hand... You can pay off your debt, buy yourself and each of all your children a more modest home, rent those homes now, and enjoy the same cash flow or more. You diversify and each of those assets increase, so you still make money on the money, it just morphs into a different source.
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I appreciate your comments.
I know I came onto the board for advice, and the overwhelming majority of you have told me to sell. I'm going to do what all of you may consider to be the stupid thing, and keep my property to hopefully enjoy further appreciation.
I think if the bubble bursts in SF, the burst will reverberate into other parts of the economy as well - the stock market and other housing areas. Thus, if I had invested my equity into other areas, I'm of the belief they would be also severely impacted by any bubble burst. Maybe I'm geographic-centric (egocentric??), but I tend to think our greater economy is indelibly connected to tech, and if tech bursts, so will I see a dip in any alternative investment I may make. Like I said, my neighborhood is the one in SF that has maintained throughout the beating SF took during the 2009 housing burst. I think the FMV of my house will just stay the same. The only way I think the SF market would burst without any consequent bursting of the stock market, etc. is if, as a prior poster noted, we had an earthquake. That's a risk I'm willing to take.
I will write back in a few years and maybe you folks will tell me, "I told you so." Since we are in our mid to late 30s, I'm willing to take this risk. we will see! Many thanks for the thoughtful, intelligent responses.
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That is exactly what you should do. Solicit advice, consider it, then decide the best option for yourself.
I don't necessarily agree with you that if the bubble bursts in SF it will be equally bad in other areas and asset classes, but to each his own. :)
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I know the decision to hold has already been made but I would just add that very few people on this board are qualified to be giving advice about this situation. This type of investing is out of most investors' league and it's completely different than investing in Las Vegas crap shacks. Looking at the current yield doesn't tell the whole story because rents are likely to grow at a rate much higher than inflation in San Francisco, whereas in Vegas rents are actually falling due to the influx of landlords. Just over the course of this thread, the OP talked about raising rents by $900, a 16% increase from the current monthly rent. That's what is missing from this discussion -- the opportunity for ever increasing cashflow on the original $220k that absolutely smashes the rate of inflation. Comparing Las Vegas to San Francisco is akin to comparing bonds to stocks. In the short term, bonds may show a higher yield, but over the long term inflation-beating dividend growth makes stocks much more desirable. Raising the rent by $900 per month amounts to an instant 5% yield on the original $220k invested, and next year the OP will be able to realize another rent increase, growing the yield another few percent. Wash, rinse, repeat.
Selling the property would lead to at least $200k in transaction fees and taxes which would minimize, if not eliminate, any benefit of selling to avoid a crash. The reason I say this is because the last crash was based on a mortgage credit bubble and the current market is comprised of 30% cash buyers and very restrictive conventional mortgage terms, so it's not likely to crash due to unsustainable mortgages this time around. Prior to the mortgage bubble of 2006, there was a crash in 2001 due to the tech bubble and a crash in 1990 due to the aerospace recession in California. Both of those prior crashes caused a 10% price decline in San Francisco. So essentially the OP would be paying 10% in transaction fees and taxes to avoid a 10% price decline, if history repeats. How silly is that?
It also assumes the OP is a perfect market timer and sells at the very top, otherwise it's 10% in fees and taxes to avoid a single digit price decline, or possibly no price decline from current levels if a crash doesn't happen for many years.
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Can you explain why you feel it's appropriate to evaluate this property based on the original purchase price/downpayment? I've always felt the fair market value is what you should use (of course accounting for transaction fees, etc). If you can sell it for $2 million and it'll cost you $200k, then it's worth $1.8 million, and your rental income sucks dog balls because that $1.8 million could do better elsewhere.
I'm honestly curious why you'd even mention the $220k. Can you explain your reasoning there? To me, that's equivalent to buying a stock for, say $5, 40 years ago, and refusing to sell at $80 today because the $1.50 in dividends every year is a 30% return on your original $5. Which makes no sense - it's ~2%, not 30. You could expect the stock to appreciate but absent that, thinking about the purchase price is silly when evaluating an asset.
