Monday, December 14, 2009

Snapping up investment properties in the Bay Area

The SJ Mercury News printed a story this morning about a significant increase in purchases of investment properties in 2008 versus 2009. The original article is here:
http://www.mercurynews.com/top-stories/ci_13972794

Investors have been active in other areas as well including Menlo Park (east of 101), East Palo Alto, Sunnyvale, and San Jose for the same reasons stated in the article; prices are low enough that costs can be covered by rents.

There was another article in the SJ Mercury earlier this year saying that a group of investors in the East Bay had pooled $6 million to buy homes priced at $100K or less to do the same thing. Their expectations were that values would double in 5 years or less. I don't see that happening, but I do see low end values going up.

Investors should also be looking at Los Altos but with a longer term picture in mind. There have been several homes priced in the $1-1.3 million range where rents would probably be in the $3500-4000 range. That rent won't cover the cost of PITI but it will cover most of it. Down the line, Los Altos has shown a history of solid growth in equity.

The homes today selling for $1.2 million would have sold 2-3 years ago for $1.3-1.5 million. Assuming the recovery continues and we see the value of entry-level homes increase in Los Altos, an investor in Los Altos could easily see gains of $100-300K in these homes in the next 2-3 years.

It's my opinion that the entry-level homes in Los Altos will move up the usual 7% per year we've seen in the past while the mid-range and high-end will grow at much slower paces.

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