People over generations have built wealth by investing in real estate. And because of that, it may seem like the proven method to grow you and your family’s wealth but there are risks involved like requiring a large amount of cash. Still, investing in real estate is a sound approach that has the potential to grow generations of wealth. Read on, then, to discover the 6 things you should know about investing in San Francisco real estate.
1. Location, Location, Location
When investing in San Francisco real estate the three most important considerations are location, location, and location. Why? Location dictates proximity to amenities, green space, scenic views, and the neighborhood’s status factor.
Let’s consider an example on a neighborhood’s status factor. In San Francisco two districts that are next to each other but with distinct personalities are South of Market and Tenderloin. South of Market is characterized by financial analysts and tech workers while tenderloin is characterized by criminals and drug addicts. Which one would you rather raise a family?
In a location that is one block away like South of Market and Tenderloin people change drastically. This is why location, location, location are the top 3 most important factors when investing. Just by investing one city block away the price is 30% lower due to the neighborhood factor.
2. Location, Location, Location
There are other location factors, which are closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.”
For example, the Dogpatch in San Francisco used to be warehouses and manufacturing space. Then over time basketball teams like the Golden State Warrior and UCSF Medical Center started building their facilities, which drove up property values.
This forced appreciation of a property’s location, which takes a mid-to-long-term view to assess how the area is expected “to evolve over the investment period.” By taking a longer-term perspective there could be profit to be made.
A San Francisco real estate agent with experience in investments is a huge asset. Your agent will know the area, how it is likely to change over time, and even zoning codes.
3. Don’s Skimp on Research
In a similar matter, investing in San Francisco real estate calls for plenty of research, which is essential before buying your investment property.
For example to evict a residential tenant from their home in San Francisco it can only be from 16 listed reasons. Any other reason would be considered a wrongful eviction and you would have to pay hefty penalties, which could easily cost $10,000.
Just like the top 3 reasons make sure that the property will attract the type of clients that are willing to pay the price. In return the client would receive a tangible piece of property that they are satisfied with.
You also need to do proper research using an analytical approach based on the historical financial factors, rather than considering your personal likes and dislikes. This will help you in purchasing the optimal property. After all, investments is about generating a return for the cash that was invested.
4. Understand Valuation
Another thing that you need to understand is real estate valuation. Valuation profoundly impacts your ability to get financing. “Property valuation is important for financing during the investment analysis, purchase, and selling price.”
Here are the three most common methods uses for real estate valuation.
- Sales-comparison approach – This method looks at “recent comparable sales of properties with similar characteristics.” It is the most common and is suitable for both new and older properties.
- Cost approach – This valuation method takes the cost of land and construction and then subtracts depreciation. It is used mostly for new construction.
- Income approach – This method is most suitable for rentals because it is based on project cash inflows.
5. Calculate Expenses and Profits
Similarly, before taking the plunge and buying investment real estate, you first need to calculate expenses and profits. In fact, experts in this arena suggest being a little paranoid and “considering every detail beforehand.”
For example, you intend to buy a house to fix and flip. “Start with calculating the money for down payment and what you can borrow before buying your first investment property. Next, calculate how much it would cost to renovate the house. Also, keep in mind the operation costs like monthly mortgage payment, utilities, and insurance. Finally, estimate the price you are going to list your property for using recent sales comparison and cut out the expenses to get a rough estimate of the profit you stand to make. Hopefully the number is in the green and you have a fix and flip to start.
6. Start with a Low-Cost Property
Also, industry pros advise starting with a low-cost property when you first buy investment real estate. This will lower your financial risk while you’re learning the business.
“Even if you are ready to invest up to 3 million dollars in your first investment property, it is always a good idea to go for properties that lie in the lower- to mid-range price brackets. Some experts suggest a house that doesn’t cost you more than 1 to 2 million. Don’t forget, you will need to spend more money on the renovation of the house before renting or selling it. [K]eeping your investment as low as possible will help you stay in the safe zone. Even if you don’t hit the expected profits, you won’t risk losing too much on it.”
And Get the Professional Assistance You Need
Finally, when it comes to investment real estate, you should not try to go it alone. An experienced San Francisco agent and the professional network she can bring to the table are almost a necessity. A good agent can help you navigate around the many investment pitfalls. So if you’re ready to get started investing in San Francisco real estate, contact me today at 415-830-1423.
