Interested in buying a rental property? The first question to ask is if you want to buy it for cash flow or for appreciation.
Here in Silicon Valley, most investment buyers are looking for long term appreciation rather than to get a monthly source of income. In some areas of the country, you can put a small down payment on a property and break even each month. In other areas, that would create a negative cash flow situation.
Here in Santa Clara County, and the greater San Francisco Bay Area, rental values are relatively low when compared to purchase prices. That translates to a much larger down payment being needed to break even each month, let alone have a positive cash flow.
Rental property down payment needed in Silicon Valley
Some consumers believe that a 20% rental property down payment would do the trick to get them started as a real estate investor since that’s the most common amount for owner occupied homes.
While 20% down may work in some places. In most of the U.S. you’ll need 30% down to be “cash flow neutral”, meaning that you aren’t losing money each month. In pricey Silicon Valley, though, often it takes more than a 40% down payment on an investment property just to break even.
A few years back, a friend and past client asked me exactly this question. At that time I did the math and it looked like she would need to put more than 52% down just to have a neutral cash flow. Today I’ve updated it.
Depending on where and what you buy for the $1 million budget ,I suspect that the amount of rent collected each month would probably run between $3,000 and $4,000.
Side note: with a condo or townhouse, insurance coverage is probably going to be a lot less costly than with a single family home. The estimates below are for a townhome.
If my calculations are correct, you really need to put more than 50% down to buy this particular Santa Clara County townhome and have it support itself.
Is that a good deal? Not really. At least not if your main focus is cash flow.
There are other places in the country where you can put a lot less down and break even or have a positive cash flow.
Of course, cash flow is one motivator. Another, though, is appreciation. Depending on your own goals, you may be far more interested in appreciation than cash flow. If that’s the case, Silicon Valley may be exactly what you’re looking for as an investment buyer. Those places where the down payment can be smaller may not have the same upside potential with appreciation as we have here in the San Jose area, or the San Francisco Bay Area as a whole.
Interested in becoming a real estate investor? Have a good down payment saved? Please call or email me and we can chat. If Silicon Valley isn’t the right place for you to make your real estate investment, I can introduce you to wonderful Realtors in other areas where the numbers may be more favorable.
See also: Buy a Los Gatos home or real estate investment property
What is an As Is Sale?
Many Silicon Valley home sellers want to sell their homes “as is” (or “as-is”). And most homes in today’s market are. But what does that mean, exactly?
Does it mean that the seller has made no repairs or renovations before listing the home? Or that they do not have to disclose if something is broken to a potential buyer? No.
As is means that the home will be conveyed to the buyer at the end of the transaction in the same general condition it was in on the day that the buyers wrote the offer. If the roof has leaks, the crawl space is full of termites, and the appliances do not work, that is how it will be on the day escrow closes.
What it means is that the seller cannot let the property condition deteriorate during the course of the escrow.
The seller must continue to maintain the home and land in the same general condition. So if the lawn was green and well trimmed, the seller cannot suddenly let the grass die and neglect to mow it. If a baseball breaks a window after the buyer and seller have entered into contract, the seller must repair it. The condition will not have to be better, but it should not be worse than it was on the day the buyer and seller agreed on the price and terms of the sale.
While the contracts most agents use in Santa Clara County and nearby today have “as is” as the default sales agreement, that doesn’t mean all sales are as is.
A few years back I attended a property inspection in San Jose and we found an unwanted resident in the garage: a black widow spider. Needless to say, did not stick around after she was found!
In case you haven’t seen one, I thought I’d share the pic here (click to see more below). Sadly she wasn’t my last encounter with these spooky locals. In fact, I’ve been seeing all too much of them over the last three years! At least this time, we always found her outside.
What does it mean when real estate professionals, journalists and consumers refer to a “hot seller’s market“? Simply put, it means there’s an imbalance in the market which is very much in the seller’s favor. In terms of supply and demand, it translates to far more demand than available inventory for sale (supply). It’s a good time to sell, but a hard time to buy.