-W
That's what is missing from this discussion -- the opportunity for ever increasing cashflow on the original $220k that absolutely smashes the rate of inflation.
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I know the decision to hold has already been made but I would just add that very few people on this board are qualified to be giving advice about this situation. This type of investing is out of most investors' league and it's completely different than investing in Las Vegas crap shacks. Looking at the current yield doesn't tell the whole story because rents are likely to grow at a rate much higher than inflation in San Francisco, whereas in Vegas rents are actually falling due to the influx of landlords. Just over the course of this thread, the OP talked about raising rents by $900, a 16% increase from the current monthly rent. That's what is missing from this discussion -- the opportunity for ever increasing cashflow on the original $220k that absolutely smashes the rate of inflation. Comparing Las Vegas to San Francisco is akin to comparing bonds to stocks. In the short term, bonds may show a higher yield, but over the long term inflation-beating dividend growth makes stocks much more desirable. Raising the rent by $900 per month amounts to an instant 5% yield on the original $220k invested, and next year the OP will be able to realize another rent increase, growing the yield another few percent. Wash, rinse, repeat.
Selling the property would lead to at least $200k in transaction fees and taxes which would minimize, if not eliminate, any benefit of selling to avoid a crash. The reason I say this is because the last crash was based on a mortgage credit bubble and the current market is comprised of 30% cash buyers and very restrictive conventional mortgage terms, so it's not likely to crash due to unsustainable mortgages this time around. Prior to the mortgage bubble of 2006, there was a crash in 2001 due to the tech bubble and a crash in 1990 due to the aerospace recession in California. Both of those prior crashes caused a 10% price decline in San Francisco. So essentially the OP would be paying 10% in transaction fees and taxes to avoid a 10% price decline, if history repeats. How silly is that?
It also assumes the OP is a perfect market timer and sells at the very top, otherwise it's 10% in fees and taxes to avoid a single digit price decline, or possibly no price decline from current levels if a crash doesn't happen for many years.
Who compared it to investing in Las Vegas?
The only reference I see to Vegas is AR saying it won't decline like Vegas, i.e. agreeing with you that it's different.
It seems to me you built a whole (quite long) post on a straw man that just isn't true.
I also find it funny that you say people shouldn't talk about what they aren't qualified to talk about, then you do so, such as ith this "fact":
whereas in Vegas rents are actually falling due to the influx of landlords.
Which is flat out false.
Can you explain why you feel it's appropriate to evaluate this property based on the original purchase price/downpayment? I've always felt the fair market value is what you should use (of course accounting for transaction fees, etc). If you can sell it for $2 million and it'll cost you $200k, then it's worth $1.8 million, and your rental income sucks dog balls because that $1.8 million could do better elsewhere.
I'm honestly curious why you'd even mention the $220k. Can you explain your reasoning there? To me, that's equivalent to buying a stock for, say $5, 40 years ago, and refusing to sell at $80 today because the $1.50 in dividends every year is a 40% return on your original $5. Which makes no sense - it's ~2%, not 40. You could expect the stock to appreciate but absent that, thinking about the purchase price is silly when evaluating an asset.
Agreed. Current yield should be calculated on market value minus transaction costs.
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I also find it funny that you say people shouldn't talk about what they aren't qualified to talk about, then you do so, such as ith this "fact":
whereas in Vegas rents are actually falling due to the influx of landlords.
Which is flat out false.
This site lists rental rate history and shows a rent decline for 1 and 2 bedroom units since 2009. For all size units, it shows a slight increase or flat depending on the exact months you compare. That is still a loss when adjusting for inflation.
http://www.rentjungle.com/average-rent-in-las-vegas-rent-trends/
The Las Vegas Review-Journal also highlights rent decines in their headlines.
http://www.reviewjournal.com/business/housing/rental-housing-prices-down-82-percent-las-vegas
I'm sure you know better than these sources of hard data for your individual rentals, but realistically, the average investor in Vegas is facing stagnant to declining rents. Yuck.
