Bay Area Real Estate – Look to Us

The Bay Area has a lot going for it and real estate is no exception. Currently, the Silicon Valley economy is firing on all cylinders, making real estate everywhere here increasingly valuable. Key factors such as population and economic growth are rising at a phenomenal pace. In addition, high barriers to entry (ie. lack of buildable land) continue to put upward pressure on home values. Unfortunately, local real estate investors looking for cash flow are victims of our area’s own success. Whether real estate investment opportunities in the Bay Area do or don’t exist, depends on your definition of opportunity.

In considering the Bay Area for real estate investments, your options will be influenced by many factors, such as your desire for passive vs active income, risk tolerance, yield expectations and investment horizon. Depending on your goals and resources, it may or may not make sense for you to invest in the Bay Area. The following are a few suggestions to consider.

Active real estate investors can certainly take advantage of the rising market to earn great returns on wholesale or fix and flip projects. To pursue these strategies, one must develop the resources, know-how and relationships to be successful. This does take a fair amount of time and risk to execute profitably. The largest challenge for most investors doing this today (me included) is finding “the deal”. The common wisdom in real estate is that you make your money when you buy, and this certainly applies to our local market. The most commonly used methods to find deals are networking, MLS agents/brokers, direct mail and bandit signs. In future blogs, I will go into detail on each of these methods. After finding a great deal, you will need to line up other resources, including inspectors, contractors, title officers, insurance brokers and agents to name a few. It is important to note that the fix and flip business is a high reward/high risk business, which is to say that it is not for everybody. And, despite what the gurus say, fix/flip strategy takes considerable time and effort to execute. With that said, the financial and intrinsic rewards can be phenomenal.

For those who do not have the time and/or desire to learn and execute the fix and flip model, there is still the possibility to become an equity partner for somebody currently doing this business. This requires cash resources to place in to the deal, and a tolerance for some risk, but the financial rewards can be very good. Along the same lines, one can be a “private money” lender, earning relatively secure returns that far exceed most other investments. More on these strategies in future articles

For those who have full-time jobs and other commitments, passive investing can be a far more practical strategy. The challenge in the Bay Area is that high real estate costs and taxes make it very difficult to find properties that will cash flow after all costs and expenses are accounted for. This is true even in lower cost areas like E San Jose or E Palo Alto, etc. If you have cash resources available to cover the majority or entire purchase price of a property, you can achieve cash flow after expenses, BUT your short-term returns (ie cash flow) will likely be poor. The real opportunity is in the appreciation you may gain from rising market prices over the long-term. Be careful, this is exactly what investors were counting on before the last market cycle turned negative. Speculation on rising values is something that can work, however it is highly risky, particularly in the short term. In my opinion, there are better opportunities to own real estate in out-of-state markets where price vs rents allow for a reasonable cash flow and moderate appreciation. More on out-of-state investing in future blogs.