The Elements of a Hot Seller’s Market
We measure or note the market conditions using a variety of data points;
- days to sell (and days on market for all homes, including unsold)
- sale price to list price ratio
- absorption rate (months of inventory, weeks or days of inventory)
- number of listings available vs pendings and recently closed homes
- rapid rise in home sale prices, especially if to unsustainable levels
- number of offers received on a property at once (multiple offers)
- buyers upping their price and improving their terms voluntarily, without getting a counter offer
- buyers writing offers with few or no contingencies, fast close of escrow or other extremely strong terms
- overall market trends of inventory lessening, prices rising, buyers getting more desperate – how all of these look when viewed as a whole
Basically, when buyers are competing against one another with multiple offers, when properties are selling quickly and over list price, and prices rise, the ball is in the seller’s court and you’ve got a hot seller’s market!
While some of the above can be easily tracked on our multiple listing service, some are not findable anywhere except in conversations with real estate agents who are actively working the market, writing and receiving contracts. What isn’t tracked includes the number of offers placed on a home for sale, whether buyers are engaging in “bidding war” tactics such as upping their price before even getting a counter offer, or offers with no contingencies.
A summary of tips for multiple-offer situations in Silicon Valley real estate contracts
Should you write an offer with no contingencies? What is the risk with a non-contingent offer?
Mistakes that buyers’ agents make which damage their clients’ chances of winning in multiple offers
An appraisal value is an opinion of real estate value by a licensed appraiser, employed when a house or condo is under contract or sale pending with a mortgage, so that the lender does not over-invest. In other words, when an appraisal is used in escrow, it is to protect the bank which is lending money on the property. Appraisals may be used at other times, too.
Market value is what home buyers and sellers will agree on as the sale price of a property. When Realtors work up a comparative market analysis or competitive market analysis, they try to figure out where the home will sell in the future, or what the market value will be. They will also strive to bring that sale price to the top of the possible range of likely values – or go beyond it.
Put another way, appraisals attempt to determine the most precise value for what a home should be worth, if buyers and sellers are both unpressured. Home buyers may or may not agree with an appraisal’s results, though. The appraisal value does not equal market value. The market may find the property to be worth more or less than what an official appraisal states as the worth of the real estate.
With an appraisal, there is a subjective element to the opinion of value. For instance, if a brand new kitchen sink is tangerine in color but in great condition, will the appraiser ding it for being unpopular, or value it higher for being new? I can tell you that most Realtors would take off projected value for that poor color choice – but I doubt that an appraiser would. How about a flag lot? Is that worth more or less than a standard lot on the street? Most buyers would prefer a home on the street, and that may impact the sale price, but will an appraiser devalue a flag lot? Maybe. (more…)
There are common or frequently asked questions (FAQs) that arise for people buying or selling property here in Silicon Valley or the Central Coast, so I’ve assembled a list of real estate FAQs that I have written about here. Each link goes to an article on this website with more information.
Real estate FAQs relating to offers, contracts, etc.
What is a blind real estate offer? It’s an offer on a property “sight unseen”
What is a sharp offer or relative bid? This is when a purchase contract states that the buyer will pay more than competing bids.
Does the contract count calendar days or business days? Most of the time, it’s calendar days. But there are some nuances.
What is a “kick out” clause? This applies to sales contingent on the sale of another property
What Is A Default in a Real Estate Transaction or Contract? Defaults occur when a party to the contract does not perform on something promised in the contract.
What makes an offer lowball? It’s one thing to be aggressive, it’s another to make a seller so mad that they don’t want to sell to you at all.
What is a backup offer? If the first offer that’s in escrow falls through, a backup offer can go into first position quickly
Rent back: what is it, who wants it, what are the issues to consider? If a seller stays on after close of escrow as a renter (even at no cost), that’a a rent back
Real estate FAQs pertaining to ownership and HOAs
What Is the Difference Between CID Ownership in a Condo, Townhouse or PUD? In some cases, you own the land, and in others, air space
What is the difference between a duplex and a duet home? – they might look similar, but ownership is different!
What are CCRs? Covenants, Conditions, Restrictions – they impact what you can and cannot do at your property
If you buy without an agent, can you get a reduction on the sales price of a Silicon Valley home? Short answer: commissions are for licensees who are members of the MLS
Patio Homes or Zero Lot Line Houses in Silicon Valley – properties with the house up against one of the property boundaries
Real estate FAQs on disclosures and other misc things
Why do real estate agents do a visual inspection of the properties they sell? It goes back to a lawsuit when agents failed to disclose a landslide on a property.
