As I said before, I think this is a good time to buy rental property in the Bay Area. To read my thoughts click here.
I also believe that investments are a great idea in the north Peninsula because I believe that the bio tech industry will do well in the coming years. The combination of the anticipated loosening of regulations, advances in immunotherapies, the Cancer Moonshot project, the proximity to bio tech centers in the Mission Bay area of San Francisco and Genentech in South San Francisco, and the relative affordability of Daly City, South San Francisco, and San Bruno make these cities a great option for investors.
But the question at hand is, is it a good idea to purchase a Daly City rental property with a loan?
There are two basic ways to make money from a Daly City rental property, cash flow and appreciation.
An investor who buys a Daly City rental property with cash has the advantage of being able to take advantage of both cash flow and hopefully appreciation.
If you, as the investor of a Daly City rental property obtain a loan to purchase the property you will need to decide how where on the scale of cash flow from major negative to somewhat positive you want to be.
In general the expenses on a bay area rental property should run you about 35% of the income.
So, for example if were to buy a one bedroom condo in Crown Colony in Daly City right now it will cost about $400,000.
Expenses would include:
HOA: $352 a month
HO6 insurance: $50 a month
Property Tax: $400 a month
Misc. $100 a month
Total Monthly Expenses = 902
Market Rent: $2200
Net profit before mortgage: $1300
So, in order to be cash flow neutral the mortgage cost must be $1300 a month.
If you get a non -owner occupied loan for 4.5% then the mortgage needs to be $160,000 or less.
A 40% loan to value is not necessarily what you want to do, but if you believe that you can handle a negative cash flow and that prices will go up, then getting a mortgage to buy a Daly City investment property in a good idea.
If you were to pay for this condo in cash and have a $1300 a month profit which would be a $15,600 profit a year.
At a $400,000 purchase price that is 3.9% cap rate which is quite good for a rental property in Daly City.
If you were to purchase a studio in Crown Colony in Daly City the numbers would be
Purchase price: $315,000
Income: $1800 a month: or $21,600 a year
Expenses:
HOA: $330
HO6 Insurance: $45 a month
Property Tax: $315 a month
Misc. $100 a month
Total Expenses: 790 a month
Net profit before mortgage: $1000 a month
Amount of loan that will make you cash flow neutral: $125,000 or a 39% loan to value
If you were to buy with cash you would have a 3.8% cap rate, again very good for a Daly City rental property.
So the bottom line here is that buying a Daly City rental property with a loan is fine if you think the negative cash flow is doable, and you will get it back with tax advantages like depreciation and value appreciation. I would suggest that you buy one ASAP before the interest rates go up even more than potential decrease in price. For my explanation of this click here.
If you cannot handle the negative and you do not have enough down payment to make the cash flow neutral then this is not the right investment for you at this time.
If you want to search for rental properties to buy click here.
Marcy Moyer
Keller Williams Realty
650-619-9285
www.marcymoyer.com
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