It is a hot real estate market, is this a good time to invest in a rental property?

Because of my financial expertise and analytical bent combined with people’s wide ranging interest in real estate, I am regularly asked if it is a good time to buy Silicon Valley houses as an investment. There are just so many variables, that it is impossible to answer that question as an overarching conclusion. Everyone’s personal situation, financial style, and economic opinions are different. One’s personal situation absolutely factors into the answer to that question. For example, here is a list of questions you should to consider:

  1. What is your time horizon for holding the property? Silicon Valley will go through normal economic cycles like most areas. Silicon Valley is one of the world’s key technology and biotechnology centers with growing companies and constant flow of new start-up companies. Assuming you continue to believe the area remains important and attractive, the longer your time horizon, the more you will have the confidence to ride out any short term hiccups – particularly considering the recent low interest rates to finance a purchase.
  2. Do you currently own Bay Area real estate or other real estate? This speaks to diversification of your overall investment portfolio or your real estate portfolio and how much experience you have. This can be looked at in multiple ways. Some people like to have their real estate investments nearby where they live so there is property management scale and efficiencies, while others prefer to be spread out in different geographies for diversification.
  3. How much cash/capital do you have to invest in real estate? Bay area real estate is expensive relative to most of the U.S. The amount of capital you have available will help determine if you’ll be able to purchase the type of asset you want to accomplish your financial objectives and within the location you desire.
  4. How much cash do you have set aside to buy a rental property relative to your overall liquid assets? What other asset classes are you considering investing in? You may want to speak to a professional financial planner who can work with you to look at your overall portfolio situation and your financial goals. What are your viewpoints on future appreciation potential for those assets and how does that look in comparison to real estate?
  5. Would you manage the property yourself or hire a property manager? There are pros and cons to either. If you do it yourself, your returns may be better, but there is “management” – more hands on work involved. If you hire a property manager, that will be an incremental expense on your monthly cash flow.
  6. What part of the Bay Area are you considering? San Mateo is different from Cupertino which is different from Morgan Hill which is different from Oakland which is different from Tracy which is different from Pacific Heights in SF which is different from Sausalito.
  7. Are you considering Bay Area rental more as a yield play or for potential appreciation? The answer to this question will drive where in the Bay Area you should concentrate on purchasing. Yield is your near term cash flow in terms of your rents subtracting out all your expenses. Generally the stronger the neighborhood/house/city/etc., the lower your near term yield but higher the appreciation. On the other spectrum, you can get higher near term cash flow by going further away from major economic centers or in not as good neighborhoods, but the prospects from value appreciation is generally lower. Like everything, it’s a tradeoff. What makes sense for one person may be different for another.
  8. What is your viewpoint of the general economy locally? Similar and correlated to question 1 above. It is difficult to totally predict how the economy will fare, the stock market and/or real estate. Of course, if you believe we are in a bubble, you will be more likely to hold off. However, if you believe the market will continue to appreciate and/or rental units will continue to be in high demand, then you’ll be more motivated to buy sooner rather than later.
  9. Are you planning to finance the purchase or pay all cash? If you intend to get a mortgage, current interest rates will be a factor. 30 year fixed rates have increased between 50 to 100 basis points over the past couple months. It is historically still considered low. The lower you lock in an interest rate, the lower your monthly expense and better your cashflow.
  10. What is your tax situation? This factor may help drive both what type of property you may wish to invest in or whether to invest in real estate or not. Additionally, there could be some tax advantages to owning property in your overall financial portfolio as well.

There are even more considerations to factor in making how to proceed even more complex. Feel free to contact me, your CPA, and/or financial adviser if you wish to discuss your situation in more detail.


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