I realize not everybody lives in San Francisco, but there are insights into this article that can help you find the best area to buy property in your respective city as well. I’m just going to use San Francisco as an example since I live here.
If you want to buy real estate as an investment, it’s important the area not only has a strong domestic demand curve due to a robust labor market, but also a strong international demand curve as well. It’s the international demand curve that really lifts prices higher during good times.
Less than 0.3% of the housing stock is for sale at any given moment. It doesn’t take much to create a property bidding frenzy if you add international buyers to the mix of domestic buyers. Prices in London are being driven by Russian and Middle Eastern tycoons. Prices in Hong Kong are being driven by the wealthy Mainland Chinese. Prices in Singapore are being driven by wealthy Indonesians and expats. While prices in San Francisco are being driven by the tech boom, low interest rates, restrictive building codes, limited land and foreign buyers from China and Russia.
To sell property now is like selling Apple Inc. 10 years ago. Your property may have appreciated a lot since purchase, but there’s still a long ways to go if you can hold on. Thankfully for buyers, couples will always get divorced, homeowners will always want to upgrade or downgrade, and companies will always lay off or relocate their employees. There just isn’t enough supply to meet demand in San Francisco, and it’s unlikely there ever will be enough supply with the rise of tech powerhouses such as Facebook, Twitter, Google, Apple, Uber, and AirBnB.
Apple alone has gained more than $100 billion in market capitalization since 2014 and employs over 20,000 people in the San Francisco Bay Area. Now imagine what will happen to housing demand when Pinterest, Airbnb, Dropbox, and Uber go public in the next several years? They are hiring like crazy at $70,000 – $250,000 a pop and already have valuations in the $5 – $62 billion dollar range as of 2016!
GENERAL PROPERTY BUYING STRATEGIES
1) Buy in an up and coming neighborhood. “Up and coming” is usually a euphemism for a not so great neighborhood. But there are various levels of “up and coming.” In San Francisco, the Tenderloin District has been “up and coming” ever since I came here in 2001. It’s strange there is such a high density of homeless people, prostitution, and drug dealers in such a small district close to the expensive shops in Union Square. But the idea is that if you can wait out the seediness, you will be rewarded with monetary gains since you get to buy at a large discount to median prices. The key is to estimate a discovery period of no longer than 7 years since statistics say that people change homes on average 7 years. You don’t want to be stuck waiting 20 years for your neighborhood to improve. You might die before then!
2) Buy in the most prime neighborhood possible. Prime neighborhoods are almost always fully built out with little supply. Turnover is sparse and when there is something available, hoards of people flock to the property. Even if you wanted to buy a $25 million house on Broadway and Lyon St. in Pacific Heights, aka “The Gold Coast” you can’t because none are available. Buying in a prime neighborhood is like being at the top of the triangle. The demand, or base of the triangle just continues to widen with job and population growth. People have a tendency to want what they can’t get.
3) Buy properties with a unique competitive advantage. Every home is different. Some might have much larger lots. Others might be situated on a quiet cul-de-sac or have sweeping ocean views. Properties surrounding the four sides of a park will always be highly sought after. Some would say simply owning a single family home in San Francisco, or a brownstone in Manhattan is a unique competitive advantage because of the cost and rarity of such properties compared to condos. Maybe you can’t afford to buy a single family home in the Marina district, but maybe you can afford to buy a smaller home 15 minutes further west in Parkside on a quiet street.
4) Buy property close to the best schools and convenient transportation. Good schools are always at the top of every parent’s list. Given spending on kids is almost inelastic because we all want what’s best for our kids, properties in good school districts tend to always hold up better during downturns and go up faster during upturns.
5) Buy property in a micro area few people have ever heard of. There are areas in each city where plenty of people have never heard of. Once everybody has heard of the area, it’s too late because you’ll be trying to outbid every Dick and Nancy when that unique property that comes up. Take a realtor map and circle some neighborhoods that look nice, but you’ve never visited before. Too often real estate buyers congregate around a certain set of areas. In San Francisco, they are: Pacific Heights, Cow Hollow, Marina, Cole Valley, Presidio Heights, Lower Haight, Hayes Valley, SOMA, and Noe Valley. If one can look outside of these neighborhoods (there are 50+ neighborhoods in SF), one will be amazed at how much more they can get.
