Great question! I am glad to see you are thinking strategically AND long-term. Real estate, like other investments, is best seen over time...
Personally, I think it is important to own your primary residence first and foremost. If you had said that you could only afford a property outside of San Francisco, then maybe my answer would be different. But, if you can afford a starter home here in San Francisco, this is most likely your wisest choice.
There are income tax savings associated with owning your home. Yes, there are tax benefits to income property too but for most folks, it is smart to start with the primary residence deductions. Talk to a tax advisor for specifics.
When you go to sell your primary residence, you will take up to $500,000 in profits (as 2 owners) TAX-FREE as long as you lived in the home for at least 2 of the past 5 years! This is tax-free capital gains. You won't get this in any other type of investment. Of course, you can defer taxes on an investment property but you can't take the cash out and you stay invested in real estate. (A very good strategy to diversify your assets down the road but again, start with your home.)
3. POTENTIAL FOR GROWTH AND APPRECIATION
It will take the Central Valley a LONG time to recover from this downturn. The downturn is far from over there as well. Yes, prices should eventually recover and head back up but you will be sitting on these homes for many, many years before they will appreciate with any significance.
Whereas, San Francisco is a global, "super-star" city with high demand and limited supply. The City is small and almost totally built-out. The market will recover here much quicker. (It hasn't been hurt nearly as hard either.) Check out Florida's book on Super-Star Cities for more info: http://sfhotlist.com/blog/2008/03/13/why-is-the-san-francisc
In my opinion, your home here in San Francisco will appreciate more rapidly and bring you more opportunities for long-term wealth creation. Plus, if you decide to keep your home and make it a rental, the rents here are higher and always will be. Yes, you have to contend with rent control but many landlords here do quite well.
There is a great book on the basics of real estate investing. Not the "get rich quick" scheme stuff but rather, the "long-term get rich slowly" stuff that actually works! Check it out: http://www.amazon.com/Automatic-Millionaire-Homeowner-Powerf
My clients are in escrow on a home in San Francisco. It was listed for about $650,000. We are in contract for about $620,000 with credits. They are putting 3% down and getting a 5% 30-year fixed loan. Yes, you read that right.
Ask me how. I cannot stress enough how good of a time it is right now to be a first time or move-up buyer in San Francisco.
I work with my clients to come up with the best long-term plan for them. This includes a primary residence and rentals down the road. Please check out my blog and website for more details and give me a ring so we can discuss your situation in more detail.
Warm regards and happy new year,
Danielle Lazier, San Francisco Realtor
Zephyr Real Estate
danielle (at) sfhotlist.com