Can you explain why you feel it's appropriate to evaluate this property based on the original purchase price/downpayment? I've always felt the fair market value is what you should use (of course accounting for transaction fees, etc). If you can sell it for $2 million and it'll cost you $200k, then it's worth $1.8 million, and your rental income sucks dog balls because that $1.8 million could do better elsewhere.
I'm honestly curious why you'd even mention the $220k. Can you explain your reasoning there? To me, that's equivalent to buying a stock for, say $5, 40 years ago, and refusing to sell at $80 today because the $1.50 in dividends every year is a 30% return on your original $5. Which makes no sense - it's ~2%, not 30. You could expect the stock to appreciate but absent that, thinking about the purchase price is silly when evaluating an asset.
-W
That's what is missing from this discussion -- the opportunity for ever increasing cashflow on the original $220k that absolutely smashes the rate of inflation.
What you are talking about is calculating the return on equity, but in doing so you are ignoring where the bulk of the equity comes from. If you are going to use equity to calculate the return then you should acknowledge that most of the equity came from price increases and include an estimate of future price increases in your return calculation. You should also include equity accumulated through mortgage amortization, as small as that may be.
My metric was return on investment. The poster invested $220k and if the rent goes up to $6,500 per month, I estimate the cashflow will be around $18,000 per year, for a ROI of 8%. If rents average a 13% increase per year as they have been doing in San Francisco, the ROI will be about 28% within ten years. Some people include equity increases as a form of ROI, but I would rather be conservative and think only terms of cashflow. Equity is not returned until you sell, so it's better to pretend it's not there. However, if you want to include future equity increases as part of the ROI calculation, well, it's not even a contest then is it?
So to summarize I think the conservative way to value investments is to ignore price increases (equity gains) and calculate solely on the cashflow vs. amount invested. I don't like to value investments with ROE because equity isn't real until you sell, so the denominator and numerator are based on assumptions.
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Fair enough, I think we just fundamentally disagree about how to evaluate an investment, then.
-W
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@ duanemark: Congratulations for being in such an awesome situation! Hooray! I too live in San Francisco and after over 30 years I've witnessed two housing cycles as my family works in the real estate industry. I feel it is reasonable to say San Francisco prices have depreciated before and probably will again especially especially since we straddle two major fault lines. As you may recall one of the most noteworthy events where San Francisco properties significantly depreciated occurred after the October 17, 1989 Loma Prieta 6.9 magnitude earthquake. Yes there were some pocket neighborhoods like Pacific Heights, Presidio Heights, Jordan Park, Laurel Heights, Lone Mountain, Sea Cliff, West Portal, Telegraph Hill and Nob Hill that historically did not decline in price even when the properties suffer structural damage. However, those are some of the most highly affluent neighborhoods. But in other San Francisco neighborhoods the property values depreciated considerably. As a whole the San Francisco real market took quite a few years to recover. But today we are experiencing a new tech renaissance emerging in San Francisco and many feel demand should continue to remain strong.
Should you sell? Well it may help to honestly evaluate your risk tolerance involving potentially losing more than 30% property value after a 7.0+ earthquake. If a quake of this magnitude occurs within your lifetime then your finances may be tied up with repairs and loss in rental income. Conversely as you may know San Francisco renters pose numerous headaches due to potential litigation and the highly bias pro-renter jury pool. I've known families that had to rebuild their income properties and later rented it out only to experience considerable grief due to renters.
As others have commented the City has an international allure that commands a premium enticing international buyers. If I was in your situation I would reconsider selling. But if you are really curious you can always try listing your property now and seeing how much interest really exists. Also I agree with your idea if you can keep your property you can pass it to your heirs. So hopefully you are in good health with secure finances and minimal obligations requiring you to firesale your San Francisco property. Let us know how it goes. Good luck!
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Fair enough, I think we just fundamentally disagree about how to evaluate an investment, then.
-W
Yes, and that's fine. One other thing occurs to me though... Would anybody advising the OP to sell have liked the numbers to begin with? A $1.1 million purchase price that could command a monthly rent of maybe $5,000 at the time? I highly doubt it. That would put the rent at less than 0.5% of purchase price. And yet that purchase led to a $1 million equity gain.