6) Buy property from an out-of-town listing agent. The real estate industry has its own little silos just like every other industry. Everybody pretty much knows everybody or has heard of everybody. If you have an Oakland-based agent list a San Francisco property, there’s not the same type of love or attention. As a result, opportunities generally arise where you can do more negotiating because there will be less demand. The out of town listing agent is generally much less savvy about pricing and drumming up as much marketing attention as possible.
7) Buy a property that is an un-staged, fixer-upper. Many people have a very difficult time visualizing how space is used. This is the reason why staging companies exist, to help you with your lack of imagination and sell you the dream of what could be. To develop your sense of visualization, I encourage you to go to as many staged open houses as possible. Most people aren’t very connected with the construction world either. Finding a contractor, an electrician, a plumber, a brick-layer, a painter, and a landscaper are daunting tasks. Even if you find them, you might not have any idea about the right cost or timing. But if you do have experience remodeling homes, then you have a good leg up on the competition. Sweat equity turns into real equity.
THE BEST PLACE TO BUY IN SAN FRANCISCO: GOLDEN GATE HEIGHTS
The one neighborhood that fulfills all the criteria above is Golden Gate Heights.
* The Great Unknown. I surveyed ~120 people over three months and only about 10% of them have ever heard of Golden Gate Heights. Yet 95% of them know the location of top-notch UCSF Medical and the hot Inner Sunset. Of the 100 or so people who have never heard of Golden Gate Heights, 30 of them included real estate agents, which was absolutely baffling since that’s their job. Meanwhile, I checked a relatively popular real estate blog called Curbed SF, and they don’t even have Golden Gate Heights listed on their homepage as one of their listed neighborhoods. For a real estate blog that posts about SF real estate 1-3X a day without knowing Golden Gate Heights is an incredible opportunity for savvy buyers to get ahead of the rush.
* Quiet Neighborhood. Practically all the properties in Golden Gate Heights consists of single family homes instead of condos. As a result, the neighborhood is family friendly and much less dense than other areas of San Francisco if you like more peace and quiet. The streets are very clean as you have fewer vagrants who are willing to trek up the hill to cause a ruckus, tag public utilities, or break into homes. Many homes are fully detached compared to homes that share walls in many other areas of San Francisco. At the same time, Golden Gate Heights is just a 10 minute walk away from all the restaurants, bars, and shops in the red hot Inner Sunset on 10th/9th and Irving St. There are over 50 restaurants within that five block circle.
* Ocean Views. The unique competitive advantage of Golden Gate Heights is that many of the homes face west towards the ocean. I never in my wildest dreams thought I would be able to find single family homes with 3 bedrooms and 2 bathrooms in San Francisco for under $2 million with panoramic ocean views. Every time I go on vacation, I choose the pool or courtyard view because the ocean view rooms are more than double the price. But now, can you imagine being able to watch an ocean view sunset for the rest of your life in the comfort of your own home? Priceless I say.
* Misconceptions. The greatest opportunities emerge when there is some type of unfound prejudice. Reed Hastings, the CEO of Netflix spoke at my business school commencement in 2006 at UC Berkeley. Netflix stock was at $10 and every single sell-side analyst was predicting Netflix’s death. The stock has since returned 40X and has made plenty of people very wealthy who had the foresight to see the online streaming potential. The same curious phenomena is happening in San Francisco among different neighborhoods.
No matter where you live in San Francisco, if an area is west of where you live, there will be prejudice against that area due to the belief that area is foggier than your own. The reality is, if it’s foggy in Golden Gate Heights, it’s foggy in the Marina (east). And if it’s foggy in the Marina, it’s foggy downtown (east of the Marina). Only in the Mission and SOMA districts is it less foggy, but the fog eventually gets to there too. Prejudice is due to ignorance. To check out the foggy perception myself, I drove to Golden Gate Heights 35 times over a three month period to go hiking at Grand View Park and search for homes. I found that only three of the 35 times the area was foggy, but so was everywhere else in San Francisco. The fog will eventually got to all of San Francisco, although June is admittedly more foggy in the western parts of the city.
