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.