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Keep increasing rent (steadily) and let it ride!
Seems like you guys are doing well financially otherwise, so some risk with this property might be justified.
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If I tell you not to play the lottery, and you win, does that make my advice bad? Or does it mean you should put all that money back into lottery tickets?
-W
Fair enough, I think we just fundamentally disagree about how to evaluate an investment, then.
-W
Yes, and that's fine. One other thing occurs to me though... Would anybody advising the OP to sell have liked the numbers to begin with? A $1.1 million purchase price that could command a monthly rent of maybe $5,000 at the time? I highly doubt it. That would put the rent at less than 0.5% of purchase price. And yet that purchase led to a $1 million equity gain.
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So buying real estate is playing the lottery? Talk about a strawman. The issue is that most real estate investing advice completely ignores income and rent growth when valuing a property, which leads to sub-optimal decision making. Focusing only on current yield is a mistake when evaluating a property. You also need to ask what the yield is going to be in 5 years, 10 years, 20 years, and beyond.
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I also find it funny that you say people shouldn't talk about what they aren't qualified to talk about, then you do so, such as ith this "fact":
whereas in Vegas rents are actually falling due to the influx of landlords.
Which is flat out false.
This site lists rental rate history and shows a rent decline for 1 and 2 bedroom units since 2009. For all size units, it shows a slight increase or flat depending on the exact months you compare. That is still a loss when adjusting for inflation.
http://www.rentjungle.com/average-rent-in-las-vegas-rent-trends/
The Las Vegas Review-Journal also highlights rent decines in their headlines.
http://www.reviewjournal.com/business/housing/rental-housing-prices-down-82-percent-las-vegas
I'm sure you know better than these sources of hard data for your individual rentals, but realistically, the average investor in Vegas is facing stagnant to declining rents. Yuck.
You said they are "falling" Not that they fell. They fell, and have been rising since 2011. Both of your links confirm that. It is more accurate to say that Vegas rents are rising. They aren't at all time highs, but neither are prices. Still, prices have risen a lot since 2011 as well, and one wouldn't claim that prices are "falling" just because you can look at a time from the peak and say they're not at an all time high, so they must be falling.
So buying real estate is playing the lottery? Talk about a strawman. The issue is that most real estate investing advice completely ignores income and rent growth when valuing a property, which leads to sub-optimal decision making. Focusing only on current yield is a mistake when evaluating a property. You also need to ask what the yield is going to be in 5 years, 10 years, 20 years, and beyond.
Yes, but you have to REALLY know the market and have a decent crystal ball also.
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Try looking at how you could hedge the investment.
ie refinance and take 80% mortgage. So you get $1.6million in cash and a loan that you have to pay, say 5%. 80k a year. Even 100% of lease money only gets you 60k. Plus taxes, maintenance, insurance, ...
offsetting that perhaps a 7% cagr on the 1.6 million. 110k a year. Enough to just cover principal repayments and expenses perhaps.
if the stock market takes off, you're good. If the house market tanks, mail back the keys and you still have the 1.6 mill. If house market doubles again, all that equity gain is yours. If the loan is at a fixed rate, you get awesome inflation insurance free. If the market tanks and the housing market too, you still end up with close to a million, whereas with the house you could loose pretty much all equity in a bust.
if I wasn't commited to the area for perhaps family reasons, personally in your situation I'd sell in heartbeat. Unless you have a vast portfolio, you have a huge concentration of your equity in a highly illiquid single market and single asset class. You made a fantastic investment that paid off. Don't double down, take profit, rebalance and reallocate.
YMMV
If everything stays relatively normal and flat, you would have better with selling and putting it all in index.
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You said they are "falling" Not that they fell. They fell, and have been rising since 2011. Both of your links confirm that. It is more accurate to say that Vegas rents are rising. They aren't at all time highs, but neither are prices. Still, prices have risen a lot since 2011 as well, and one wouldn't claim that prices are "falling" just because you can look at a time from the peak and say they're not at an all time high, so they must be falling.