* Fantastic Schools: If you look up any Golden Gate Heights property on Zillow or Trulia, you’ll see 10 out of 10 marks or “exemplary” marks in the schools section, which includes Clarendon Alternative Elementary, Alice Fong Elementary, and Lowell High School (magnet school). These high marks are in deep contrasts to many other public schools in the city. Unfortunately, the logic of getting into your local public school is not a guarantee in San Francisco. If a resident wants to send their child to private school, they can send them to St. Ignatius College Prep about 20 blocks away in the Outer Sunset.
* Transportation: Transportation is convenient with the 6 Bus or N-Judah train both going downtown. There is also the 6 bus that shuttles residents south of Golden Gate Heights and into the Inner Sunset. There is also the 91 bus the brings residents along 19th avenue, through the Presidio north, along Fisherman’s Wharf, and back into downtown for one big circle. Golden Gate Heights, Parkside, West Portal, Ingleside Heights, Merced Heights and other neighborhoods close by are going to become highly coveted areas because they can easily shoot down Highway 1 to 280 to get to all the tech/internet companies down south. Convenience to the highway heading south is why Noe Valley really started heating up about five to seven years ago.
* Inexpensive: At an average price per square foot of ~$600-$800, Golden Gate Heights is an absolute steal compared to other neighborhoods in San Francisco. There is no major international city I can think of where one can buy a single family home with ocean views for under $1,000/sft. I have researched properties in Hong Kong, Singapore, New York City, London, and Mumbai and everything is way over $1,000/sqft. When a 1,530 sqft, 2/2.5 Pacific Heights/Cow Hollow/Marina area home with no views sells for $3.4 million ($2,200/sqft), it is an inevitability that prices will start rising elsewhere.
EXPAND YOUR PROPERTY HUNT
I have lived in San Francisco for over 15 years and I just discovered Golden Gate Heights in 2014 because I decided to expand my search and really do some deep due diligence. I just assumed it was financially impossible to get a home with ocean views so I never looked. It’s kind of like never asking out a super model because you think you have no chance…. until you do.
The majority of prime real estate in San Francisco is closer to $1,100-$1,500 per square foot if we exclude the $3.4 million “outlier” mentioned above at $2,200/sqft. But even at $1,500/sqft, that’s still cheaper than the $2,000 – $3,000 per square foot in places like Hong Kong, London, and Manhattan. San Francisco is turning into a major international city before our eyes with all the cranes downtown due to the profitability of tech firms e.g. Facebook is set to pull in over $10 billion in revenue and $2.5 billion in net profits in 2014. Revenue and earnings are estimated to grow in the double digits for years.
I see the average Golden Gate Heights view home reaching well over $1,000/sqft by 2019 if not sooner as long as the economy remains stable. Let’s just hope local residences discover Golden Gate Heights before foreign buyers do. From what I know and hear, Chinese and Russian buyers are buying prime properties around the nation in droves, sight unseen.
Property will always be my favorite asset class to build wealth. And real wealth is all about generating cash flow and owning real assets that can be enjoyed and controlled by you. Property sellers in 2009-2011 are probably kicking themselves for selling if they did not roll their proceeds into a new property or alternative investment. 10 years from now, property sellers will probably be kicking themselves again for selling in Golden Gate Heights and other parts of San Francisco.
The power of inflation cannot be beat. Sooner or later there will be a marketing term, “Four million dollar views” instead of “million dollar views.” After all, who can buy gas for $1 a gallon anymore?
Other Great Neighborhoods To Buy In SF
* Inner Parkside, Parkside
* Inner Sunset, Outer Sunset
* Inner Richmond, Outer Richmond
* Diamond Heights
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 5% -25%. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates around around 4% – 5% in San Francisco, but over 10% in the Midwest if you’re looking for strictly investing income returns. Check out my Fundrise review as well.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.