Looking for some hard facts about Capitalization Rates in the Bay Area.

Asked by Luke, San Francisco, CA Mon Jan 24, 2011

I'm looking to buy in the Bay Area and was wondering in which cities and neighborhoods are the best Cap Rates. Is 10% out of the question in the Bay Area?
E.G. Purchase price of $120k and rent of $1,000 a month.
If they don't exist in the Bay Area, where should I be looking?

Interested to see what the lows, highs, and averages are.

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Peter Brunton, , San Francisco, CA
Mon Jan 24, 2011
Hi Luke,

Cap rates of 10 are not going to be possible in the Bay Area. Remember also, that the number you are referring to in your example is gross rent multiplier (GRM). This number is simply your purchase price divided by rent while the cap rate takes into account your income less expenses (not including cost of financing).

You can find GRM's of 10 in the Bay Area, but these are going to be large scale multi-family properties probably greater than 2 Million.

Some places where you can find much more competive cap rates in California are areas like Fresno. Outside California, places like Texas can be good for cash flow.

Another thing to remember is that there is a big difference between your cap rate and your actual rate of return (irr). Areas where you get higher cap rates tend to have less growth and appreciation potential. Even the Dallas/FT. Worth area which has a fairly strong economy doesn't have a history of property appreciation because of excess supply.....this supply also causes higher vacancy rates.

If you want to stick in California and keep it around 200k, then I would suggest a single family in Concord or even a condo in Walnut Creek. Both areas have been hit hard, but are attractive communities close to BART and commuting to SF.

Feel free to give me a call at 415 728 5580 if you would like to dicuss or email me at peter_brunton@yahoo.com

Regards,
Peter Brunton
Prudential CA Realty-Franciscan Properties
677 Portola Drive
San Francisco, CA 94127
415 664 9400
DRE 01789498
Web Reference:  http://sfpru.com
2 votes
Ann Sullivan,…, Agent, San Francisco, CA
Tue Feb 1, 2011
Dear Luke,

You are doing exactly what I am right now. In the east bay I would recommend looking in Concord, Pleasant Hill, Martinez to start. There are certain pockets within these that will offer you the best rental rates to achieve the highest cap rate. There have actually been a few over 10% in Concord that have sold. The houses needed work and there were multiple offers, thus if you are a contractor or can do the work yourself you could achieve a higher cap rate. The nicer the area the lower the cap rate... I have been tracking foreclosures and personally have purchased homes on the court house steps for the last few years. I find that REO and short sale properties are offering the best value if you do not mind doing some fix-up. If you have cash, trustee sales may be an option for you to consider. As you may know, the FHA is no longer approving all condo's for financing so due diligence is necessary with condo's.

Please do not hesitate to contact me if you would like assistance in the East Bay. My firm does property management as well, if you are not interested in managing the property. My best to you!

Sincerely,

B. Ann Sullivan
Realtor, MBA
Cal Bay Real Estate
Walnut Creek, CA
ann@annsullivanrealestate.com
925-330-8214
DRE 01488386
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