The data does not back you up on this. The best you could make a case for is that rents have shown a year-over-year increase since August 2013 or on a month-over-month basis since May 2013 (although mostly flat in the past 6 months). Since we are having a discussion about a property purchased "at the bottom" it's appropriate to analyze rents over that entire timeframe, not over an arbitrary timeline that makes Las Vegas look better. The fact remains that investment properties purchased in Vegas "at the bottom" have shown declining rents since that time. The numbers lately look more promising like they will finally keep pace with inflation, but that's still nothing to write home about. The maintenance costs, tax costs, and insurance costs have all risen with inflation, which means margins are getting squeezed due to lack of rental pricing power.
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@ duanemark: As you may recall one of the most noteworthy events where San Francisco properties significantly depreciated occurred after the October 17, 1989 Loma Prieta 6.9 magnitude earthquake. Yes there were some pocket neighborhoods like Pacific Heights, Presidio Heights, Jordan Park, Laurel Heights, Lone Mountain, Sea Cliff, West Portal, Telegraph Hill and Nob Hill that historically did not decline in price even when the properties suffer structural damage. However, those are some of the most highly affluent neighborhoods.
Conversely as you may know San Francisco renters pose numerous headaches due to potential litigation and the highly bias pro-renter jury pool. I've known families that had to rebuild their income properties and later rented it out only to experience considerable grief due to renters.
I truly appreciate the comments from a fellow San Francisco resident! I did not live in San Francisco after the Loma Prieta earthquake. Your information is very helpful. I do think an earthquake is my biggest risk. However, my property is located in a highly affluent neighborhood - probably one of the most affluent neighborhoods in San Francisco. My property is probably one of the "cheapest" SFHs in the neighborhood. Therefore, I am not too concerned about a huge decline in value. But again, I acknowledge an earthquake is my biggest issue. I'm willing to take that risk.
As for potential litigation from a renter - I am not afraid of litigation because, I happen to be a litigator! Though laws are certainly pro-tenant (almost ridiculously so), I understand them. Also, my tenant pool is pretty affluent - I think (perhaps wrongfully so) that they are less litigous because they are not as "desperate" as other tenants in SF. My tenants could simply move out and find another place because they have the financial security to do so. Also, we have an umbrella policy. Therefore, I'm not too concerned about liability. Litigation does not scare me - I do it every day!
Poorman - thank you so much for your very thoughtful commentary! I, too, have valued my ROI based on the $220K we plunked down for purchase. I really appreciate your analysis - I happen to agree with you on all fronts. I especially appreciate your thought that if I sold now, I'd be losing 10% just to eliminate the risk of a 10% downturn. I never thought of it that way, but it makes sense to me.
My final thought is this - I understand the idea that based on the total value of the property, I'm not getting a lot of cash flow. However, even if I were to pull my equity into, say, an index fund, I would not be "cashing out" on any of the increase in yearly value - I would simply reinvest in the fund. Thus, I'd be in the same situation as if I kept my equity in my house. I hope that makes sense. Perhaps unlike most on this board, I'm not interested in retiring by the time I turn 40. Thus, I'm not really interested in using the cash flow for my own expenditures.
Again, I really appreciate this board! I am always interested in discussing real estate investments, and this board provides a wonderful vehicle to do so.
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You are most welcome duanemark! It is a noble intention indeed to plan beyond one generation, I commend your bold foresight. Also I am glad to hear you are a skilled litigator and fully accept the risks of being a landlord in our beloved City. I find some San Francisco property owners underestimate how the real estate laws are often as you noted, ridiculously pro-tenant. Keep us posted on how things develop. Thanks! Cheers!
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If you're not interested in cashing out, whether you're investing in property or funds, then I would go with holding onto the house, at least in the next 5 - 10 years. If it was in most other locations, I'd be all for selling it, but the SF property market is so strong that price appreciation in the short term is going to rival a lot of funds.
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Fair enough, I think we just fundamentally disagree about how to evaluate an investment, then.
-W
Yes, and that's fine. One other thing occurs to me though... Would anybody advising the OP to sell have liked the numbers to begin with? A $1.1 million purchase price that could command a monthly rent of maybe $5,000 at the time? I highly doubt it. That would put the rent at less than 0.5% of purchase price. And yet that purchase led to a $1 million equity gain.
