Ken Nava, Both Buyer and Seller in San Jose, CA

I'm interested owning a rental property in Palo Alto. I'm curious about :

Asked by Ken Nava, San Jose, CA Fri Feb 22, 2008

1) Demographics of people who rent in PA
2)With 600K down, is there a neighborhood where I can break even with the rent? I'm interested only in a house.

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Answers

10
Ali Moein, Agent, Saratoga, CA
Sat Feb 23, 2008
BEST ANSWER
Hello Ken,
Palo Alto is a prime real estate market for investing and the rental market is also very strong. Based on your requirement you'll be able to purchase a home between $1.0-to-$1.2Mil depending on your credit and what type of loan you'd like to get and break even with $600K down. There are a number of single family homes on the market in this price range. Hope this helps!
1 vote
CJ Brasiel, Agent, San Jose, CA
Fri Feb 22, 2008
Ken -

It depends on which part of Palo Alto you are looking at to understand the demographics of the renters for that area. Obviously, many renters in Palo Alto are associated with Stanford University. Those renters can be professors, students, and of course support staff. That in itself would give you a wide variety of rental rates depending on the neighborhood and property.

As far as your net income, you really need to sit down with someone and go over the numbers. The loan would be a non-occupying loan so that has higher interest rates than a loan where you will be occupying the home. You will need to find out what loan amount you can be approved for and then run the numbers on what the average rent is for what you can afford, and then look at the capitalization rate. Because much of Palo Alto has not depreciated in this current market, it may be difficult to get the cap rate where you want it to be. However, many investors work with negative cash flow in the beginning because they consider real estate a long term investment and eventually it will pay you back. Many times over , historically in the Bay Area.

For more on cap rates follow the link below
http://en.wikipedia.org/wiki/Capitalization_rate

Also, if you are interested in talking investment opportunities in Palo Alto, I would recommend Catherine Gortner http://www.cgprop.us/ She is an investor herself and knows the Palo Alto area well.

Good luck,
CJ
Web Reference:  http://www.CJBRealEstate.com
3 votes
John Souerbry, Agent, Fairfield, CA
Fri May 9, 2008
With the numbers you mention, the neighborhoods in Palo Alto in which you could purchase a single family home would probably not earn the amount of rent needed to be cashflow positive. You could buy a condo, but you'd have the same cashflow problem and I never recommend condos as investments outside of vacation destinations. You could try foreclosure auctions, though it's looking for a needle in a haystack to find a low purchase price on anything in Palo Alto. Your best bet might be a severe fixer-upper.
0 votes
Leon Leong, , Palo Alto, CA
Tue Apr 29, 2008
Ken, for a single family house - answer is No; for a condo/townhouse - possibly.

The entry level price for a 3 bed/2 bath house in Palo Alto is around $1,300,000; the median rent for such a place is around $3,600/month. Property tax & insurance will run around $1,250/month, leaving you with around $2,350 to cover a $700,000 mortgage (which it won't with today's rates).

You can find out more info at my website, under newsletters.
Web Reference:  http://www.leonleong.com
0 votes
John, , Los Angeles, CA
Tue Apr 29, 2008
Ken,
Did you end up buying? I'm interested in hearing your story for possible film/tv rights.
Let me know and I'll send you my contact info...
Thanks,
J
0 votes
Susan Vander…, Agent, Lake Elsinore, CA
Wed Apr 23, 2008
Even though the Palo Alto rental market is popular, even Palo Alto has "poor people". A multiple unit or mixed property might be a better buy than just a single-family 1 unit. With 600K, why not go to the auctions or buy bank-owned properties that you could leverage and easily break even? You could get 3 properties for the price of one, like my clients did. Some of them are buying in cash and renting out -- it works for them because the properties are paid for and they are positive every month.

It also depends on your financial situation and real estate portfolio. $600k does not last long if you don't have a good plan for it.
0 votes
John, , Los Angeles, CA
Wed Apr 16, 2008
Ken,
The Center for Economic Policy and Research recently put out a study on the cost of ownership vs. the cost of rent in major metropolitan areas.

http://www.cepr.net/documents/publications/ownrent_2008_04.pdf

It estimates equity gains/losses in the 20 major metros if you were to buy today. It says that you will lose nearly $350,000 in equity over the next four years if you buy in the San Francisco Bay Area today.

Why not simply donate that $350,000 to a charity--rather than donate it to some Palo Alto homeowner and their real estate agent?

Maybe you can earn some equity with a higher power...
Just a thought,
John
0 votes
Arn Cenedella, Agent, Greenville, SC
Tue Apr 15, 2008
Ken:
You will need about 50% down to break even on a single family or small income property in the Menlo Park or Palo Alto area. This 50% guideline also applies to small income properties. For this investment to make sense, you will need to count on continued property appreciation. In Palo Alto, this is probably a good bet. Depsite the slowing market, Palo Alto values have continued to go up over the past year and a half. Since maybe 5% of the single family housing stock in Palo Alto is tenant occupied; demand well outstrips supply so you will have your pick of some very well-qualified tenants.
0 votes
John, , Los Angeles, CA
Sat Feb 23, 2008
Ken,
With $600k to invest, why would you want to put that into real estate?
Bay Area home prices are among the most overpriced in the country and are headed for a catastrophic fall. The outerlying parts of the bay area are already seeing devastating price drops--slowly, the price falls are creeping in to the most prime areas, such as Palo Alto.

The book Irrational Exuberance explains a great deal about why the bubble occurred, and how it's demise will affect EVERY corner of the country, not just the overbuilt areas.

Check out this artice:
NEW YORK (Reuters) - One-tenth of U.S. homeowners hold mortgages that are larger than the worth of their homes, Moody's Economy.com said on Friday.

Nearly 8.8 million homeowners, or 10.3 percent, are in over their heads, its chief economist, Mark Zandi, estimates.

As a result, millions of U.S. homeowners have the incentive to abandon their properties.


http://www.reuters.com/article/domesticNews/idUSN2259847620080222

Also, check out this one:
http://www.businessweek.com/magazine/content/08_06/b40700407…


There couldn't be a worse time to buy a home. There couldn't be a worse return on your $600k that putting it in real estate.
Good luck,
John
0 votes
Realtor, ,
Fri Feb 22, 2008
Ken, I'd be happy to send you a list of demographics on any particular property you may be interested in. This info comes directly from the assessor. Your net profit depends on many factors.
0 votes
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