Profile picture for ryan81

Buy a property for self or Investment?

Hello All, 
We are a couple in our early 30's and live in San Francisco. We have an investment property which we purchased 4 years back where the rent covers for the EMI.
Now we have an opportunity to buy a 1000sq ft condo in SF for 700k or another investment property for 400k outside SF. My question is which one should I buy?

Some more data points which might help you - we love living in SF but we have a baby coming soon and we know even if we buy a property in SF we might not live in it for more then 2 yrs. After that we would be moving to suburbs and potentially look at buying something there. Also, in case we buy something in SF the EMI would be the same as my current rent. Also in case we move out after 2 years, we could easily put the SF property on rent where the EMI would be covered by rent (cos I am putting 40% down now)

Now the dilemma is should we buy something right now in SF where we know we wont use it for more then 2 yrs, but on the plus side we have always wanted to own something in SF. But the drawback with this is all our equity will get stuck and after 2 years if we wanna buy something in suburbs we wont have enough for down payment.

But if just invest now, we can still rent for next 2 years and when we are ready to move to suburbs we can buy something without any issues. 

Seeking opinion from all you experts. 

thanks
R
  • October 30 2013 - San Francisco
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Answers (8)

Best Answer

Hi Ryan,

You seem to have been doing some great research. I now clearly understand that your strategy is to own real estate as a longer term asset, which has proven to be a smart move for many in the bay area.

I think the question to ask yourself and will sway the decision is: How strong is the desire to own in SF? It would appear that both scenarios buying in or outside the city will satisfy your investment strategy. Why do you want to own in SF? Is it that after the kids, it could become a weekend retreat for you and your wife? Or do you feel that it would provide you with better appreciation? Or is it something else entirely?

Ask a Realtor who specializes in each area that you are considering to run some data for you so you can see what the appreciation trends have been for both areas.Be sure to go far enough back to see how the last market drop effected both areas. Review how quickly and to what extent each area rebounded. Although past performance is not a sure way to determine future performance, it does help provide some insight and help with the decision. If the SF neighborhood has had substantially better appreciation, perhaps it may make better sense to take the plunge. If appreciation for both locations, is on par, perhaps the more conservative decision would be to buy outside the city giving you more flexibility when you look to move your family.

  • October 30 2013
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Profile picture for gator70
Rent near the job, buy an investment property for long term cash flow and appreciation.

SF is expensive, but rents will always increase. Any Bay Area property is less than perfect for long term cash flow. Anybody that lives there will argue with this. I lived there for 16 years, and moved away. I see the alternatives easily now.
  • January 09
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  • January 08
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Profile picture for Tony Ngai
Ryan,

There are currently 2 active condo in Diamond Heights.  5175 Diamond Heights Blvd. #201 will have an open house this Sunday from 2-4 PM.  5120 Diamond Heights Blvd. #C is by appointment, and 24 hour notice.  Both have fantastic views of the bay.
  • October 31 2013
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Profile picture for ryan81
Thanks for the replies All of you. I appreciate you all looking out for us and making sure we are aware of the expenses forthcoming. 
To Tony's point - I didnt mention that we have a separate contingency fund which we are not bringing in the picture at all + I have a pretty steady job which pays decent. 
Also, the house in SF is in Diamond Heights which is about 2 blocks away from where we are living right now so we are fairly familiar with the area and transportation options. The house comes with ample storage and 2 car park spots.
Also, we have other investments as well so we are not putting all our eggs in one basket.
To April's point- yes I have considered the tax savings of owning the house and after taking into consideration the EMI would become the same as the rent :) And with the rental property I am not looking to make money straight away, cos the rent would pay for EMI and potential deductions would pay the increase in income (almost)via rent, I am looking to make an asset. We would ideally not like to sell the property in SF when we move out, would like to rent it out and make another asset.
To Blaine's point - Thanks for looking out for us but as I mentioned above, we have a contingency fund which we are not bringing in the picture at all. Yes I agree with your point, but I plan to invest into Real estate (may be one property every 4-5 years)
Based on the points above, how would you all guide us. Do let me know if any other data points from my end would be helpful
Thanks
  • October 30 2013
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Profile picture for Tony Ngai
Ryan,

First of all, congrats on your baby.  I'm sure once he/she arrives, you and your wife will have your hands full.  If you have not figure out the expenses for the baby yet, then that would be your first priority.  That is a reserve you must have because you won't be able to live without it.

Next agenda, you can then consider on the investment.  Putting 40% down is not going to differ much from 20-25% down.  Perhaps you can reserve the 15% for other contingencies and invest in other areas (stocks, bonds, funds, etc).  If you do well, in 2+ years, you might be able to save enough for another down payment in the suburbs.

Living in SF, you need to consider the neighborhood and the ease of transportation.  Having a parking spot is a luxury, but is a must (for future rental and in case if you need to sell).  You will have plenty to choose from.

The reserve for the baby cannot be touch and compromise, but the rest you can definitely consider investing, whether in the city or the suburb.

Best of luck.
  • October 30 2013
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You may want to consult a tax professional. Here is why I suggest getting this added advice. If you bought in SF a primary residence the monthly cashflow would be be the same (per your notes above). However, you will have the added ability to claim the interest deduction which you don't have today with your rent payments. Annually, this deduction may actually decrease your residence cost.

That being said, with an investment property you could have additional write-offs but often they are passive losses and do not apply directly against your income, unless you can demonstrate per the IRS requirements that you are actively managing the properties. It starts to get a bit complicated and to fully understand the financial ramifications of both options, I believe it would benefit you to consult a tax professional.

You also mentioned that you would be stuck after 2 years if you purchased a primary residence in SF. I think that is a maybe. The likelihood is pretty strong that selling would be a viable option, giving you access to the proceeds and your initial deposit to use for the purchase of a home in the burbs. The SF market historically maintains value fairly well. But again, selling may have tax consequences that you would prefer not to deal with.

Best of luck!
  • October 30 2013
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Ryan,

Please please please, make sure the rest of your financial house is in order! Making sure you have an ample emergency fund for various contingencies.  You sound like a very ambitious young man.  Just don't go overboard in obligations that could make you realize problems with issues that do arise from owning multiple investment properties.  Speaking from a broker with 5 single family homes.  There are alsways unexpected repairs, vacancies that sometimes cause cash flow negatives.  Just be careful and perhaps consult with a good financial advisor.  An advisor that does not get paid by selling you products.
  • October 30 2013
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