It ain't a gain until he has sold it.. Just ask all those other California (Phoenix, Vegas, and Florida) sellers with million dollar gains on their properties 2006 and 2007.
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It ain't a gain until he has sold it.. Just ask all those other California (Phoenix, Vegas, and Florida) sellers with million dollar gains on their properties 2006 and 2007.
Yeah, so? That's true of any investment. A large gain by itself is not reason enough to sell. The underlying fundamentals are what matters when deciding to sell (at least they should be if you really are an investor). Applying the 1% rule to San Francisco anytime over the past 40 years would have meant avoiding it as an investment, and yet those that bought have come out way ahead of those that follow the 1% rule. Why is that?
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Thanks for your posts. I am quite torn about the situation.
Part of me wonders if SF is the new Manhattan...I have seen brownstones sold for $1MM 20-30 years ago now worth 8 figures. Could SF be next?
I know - pigs get slaughtered. I shouldn't be too greedy.
I think I would more inclined to regret selling now in the off chance there is huge appreciation in the next ten years than regret not selling if the property value remains stagnant. I am not inclined to believe the market will go down in this particular area of SF - even during the 2009 bust, property values in my neighborhood remained the same. In fact, it was the only neighborhood in all of SF not to dip down.
Thank you for your posts - I realize we are in a lucky situation, and I am just being greedy.
In general, the west coast has appreciated a lot, and the bay area is just another example of that. Most places around here are going for twice what their indexed (year 2000) values are.
http://research.stlouisfed.org/fred2/release?rid=199
It could be another Manhattan (do you have any examples?), but CA is also tricky because of prop 13. There are quite a few people who have held on to homes (and base values) over 30+ years and pay next to nothing in taxes, which allows much better cash flows on rentals that others have trouble matching, especially when the economy sours.
I'm not sure how sustainable this is in the long run, but a lot of people are apparently willing to pay a premium to live in coastal CA communities (SD, LA/OC, and the bay area).
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There are quite a few people who have held on to homes (and base values) over 30+ years and pay next to nothing in taxes, which allows much better cash flows on rentals that others have trouble matching, especially when the economy sours.
I'm not sure how sustainable this is in the long run, but a lot of people are apparently willing to pay a premium to live in coastal CA communities (SD, LA/OC, and the bay area).
Excellent points! A lot of people are willing to pay a premium to live in Northern California and especially in the world famous San Francisco. Many have not noticed the housing trend since the 1980s, but when other parts of the nation are slumping, the Bay Area recovers quicker and this is particularly in San Francisco. Today, demand is not isolated to just domestic buyers anymore, we are now faced with cash flush international buyers. I fully believe even when a correction occurs, San Francisco will recover sooner than most cities.
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Just an update - since I originally posted this, my "zestimate" has gone up another $200K. Now it's worth $2.25. Not sure how accurate we consider zillow, not sure how sustainable this market is, but just wanted to provide an update.
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Press it cowboy!
what could go wrong?
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Just an update - since I originally posted this, my "zestimate" has gone up another $200K. Now it's worth $2.25. Not sure how accurate we consider zillow, not sure how sustainable this market is, but just wanted to provide an update.
The zestimate can be wierd. Look at the average price per square foot sold for a better idea of what you could get.
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Just an update - since I originally posted this, my "zestimate" has gone up another $200K. Now it's worth $2.25. Not sure how accurate we consider zillow, not sure how sustainable this market is, but just wanted to provide an update.
The zestimate can be wierd. Look at the average price per square foot sold for a better idea of what you could get.
Depending on your location, price per square foot may be dominated by small condos. A 2100 square foot single family house does not go for the same price as 6 350 square foot studio condos.
Its absolutely crucial that you have exceptionally well screened tenants in SF as you soon won't be able to limit the number of people living in an apartment: http://www.socketsite.com/archives/2014/06/lease-prohibit-adding-roommates-perhaps-long.html
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Just an update - since I originally posted this, my "zestimate" has gone up another $200K. Now it's worth $2.25. Not sure how accurate we consider zillow, not sure how sustainable this market is, but just wanted to provide an update.
