[arcticbull]

The Bay Area isn’t in a bubble either, it’s a market whose pricing dynamics are determined by constant strong demand due to economic prospects combined with city councils artificially constraining supply to the benefit of landowners.

[almost_usual]

There also really isn’t much of an incentive to sell unless you plan on buying more homes in the Bay Area. The tax hit is too high to simply cash out.

[arcticbull]

Especially with rents as high as they are. Some higher end 1BR condos are cash flow positive immediately at purchase at the moment. Much more tax efficient, too.

[nostrademons]

This is the sort of reasoning that scares me, because it assumes prices stay the same across wide economic shocks. Prices don't stay the same. In my neighborhood I've seen widespread move-outs at the end of March and April - as in I'd take a 10 minute walk around the block and see 5 families moving out at that instant. When you've got 20% vacancies you have a very strong incentive to drop prices and fill that apartment now, or else you get foreclosed upon because you're not getting rent. I just took a quick glance at Craigslist and am seeing a $200-300/month drop in rent just in the last couple weeks. My neighborhood is at the bottom of the market, but economic distress tends to travel up-market as spending drops, people seek cheaper digs, and vacancies trickle down.

If lots of people were buying 1BR condos because they saw a profit opportunity arbitraging the difference in rent vs. mortgage payments, then a small drop in rents might mean that a large number of people can't make their mortgage payments. That's a big problem, because it implies a foreclosure wave that'll put further downward pressure on prices.

[arcticbull]

That's the risk, right. You have to account for that or you're doing a really bad job of building a real-estate business. This is often cited as a reason multi-family homes (or larger) are better for landlords than individual units: if you have an apartment you rent out and you have a vacancy, that's a 100% vacancy rate. If you buy a 10-plex and you have a vacancy thats a 10% vacancy rate.

Luckily, or not depending on how you look at it, SF properties and rents tend to be fairly predictable as compared to other markets in large part due to the artificial supply constraints imposed by city council, and the huge demand of the tech industry which tends to weather downturns pretty well. If you can afford $4500/month in rent for a 1 bedroom, chances are you're not going to be fired first.

[conanbatt]

Cash flow positive mortgage purchase in the bay area? Can you share an example?

[arcticbull]

Personally I'm a huge fan of 855 Folsom (https://www.redfin.com/CA/San-Francisco/855-Folsom-St-94107/...). It's got that prison-chic aesthetic I love -- kidding, but not kidding -- the architect was Stanley Saitowitz [1]. I nearly bought a unit there. Went with something north of Market instead.

A similar unit is on HotPads renting for $4500/month (https://hotpads.com/855-folsom-street-san-francisco-ca-94107...).

So with 20% down, 30 Year Fixed, 3.905% Interest, you're paying $3353 in mortgage, $903 in taxes, $605 in HOA and $163 in homeowners insurance. Set aside 1%/year for damages and repairs - $74/mth. (total $5100).

66% of your mortgage in the first year and all those fees are tax deductible, so you can deduct a total of $3900/month. [2] Depending on your tax bracket you can expect to get back $1500.

So your total expenses ($5100) minus tax deductions ($1500) is $3600/month, and it's renting for $4500. You could realize $900 free cash flow, assuming you're a well paid tech worker. Not to mention you'd have your renter building equity in your unit for you -- another $1106/month. Depending on how you account for that, your monthly realized profit could be about $2000.

NOTE: That's after-tax cash flow, which is the model I went with when I was running numbers on my own unit, and it depends on your tax bracket. I picked pretty generous numbers so YMMV.

[1] https://en.wikipedia.org/wiki/Stanley_Saitowitz

[2] https://www.irs.gov/businesses/small-businesses-self-employe...

[conanbatt]

Thanks for sharing. It's true that the numbers are reasonably close there. I wonder if this results on the type of property, because my experience looking at this was that the business was banking on appreciation more than cashflow. Even real estate companies have decided to ignore SF (Open door, Unison, etc)

[*] I doubt that you can rent such a unit at 4,500. Its well above market, so it either has high rotation or high closing costs. Also really hope the US cleans up their act with their tax policies on housing.

[arcticbull]

I think many businesses do tend to focus on appreciation over free cash flow because a lot of the FCF in my model comes from tax deductions which aren't super relevant for a business which then distributes all its proceeds. The win here might be whatever the positive take on a lack of economy of scale might be called.

Remember 20%-down mortgages are 5X leveraged investments in real-estate so even a 1% appreciation in the underlying works out to a ~5% ROI. To the extent they break even on rental I could easily see why they'd rather take the appreciation.

OpenDoor would have a heck of a time in SF, buying units sight-unseen. On the one hand it would be lower risk thank Phoenix, but it would tie up an ungodly amount of capital.

Re [*]: Totally. $4,500 is a lot, no question, though in it's favor units at 855 come with deeded parking -- in the building, which is ~$300/month in extra value for downtown condos. They're also new, super-modern lofts, and quite large, and SOMA lofts are very reasonable on a $/sqft level. 10 minutes walk to the IG and FB buildings too. I think factoring in all the +'s it's not uncompetitive with similar units nearby without parking in the low 4000's range.