What is implied agency in real estate? It’s all of the liability and none of the pay, so scary for Realtors!
How to fix incorrect property records in Santa Clara County? Often it’s a matter of reaching out to the tax assessor’s office
Where are the easements? Request a color coded easement map from your title company! Easements give someone else the right to use your property, or you the right to use someone else’s
What is a preliminary title report? Why does it matter? The title company provides this to give info on ownership and liens
What is a plat map, and what can you learn from it? This map displays relevant info. Learn how to decipher it in this post.
What Is Cellulose Debris (in a pest or termite report)? Wood and paper where it does not belong, which is a problem because it’s a buffet for pests
Do you have a real estate FAQ that isn’t listed here? Please google the question with my last name, Pope-Handy, and there’s a good chance that I’ve addressed it here or on one of my other sites. Still no luck? Please shoot me an email and we can discuss it (and perhaps I’ll write about it).
January is National Radon Action Month. Californians can get a free test kit here https://www.cdph.ca.gov/Programs/CEH/DRSEM/Pages/EMB/Radon/Radon.aspx
While there are many natural hazards that are commonly discussed in the San Jose area, such as earthquake faults, flood planes, and liquefaction zones, there’s one which comes up frequently on the east coast but is largely ignored here in the Valley of Heart’s Delight. The question is this: is there a radon risk in Silicon Valley homes?
First, though, what is radon?
Per the EPA website, “Radon (chemical symbol Rn) is an odorless, colorless, radioactive gas. It comes from the natural decay of uranium and radium found in nearly all rocks and soils. Radon can move up from the ground into buildings through openings in floors or walls that are in contact with the ground.”
If the idea that a radioactive carcinogenic gas can enter your home or workplace completely unnoticed spooks you, that’s understandable. Thankfully, it is uncommon to find radon at high enough concentrations for concern in Silicon Valley. It’s helpful in that regard that it’s a region with few smokers and few basements, both of which can increase the risk.
That being said, radon can be found all over the world, and similarly, homes high in radon can be found anywhere, though they are more or less common depending on where you are.
So how do you know your radon risk?
Santa Clara County is considered to be a moderate, and not high, radon area. Different geological conditions may make an area more or less prone to high levels of radon gas, though, so even here it is possible to have a radon risk.
The U.S. Environmental Protection Agency (EPA) and the U.S. Geological Survey have mapped by county the average potential radon levels in the area, divided into three zoning (Level 3 being the lowest and Level 1 the highest average measurement zones) for buildings without radon remediation. Santa Clara County is a Zone 2 area per the map linked to above. Check the map at Berkeley Lab Columbia Univeristy Radon Project page. Areas with the greatest risk, and which suggest remediation, are those in Zone 1. The are counties with predicted average indoor radon screening levels greater than 4 pCi/L.
If you would like to check your home’s radon risk levels, there are two tests you can use to measure indoor exposure: a short-term test and a long-term test, and both are affordable. The short-term test only takes a few days, might cost around $15, and is a less reliable way to get results quickly. Long-term measurements take a year and uses detectors placed one on each living level of the house (so approximately $25 for a single-story, $50 for a two-story home). These are much more accurate, so they are the ones preferred by researchers and home owners, but the results will take longer to reach and the cost is higher.
Worst-case-scenario, you have measured 4+ pCi/L (picoCuries per liter of air), the level at which the EPA recommends remediation. Now what? Prepare to spend a few thousand dollars (a great bargain to keep you and your family healthy). The standard treatment involves the installation of a pipeline and fan system which will pull the seeping gas from the ground beneath your house and redirect it outside where it can disperse safely in the air. The only apparent downside to this procedure (other than the time and cost of installation) is that your heat and air conditioning costs may rise slightly. Check with the experts, though, to get the full scope of both the risk and the remediation impact.
Read more at the pages listed below.
What is the function of a title company or title insurance company in real estate purchases or refinances? In Silicon Valley, and the San Francisco Bay Area and northern California generally, title companies perform two specific services:
- provide title insurance for real estate being bought or borrowed against
- provide escrow services, acting as the neutral third party which takes in the deposit money and holds it during the escrow period, disbursing all funds when escrow closes and having someone go to the county recorder’s office to record the deeds to complete the sale
Title insurance companies research the title history, find out what recorded easements may exist,reveal any encumbrances (leins, clouds on title, etc.). An escrow officer from the title company is usually the professional with a notary’s license who will sign off home buyers and sellers on the final documents, too.
