In the fix-and-flip business, everyone indulges in a few mild understatements. “Everything didn’t go exactly to plan” is one, or “The buyer was a little bit stubborn” is another. However, none of those compare to this one: “The Bay Area housing market is experiencing an upswing.” All over the Bay Area, but particularly in San Francisco, the housing market is in an incredible boom, with numbers that are almost completely unheard of. For many developers, this is a dream, but it has people worried about a possible bust. For fix-and-flip professionals, you have to wonder if getting in now is a great idea, or if you will be left holding the bag.
There are a few ways to look at this, and to know what are the best uses of your hard-money loans from Socotra Capital. You have to understand the market, understand the fundamentals, and figure out the best way to use your resources and capital in order to compete in the nation’s toughest environment.
The Bay Area Housing Market: What Goes Up…
In 2007, right before the economy burst, thanks largely to a housing bubble, the median home price in San Francisco topped out at $895,000. This was the peak of the market, right before the bottom began to sweat and shake, and the whole human pyramid collapsed. Prices elsewhere in the Bay Area didn’t generally reach the peak of San Francisco’s, although they were close. It was considered by some an unsustainably high price, and a perfect demonstration of why a bubble was going to burst.
Flash forward to 2011, and median prices were hovering around $600,000. This was before the economy had absorbed the impact of the stimulus, but it was beginning to. The market slowly began to rise, and then rose more quickly. The stock market went to record highs, and tech led the way, which means the Bay Area reaped a disproportionate (though not wholly unearned) percentage of the benefits. The home market leapt past the previous high water mark. As of this writing, the median home price in San Francisco is $1,225,000, more than double what it was barely four years ago.
While there is glee in many quarters, other people are warning of a bubble about to burst. This hasn’t slowed down development at all. New construction is booming. The Bay Area is awash in cranes, though they are for very specific purposes. In San Francisco, it is estimated that 99% of new residential construction projects are for multi-tenant dwellings and multi-use buildings.
This makes sense in a dense area, especially when single-family homes are so much. And while one could argue that this is little help, given that San Francisco has the second-highest rental prices in the country (coming behind the truly outrageous New York), this new construction will help with the city’s tight vacancy rates, standing at a national worst of 3.6% (experts estimate that 8-10% is a healthy vacancy rate, as it encourages mobility without leaving too many lights off).
This is great right now. But what if it is going to burst?
How A Smaller Real Estate Pro Can Handle A Gargantuan Market
If you are a residential rehab expert, you may look at these housing prices and decide to walk away. Even if you know the $900,000 home you buy now might, with time and some work, be worth $1,000,000 next year, you might not have the capital needed to get in. And anyway, you might not want to, knowing that the market might collapse, leaving you in the red.
However, there are some strategies for how to succeed in the Bay Area, and that includes looking at areas that are doing well, but are still below market price. Take for example Daly City. Just south of San Francisco, Daly City has long stagnated, overshadowed by its Bay Area counterparts, despite its BART access and waterfront views. There are million-dollar homes there, but for the most part it is a calmer real estate environment, which makes it the perfect area in which to invest.
Prices are lower, and more affordable, which means that you can afford to purchase a home and, with the help of an equity-based residential rehab loan, flip it over. You can also hold onto it, renting it out or putting in more work. This kind of investment helps you no matter what. If the market defies gravity, and keeps growing, there will need to be expansion, and your house will already be worth more, positioned as it is to pick up the next wave of urban refugees.
On the other hand, if the market slumps, and people are forced to sell, or forced to not buy such expensive property, an already-rehabbed and reasonably priced home is waiting for them, thanks to you.
We aren’t necessarily saying “buy in Daly City now!” That is up to you and your circumstances, and your own read of the market. Indeed, it might not be the next hot spot; it is just an example of a place where conditions are right. Those don’t always pan out, of course. The point is that even in huge, seemingly all-encompassing bubbles, there are marginal areas that can either take in the next wave of growth or be a stop-gap if it falls. Finding them, and using your hard money loan from Socotra to fix them and get them ready, is the best way for a smaller business to operate.
