Want to make double digit returns on your investment property? If you time it well, you can make a fortune in California real estate through appreciation alone. In this article you’ll learn why the time to sell your California real estate is right now. Continue reading now.
A Time for Appreciation
If you time it well, you can make a fortune in California real estate through appreciation alone. If you time it wrong, you can lose everything.
For example, if you bought California property between 2009 and 2014, you probably earned double digit returns for doing absolutely nothing. However, if you bought property between 2005-2007, you probably experienced double digits losses when values went over a cliff.
This scenario is not new for California. The same pattern happened during the housing booms and subsequent crashes in the mid-70’s, mid-to-late-80’s, the late-90’s and into the mid-2000’s.
Here we are in mid-2010’s. Should we be looking for another housing correction like the 4 that have preceded us? It’s been 9 years since the last peak and 7 years from the last crash.
Can investors count on continued appreciation or are we headed for another cyclical correction?
The median home price in California is currently $448,000. During the 2006 peak, median home prices reached $538,000 so it is possible we could see continued price gains this year and next. But what happens when we exceed those inflated 2006 levels? This has already happened in many California coastal markets…
If history is any indicator, there will most likely be a correction. Salaries haven’t increased at the same pace as home prices and affordability is once again totally out-of-whack. This doesn’t necessarily mean there will be a real estate crash like we just experienced in 2008 because loans since then have only been given to qualified borrowers… but we could certainly see a slow down or flattening of prices.
So if you don’t expect to get more appreciation in California and you can’t get positive cash flow from rental properties, how do you make money in this part of the market cycle?
Many people are choosing to sell their California property to “cash in their chips” and trade those properties tax-deferred for high cash flow properties in markets that are just at the beginning of their boom cycles. (Check out an amazing testimonial from one of our members on the Real Wealth Show.)
However, regardless of the negative cash flow and lack of near-term appreciation, some investors still simply prefer investing in California, no matter what phase of the market cycle.
So how can these California Faithfuls profit in a peak market like today? They have to take a different approach, and that strategy can be very high yielding if done right.
Forced appreciation is a fancy investor term for improving a property, thereby increasing it’s value.
You can force appreciation in any market cycle, but it’s really your only available strategy in an expensive boom market like San Francisco, Los Angeles and New York City.
One of the best ways to force appreciation in these kinds of markets is through multi-family property. If you can find a B or C class apartment in an A class neighborhood, you can potentially earn huge returns by bringing the building up to A standards. Once the building is improved, you can increase the rents which dramatically increases the property value.
Another way to profit in a boom market is to provide more inventory to an inventory-starved market. You can do this through condo conversions, subdividing land, entitling land for residential housing and building more housing units.
RealWealth recently did something similar. We partnered with a well-known Bay Area developer to acquire an outdated apartment building in a highly desirable A-class neighborhood right next to the Google and LinkedIn headquarters in Mountain View. We did not buy it for the meager 3.5% cap rate.
Our business plan is to re-entitle the land to allow higher density, substantially increasing the number of allowed housing units on the property. The city of Mountain View is in dire need of housing due to massive job growth and is very supportive of this endeavor. If for some reason the entitlements didn’t go through (highly unlikely) then we simply bring the units up to A+ condition, raise rents, increase the property value and sell for a profit.
We just wrapped up a similar project in Dublin, California. We leased-optioned a commercial building, re-entitled the land to residential, and sold the “shovel ready” lots to a national builder. We knew the city wanted and needed more residential housing in what will be their new downtown. Due to market timing, we sold the lots for $6M more than was projected. The closing is this week and investors expect to make a very substantial profit.
You can still make double digit returns in a hot seller’s market but not necessarily through positive cash flow. In a seller’s markets, there’s limited inventory and the seller has the power. The way to profit is to be a seller by providing more housing inventory.
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