San Francisco has a reputation for some of the highest real estate prices in the country. While that scares away many first-time real estate investors, San Francisco is a smart place to buy.
While prices are high, San Francisco’s economy is strong, and real estate prices have remained on a steady upward trend for decades. For investors who can afford to buy into the San Francisco market, there’s great potential for both short-term cash flow and long-term growth.
Even with San Francisco’s strong real estate market, it’s important to be strategic when investing in this high-priced city. Before buying your first San Francisco rental property, ask yourself these three questions.
What Can You Afford to Spend?
Any real estate purchase should always start with a budget. Otherwise, you could get caught up in the hype and wind up over-leveraging yourself.
Most lenders also require a minimum 20% down payment for investment properties. If you’re buying a property for cash flow, not just long-term appreciation, you may want to put down even more.
Use property values in the neighborhood you want to buy to reverse-engineer the amount you need to save for a down payment and closing costs.
Then, calculate the rent you’ll need to charge to cover operating expenses and generate income. Is it comparable to median rents in the neighborhood, or do you need to adjust to your budget?
Even if you’re not using your rental property as an income source, it’s important to have enough cash flow to cover upkeep and improvements.
Where Should You Buy?
Not all neighborhoods are created equal. That’s true no matter what type of buyer you are, but especially when investing. In addition to price variations, some neighborhoods are more attractive to renters than others.
Neighborhoods with access to good schools and convenient transportation are an ideal place to find long-term family renters. At the same time, vibrant areas like:
And the Tenderloin.
Are popular with young people in search of hip neighborhoods and cheaper rent.
The neighborhood is of particular importance if you plan to operate your investment property as a short-term rental.
Vacationers want rentals close to popular San Francisco attractions and will pay a premium for a convenient yet safe location.
While buying near hot neighborhoods like SoMa, North Beach, and Hayes Valley also means paying a premium as a buyer, it’s a must if your cash flow relies on tourism.
Luckily, highlighting the short walk or Muni ride to attractions like:
Golden Gate Park.
And the SFMOMA.
Is a great way to keep your vacation rental fully-booked.
Should You Self-Manage or Outsource?
The decision to hire a property management agency can have a big impact on rental property profits — but not necessarily in the way you think.
While it’s true that property management fees add to overhead costs, a skilled property manager can also maximize occupancy rates and rental profits.
That’s because professional property management agencies have the:
And customer service skills.
That not all investors possess.
As a result, they can help with everything from finding the tenants most likely to treat your property well to minimizing repair costs through regular upkeep.
Agencies also have more negotiating power than individual landlords, helping you save money on cleaning and maintenance services. Some agencies even offer 24-hour guest support for tenants so they can respond quickly to any issues.
Buying an investment property is a big decision at any price point, especially in San Francisco, where home prices are often in the seven figures.
Before making your first real estate investment, make sure you have a handle on all the financials of owning a rental property.
From finding the neighborhoods with the greatest growth potential to calculating a property’s cash flow, answering these questions will put you on the path to a profitable first investment.