There are many other services that title companies provide. Many people wonder how to hold title, and while neither your Realtor nor your escrow officer can advise you on how to do so, the title companies all have a little 1 page handout explaining the major concepts for each option on how to hold title.
If you need to sign off on the final documents out of town or even out of the country, the escrow officer and her or his support staff will work with you to coordinate it. (It can be a little tricky if overseas and outside of the U.S.).
If you are selling your house or condo and discover that an old loan that you paid off is still showing up in the preliminary title report, the escrow officer at the title insurance company will work to get it resolved and removed.
The customer service department at title companies can research the chain of title, too. Sometimes it’s quite interesting as the chain brings you back to the time of patents and land grants, with hand written deeds in a style of cursive which is somewhat foreign to us today.
There are many other things that title companies do – big and small – and most of them are “behind the scenes” that few of us ever witness directly, but without which no one would be able to close out sales with the safety net of title insurance which we value so much.
Title insurance can be a confusing concept, but I wrote about it elsewhere on this site.
What Is Title Insurance and Who Pays For It?
What is a preliminary title report? Why does it matter?
The sign off is an appointment in which home buyers and sellers sign the final papers which will lead to closing a few days later. (In some states, the closing happens when all parties sign, and both sellers and buyers meet at the same time for the official paperwork. Not so here in Silicon Valley, though.) Usually the appointment takes place at the title company which is also handling the escrow – that is the norm in northern California. Sometimes either buyers or sellers cannot be available during regular business hours. In that case, they have an option of paying for a mobile notary to do the signing at their home or some other convenient location.
The closing, or close of escrow, takes place when the deed is recorded with the county at the County Recorder’s Office. Usually each title company will send one person to record all of the deeds scheduled to close that day for that firm. Once a particular property has been recorded, we say “it is on record”. Someone from the title company will call or email the clients or the real estate agents (or both) to confirm that it’s on record. For short, they often say “we have confirmation” – meaning that they’ve been told that the deed was recorded. The property transfer happens when the deed is recorded – not when the papers are signed.
Who should be at the sign off or closing in Silicon Valley?
What is escrow?
One big challenge we have in today’s Silicon Valley real estate market that we didn’t have 20 years ago is the proliferation of misinformation on real estate or home values due to the prevalence and popularity of online home valuation websites. Everyone wants an easy answer, but often the easy answers aren’t all that accurate.
Sometimes my clients present me with “THE VALUE” of property per one of these online sites and in some cases, they challenge me to disprove it (Zillow says it, so it must be right, goes the thinking). If they want to buy a house which is listed for more than the auto-comped value, it may cause some emotional anguish. And if they want to buy one which is listed for less, they may feel a little giddy – unless multiple offers are looming. Same with home sellers. They agonize when Zillow, Trulia or some other big name site places a worth on their property which is less than what they feel it should be. (It is not uncommon for most home owners – including real estate agents, by the way – to feel that their home is really going to sell for 5-10% more than is likely. But this is an additional problem.)
Over the last couple of days, I used various web sites (Eppraisal, Trulia, Zillow, Chase, SmartZip, DataQuick, HomePriceReview), some of which you may have heard of and perhaps others you haven’t, to spot check the value of a particular house in San Jose’s Cambrian area (95124, Cambrian Gardens in the Little Branham area). Most of these provide the number or range without an account or email address. A couple of them came from other sources (SmartZip and Dataquick) listed, so is second hand info in those cases. Also, some of these which do require your contact info will provide what you give to a real estate agent who will then want to follow up with you (HomePriceReview, for one).
What might surprise a lot of people is the huge discrepancy in values given.
In our sample of the San Jose house above, the estimated value ranges from $624,239 all the way to $888,000. That’s a whopping $263,761 difference, which is more than a typical down payment, well more than 30%! Zillow’s stated goal is right in line with this spread, though. Zillow says it targets being within 20% of the correct value 80% of the time.
How can they disagree so much?