How to Buy an Investment Property in San Francisco
Purchasing your first investment property is daunting even for battle-hardened investors. Evaluating financial predictions before you buy can save you from tons of uncertainty and depreciation later. With a little bit of wherewithal and knowledge, you can be well on your way to generating passive income with your investment property in San Francisco.
Three Parts to a Successful Investment
Before you jump right into becoming the next real estate investor mogul and ruling your vast housing empire, let’s start with the basics. There are three parts to investing in the best property: seeking the right location, securing the right mortgage, and finding the right tenants.
Investment Property vs. Primary Residence
Although purchasing an investment property is similar to a primary residence, there are some unique differences. With a primary residence, you have just you and your closing costs, mortgage, and family to worry about. With an investment property, there’s a greater risk involved.
Real estate investing is exactly that: it’s real. Stocks are floating around in the ether somewhere, but your property is right in front of you. If you invest wisely, you can yield a much higher return and have a piece of tangible equity. According to RealtyTrac, in March 2020, investors yielded annual gross rent returns of 9.4% for single-family homes. This is vastly higher than the average return of 4.8% on Dow Jones investments.
Finding the Right Tenants
No matter how much you predict that your investment property will yield, you have to find tenants who bring the profit to fruition. This requires a basic understanding of property management tasks (assuming you don’t hire a property manager), like vetting tenants, conducting basic home inspections, and pricing the property right for your target market.
Failing to do background checks on potential tenants can leave you in a whirlwind of trouble, chasing your investment and putting in more hours than it’s worth. Think late rent payments, early move-outs, and damages that reduce the value of your property. Due to these risks, I always recommend that investors have the number of a good property manager on speed dial instead of trying to take on the responsibility themselves.
Pricing the Property Right
When it comes to how much gross revenue a property generates, you have the control. Know your target renter. If you’re trying to rent a huge home to a wealthy bachelor, then make improvements on the property that caters to that demographic. On the other hand, if you’re trying to rent individual rooms to college students, don’t over-improve the property to the point that you’re asking for more money than they can pay.
Is Investment Property in The Bay Area Really Worth It?
San Francisco’s economy is strong and is projected to maintain that state, making it a great area for investing. At the beginning of 2020, San Fransisco’s unemployment rate was only 2.3% (COVID-19 obviously affected this number, but it’s still one of the lowest rates in the country). Furthermore, its GDP per capita well exceeds the $100,000 mark, which means that there are plenty of people looking to invest, and plenty who can pay to live in your investment property.
San Francisco is a prime example of a great location to find an investment property. According to neighborhoodscout.com, 63.3% of people living in San Francisco are renting and the average market rent is $3,216. A quickly-growing economy, a high median salary, low unemployment, and continued economic growth mean housing is in high demand.
The City Of Appreciation
Owning a property in a city that people want to move to means your ROI is almost guaranteed. San Francisco has one of the highest appreciation rates in California for real estate. Since the year 2000, properties have appreciated at a rate of 4.67% every year. Your investment property in San Francisco is no different.
Adding a charming old Italianate, Stick, Queen Anne, Monterey Revival, Marina, to your portfolio just might be the diversification you are looking for. When you’re ready to expand your investment portfolio and look for investment properties in the Bay Area, send me an email at greg.mundia@kw.com.