The zestimate can be wierd. Look at the average price per square foot sold for a better idea of what you could get.
Agreed. Not trying to be a party pooper or claim that this place isn't what you think it's worth. But I have found Zillow, Trulia, etc to be completely unreliable at least for estimating sales/rent prices in small midwestern cities. It's obvious some non-subjective algorithms are at play, and I'm sure it's somewhat more accurate for bigger cities and cookie-cutter neighborhoods.... but still.... I wouldn't adjust my net worth by $200K because Zillow said so.
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I'd lock in the gain. the house has done really well for you so far, but if you own another house in the city that you live in, then wow, your personal finances are very heavily tied up in the future of Sf real estate. Cash out of the rental and diversify to other kinds of assets or real estate in other places.
I wouldn't trust zillow much either. I'm in Berkeley and refinanced last year, was also considering selling at that time. The credit union appraisal for refi and the realtor's appraisal for selling came in at the same figure - which was not very close to zillow.
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A) I'd dump it.
B) We are in a bubble. That said, we're also locked in by the Bay and the ocean and yes, people want to move here. How much did prices tank during the worst real estate downturn most of us will ever see -- 15% in the SF area...maybe 20%?
C) If you're yielding 2% why not eliminate the landlord hassle and buy SPY. Same yield, and cap gains will be more than the average price increase in your property per year.
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If you firmly believe that you have a good location that is low in supply and high in demand then you should rent it out. Why can't millionaires rent from you? Don't some people prefer to rent in the city than own in the suburbs?
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Wouldn't it be better to use the proceed from the sale to purchase an income producing real estate? This way you you are getting cash flow and it still has the potential to appreciate. Just some thoughts....
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Plenty of good advice here on your financial options, most of which you seem to ignore in favor of watching Zillow numbers rise. If you want to keep the house, keep it, but why not put the equity to work for you? I would pull out at least another million and invest it elsewhere. If you like real estate and expect appreciation, buy five more $1mm Bay area houses with it. If you like income and think rents will rise, buy 20 of the $50,000 houses mentioned so frequently here which bring $500/mo in rent each. If the stock market forecast impresses you put it in an index fund. Any of these options will do more for you than letting the equity just sit there doing nothing.
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Plenty of good advice here on your financial options, most of which you seem to ignore in favor of watching Zillow numbers rise. If you want to keep the house, keep it, but why not put the equity to work for you? I would pull out at least another million and invest it elsewhere. If you like real estate and expect appreciation, buy five more $1mm Bay area houses with it. If you like income and think rents will rise, buy 20 of the $50,000 houses mentioned so frequently here which bring $500/mo in rent each. If the stock market forecast impresses you put it in an index fund. Any of these options will do more for you than letting the equity just sit there doing nothing.
According to Zillow, I'm going to instantly make $500k when my new home closes! Brilliant!
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Hi,
NYC did/does exceptionally well because of its a. Wealth producers and B. Proximity to Europe.
San Fran, while not another NYC due to above, can become a slightly less, but awesomely expensive city sustained through its proximity to China, and the growth going on over there. So while the market has similarities, there are vast differences. I wouldn't bank San Fran going to NY way for the next 20 years with this property unless you really want to let the cash sit.
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A) I'd dump it.
B) We are in a bubble. That said, we're also locked in by the Bay and the ocean and yes, people want to move here. How much did prices tank during the worst real estate downturn most of us will ever see -- 15% in the SF area...maybe 20%?
~45% according to the CS index.
http://research.stlouisfed.org/fred2/series/SFXRSA
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A) I'd dump it.
B) We are in a bubble. That said, we're also locked in by the Bay and the ocean and yes, people want to move here. How much did prices tank during the worst real estate downturn most of us will ever see -- 15% in the SF area...maybe 20%?
~45% according to the CS index.
http://research.stlouisfed.org/fred2/series/SFXRSA
I can't tell for sure, but I suspect that includes the entire combined statistical area, and the exurbs definitely got hit a lot harder than the city proper.