Where readers ask, and we (the community) try to answer:
Dear tFS,
I have been following your newsletters for awhile, now that my husband and I are considering investing in an income property, we are coming to you for advice. A friend of ours has referred an real estate agent and we have worked with him for about a month. The area which we have visited are Ingleside Heights, Oceanview, Excelsior, Geneva or Alemany ( got a bit confuse after awhile) along 3rd St., and original Daly City.
Our original intention was to look at foreclosures and short sales since we thought we might find something closer to our budget, but our agent explained that the process would take a very long time and the price difference is minimal so it is not really worth the hassle.
We are in our 40’s and will sell this income property when we reach retirement age so this will more or less be our retirement nest. We have a pre-approval letter already but we are not sure which locations would make the best option with the following considerations:
Rent control & Tenants rights
Monthly Rental Income
Future prospective of the propertyYour insight would be most appreciated.
Yours truly,
L
We have to say that ALL of your questions generally depend on each individual property in each different location. There is really no “blanket” answer we can provide, especially in regards to rent control, monthly rent, and future prospects of the property. We can; however, comment that it is true a short sale takes much longer to sell, if at all, but the price difference can be substantial, so you might want to corner your agent on that topic and find out where the hassle really lies…with them not getting paid soon enough? ;-) They are a hassle though…no doubt, but it is to your advantage to have an agent with sticktoitiveness (you need a lot of it as well).
Best of luck to you. Thanks for reading, and thanks for writing in!
L, here is some sage advice: you are crazy if you are even considering purchasing income property in SF today! At prevailing prices, you are going to lose anywhere from hundreds to thousands of dollars each month. With a 20-year hold period, you may, but very well may not, get your inflation-adjusted purchase price back when you sell.
You would be far, far better off buying inflation-protected bonds. If you simply must have real estate, look outside of SF (Sacramento, outer East Bay) where you can actually make money on rental properties. Those who bought in SF 30 years ago did well. But remember that past performance is no guarantee of future returns. The world is very different today. Don’t throw your retirement savings away on such a poor investment.
Anon,
You are wrong about income properties being cash negative in San Francisco. I started 8 years ago and support my family of 5 with the income from my properties. We are much better off than if we had invested in bonds. Bonds do not protect you one bit against inflation while real estated definitely can. High inflation definitely is a possibility in the next years.
You do however need to make smart purchases, a stomach for very difficult tenant law, difficult building / planning department, difficult appraisers / banking, ect. But who ever said making a living was easy in real estate? (or in stocks/bonds for that matter)
Dear L,
Feel free to contact me through my website and I may be able to shed some light depending on your specifics.
-Ryan
Ryan —
First, today’s prevailing prices are very different from those 8 years ago. Second, you do not know what you are talking about with respect to bonds. TIPS, or Treasury Inflation-Protected Securities, by definition protect against inflation — always. SF real estate may go up in value in the next 20 years or it may fall considerably. TIPS do not carry that risk. I only threw TIPS out as one of many, many examples of where money could be parked far more profitably and with less risk than SF investment property at today’s high prevailing prices. The latter is a fool’s investment choice, particularly when assessed for L’s stated investment goals.
I’m an East Bay Realtor so my comments are based on my experience out here. I have two observations:
First, I’m often approached by people who are interested in focusing on short sales and REOs because they think the price will be lower. Since most of the inventory here (at least in the low to mid price ranges and on investment properties) are short sales and REOs , those listings are controlling the pricing. A buyer will not buy a property that is overpriced so a normal seller (or a seller that does not fall into those categories) will be forced to accept the the price that is dictated by the market or else people will be passing on their listing in favor of all of the short sales and REOs around them. Buyers right now aren’t at all interested in over paying and lenders are so strict with appraising that they will not provide a loan for more than what they ascertain the value to be (based on comparable sales in the area).
Not that there aren’t even better deals to be found in this market (esp for cash buyers, buyers who find a listing that hasn’t been marketed properly, etc.) Also, short sales and REOs often appear to be more of a deal than they actually are because they are often priced well below the market to attract attention but end up going for much more than asking.
Second, there was a time when I was hesitant to assist buyers with short sales. I never shunned them completely but they had such a terrible rate of actually ending up in a sale and so many agents doing them were not acting fairly to buyers that I did a lot of investigation before I would show them. This wasn’t out of a selfish desire to ensure that I got paid. My job is to help people buy homes and if a listing has a very low likelihood of being able to be sold, it’s my job to make the buyer aware of this although it’s ultimately their choice if they’d like to make an offer.
Short sales have changed and it’s a huge mistake in this market to overlook them. Banks are taking much longer to foreclose and with REO inventory declining, we’re seeing more and more short sales. Plus, banks and agents have had a few years to learn how to handle them so the process (while still lengthy) is not as risky. With inventory so low, a good Realtor must help their clients explore all of their options, even the ones that are not as simple. Plus, with a Short Sale Addendum, you can set a reasonable deadline for the bank to make their decision so that you and the Realtor aren’t stuck waiting for 4 months without exploring other options (and giving the Realtor other opportunities to get paid if they are so concerned about that.)
Anon,
I stand corrected on the bonds. I did not mean to imply that I know anything about bonds or stocks.
I’m with Ryan on this one. I also own several units in SF and live off my investments (hint- it’s not quantity of units, but quality that counts.)
Anon- TIPS certainly are safer than SF RE, but you are wrong when you claim that they will yield a higher ROI in the long run. That is strictly your opinion! I’d say that with a 20 year time horizon one stands an excellent chance of making significant capital appreciation with SF investments. I can promise you that rents will be alot higher then, and there will still be very little new rental stock in SF. Even with rent control, you learn how to play that to your advantage. Remember, RC is a main cause of why rents are so high for vacant units. The trick is not to get stuck with too many low rent long term tenants (eventually they move; buy outs; Ellis act/tic conversions; there are options.)
Put it this way: I’m planning on buying another SF multiunit property in the future! (FYI- I’m not a broker, I’m a private investor :)
hipster – multi-units appear to be great deals right now – probably because nobody can get loans. fixers, same thing, hard to get construction loans. but if this couple is thinking of buying a single family home or condo, or even a 2-unit building as an investment, i’m going to have to agree with anon…. at least for now… and at least within SF vs. outside of SF… and because it sounds like it’s their entire retirement fund.
if it were me, I’d wait for a huge wave of foreclosures in the nearby east bay this coming year, and probably 2011 too. the only reason there’s been an uptick in prices and multiple over-asking offers in their REO’s is because of artificially restricted inventory. the banks have millions more homes… and they have to hit the market sooner or later. Plus all the HAMP loan mods are not working – only delaying more foreclosures. and once the govt intervention goes away, that will kill this mini-bubble in the EB and elsewhere in the US
to make my point clearer, one of the best “deals” i’ve seen within SF was a $560k multi-unit supposedly bringing in $4500 in rent (try that in the Marina). I’ll defer to the above EB agent, but i’m pretty sure you can get about $6,000 in rent for a similar expenditure in and around Oakland and other EB areas. And that’s today…. just wait til next year’s foreclosure wave
can i negotiate a lower price for a rental home .
Do you mean lower rent?