buy investment prop in central valley first OR buy primary home first in SF ?

Asked by SF Home Buyer, San Francisco, CA Tue Dec 30, 2008

Due to the plunging prices in central valley (Stockton, Modesto, etc.) my wife and I aren't sure if we should buy couple of houses in central valley first (each about 200K) before we purchase our home in SF.
If we buy a 650K house in SF there won't be much cashflow left for any other investments (stocks, 2nd home etc.); whereas if we instead buy couple of houses in central valley and rent them out that would atleast be great investments for long term while we continue to rent in SF
We are not sure what is a smart choice. Please help.

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Cheryl Bower, Agent, San Francisco, CA
Tue Dec 30, 2008
My first thought is how strong is the rental market in the Modesto area? What is projected job growth? What is the main industry supporting the community?

Will most of your mortgage be covered by the incoming rent? By making a purchase in the central valley, how many years out will it delay your potential S.F. purchase?

How long do you intend to live in S.F.? If you can make a commitment of a 4-7 year holding period owning a S.F. home, you will likely see a nice return on your S.F. purchase.

Will you self-manage the rentals or work with a locally based property management company? I typically recommend to my investor clients that if they want to self-manage it’s ideal to be no further than an hour away from the property otherwise it can be a double whammy of the hassle factor in handling tenant calls along with making a long drive. You would also need to have a team of reputable trades people to help handle the maintenance details that come up (IE: painter, plumber, electrician).

Buying in Modesto, could be a great opportunity if this is also an area that you eventually want to retire to.

Meanwhile, S.F.’s market is finally at a point where buyers have choices and don’t have to deal with the bidding wars that we’ve experienced for the last several years.

I’d recommend talking with an agent in each area and evaluate previous appreciation levels & market cycles, job growth & community features.

S.F. is a world class city with no new land to build on which has also made it a very expensive city to buy into.

There are pros and cons with each approach. It really comes down to a lifestyle choice.
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Tony Abad, Agent, El Cajon, CA
Tue Dec 30, 2008
Looks like you have lots of answers to read here, so I'll just leave you with one thought. Don't put all your eggs in one basket. If you are investing, pick several different locations. Feel free to contact me for some in the Brentwood area.

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Shaban Shako…, , San Francisco, CA
Tue Dec 30, 2008
Having been in this position myself and having had clients that consider this question, I felt compelled to answer. I believe buying your home first is a better decision. The tax benefits are best on your own primary residence and the more money you give to your landlord, the less you put towards your own home and your own tax savings. You also capture appreciation in a much better market (san francisco) versus other more questionable markets.

Jed and others are right about picking the area for investment property wisely. I have some other areas that I think give more bang for the buck, but regardless they all present risk. You could be stuck in these investment properties for some time to realize the best return and that would put out buying your own home even further.

I rarely see a tenant go out and buy investment property first, most likely because most people, I believe, view investment property as something you acquire when you have the luxury of doing so after you've established yourself in a community and are making good money to invest.

Shaban Shakoori
TRI Coldwell Banker, SF's #1 Office
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David Tapper, Agent, Burlingame, CA
Tue Dec 30, 2008
I forgot to ask, have you considered Merced instead of Stockton or Modesto? They built the Unniversity around 4-5 years ago and I would think it might have more upside. I've heard but not confirmed that they will have almost 20,000 students some time in the future. Just a thought.

Dave Tapper
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David Tapper, Agent, Burlingame, CA
Tue Dec 30, 2008
You are fortunate to be in the position you are, and also lucky to have been given such good advice. I will add one thing that is just as important.

Financing. The best advice I can give you is to sit down with a banker and discuss your options. From there you will have a very good idea of which direction to go.

If it were me, and I own rental properties as well as my own home, and it was my first purchase, I would go for income. Why, because you need to set the table for your future. The other reason is you can qualify a lot easier for a single family home later, especially if it's going to be your primary residence. I can't say the same for multi residential, which is much harder to qualify for and you need a larger down payment.

You might want to consider buying a 2-4 unit building and living in one of the units. This way you should be able to get owner occupied financing.

One last thing, which ever way you decide to go, it will be the best thing you have done. You need to jump on the bus and there is no better time than right now. Home values are down and money is cheap. That's an awesome combination.

Good luck,

Dave Tap Tapper
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Dp2, , Virginia
Tue Dec 30, 2008
You've received some good advice thus far, and I especially appreciate the advice Cheryl, Jed, and Peter gave you.

I'll build upon Peter's answer. Let's say you do acquire a 4-unit property at a 10% cap rate, with a 30-year fixed mortgage at 6% ($1795.77/month), and you can rent each unit for $1200. You'd end up buying that property for $374.4K (1200[4][12][.65]/.1), and your pre-tax cash-flow should be roughly $1324.23/month. Afterwards, you could use part of that money along with your current income to acquire dream home (or to help you save up for the down-payment for that home).
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Peter Brunton, , San Francisco, CA
Tue Dec 30, 2008
Hello SF Home Buyer,

Obviously there is no right or wrong answer, but I would recommend considering buying a multi family property in the central valley over many single family homes. By purchasing a multi family you can find cap rates in the central valley near 10% and rising. These multi family properties also allow you to maintain cash flow better in case of vacancy and will provide a high return on your investment even when you factor in the cost of hiring a property manager. There in no way to tell how real estate with perform in those areas in the next year, but your cash flow should be able to cover you and provide a return that will outperform stocks.

Also, depending on what type of down payment you have you might be able to leverage buying both a starter home in San Francisco and a property in the Central Valley on a smaller scale.

Please feel free to contact me at if you have any questions and would like to view a cash flow model that I think does a pretty good job of showing the return on your money.
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Danielle Laz…, Agent, San Francisco, CA
Tue Dec 30, 2008
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.)


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:…

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:…

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)
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Jed Lane, Agent, Petaluma, CA
Tue Dec 30, 2008
I have very good clients that did what you are contemplating. You need to be smart about where you invest because there are many factors that can change. Look at areas that have steady industries, good government, good transportation links to major urban areas or look at inner urban areas. Gas prices will continue to rise and trhe demand for housing closer to jobs than Merced and Stockton will be in higher demand than the perifery of the urban area. Also look at housing around universities and colleges.
In reality it is not a simple undertaking to go into the landlording business. It can be profitable but it can also be tough at times. If you are going to manage the property yourself tyr to remember that you will have to drive out and show it, fix it, clean it between tenants etc. Many say keep it within 50 miles if you plan on self managing.
To make a smart choice you need to do your due diligence and then discuss what is right for you.
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Lance King, Agent, San Francisco, CA
Tue Dec 30, 2008
Good Afternoon,

Based purely on numbers, logic would dictate to buy in the central valley first because prices in the outlying areas dropped first and therefore further than San Francisco, and it seems likely that San Francisco probably has some downward movement left. However, I am not familiar with the demand for rentals in that area so I would talk to someone who is. Keep in mind that you need to be prepared to carry the mortgages while looking for tenants if you go that route.

Before advising anyone definitively I would want to have a conversation about ultimate goals. Feel free to call for no-strings expert advice anytime.

Regards, and Happy Holidays,

Lance King/Managing Broker
415.722.5549 Cell
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