Location, location, location! This is probably the real estate industry’s most overused adage, and as much as we hate to repeat it time and again, we can’t ignore a longtime truth: where investors buy matters as much as — if not more than —what they buy.
OK. So, location matters. You get that. But what exactly does that mean? How should real estate investors evaluate locations throughout the East Bay area?
In Part I of a multi-installment series on real estate investing, we explore a number of factors that influence where to buy income property. Our advice is grounded in decades of experience buying and managing rental properties, both at the height of the market and when it was at record-lows.
So, without further ado, we offer a few guiding principles:
The latter half of the 20th century favored the suburbs. A number of factors, most notably persistently high crime, meant that anyone who could afford to leave the city fled for the suburbs’ greener pastures. Over the last decade, the pendulum has shifted back and people are moving back to cities in droves. Why? Well, in addition to the jobs, cultural amenities, bars and restaurants that cities have to offer, they also tend to be highly walkable.
Residents today place a premium on being able to run errands, grab lunch, or get to work with little or no need for an automobile. This is especially true now that Zipcar, Uber, Lyft and other ride-sharing services have created on-demand access to vehicles as needed. Millennials and Baby Boomers alike want to live in these “20-minute neighborhoods,” where a bulk of their daily activities can easily be reached within a 20-minute walk. While these areas tend to be located in the urban core, they’re also starting to pop up in inner-ring suburbs.
To evaluate a neighborhood’s walkability, check its Walk Score. Most people assume that San Francisco is the Bay Area’s most walkable community – but as it turns out, Downtown Berkeley takes the top spot with a walk score of 96. All told, the East Bay offers a range of highly walkable neighborhoods. Oakland’s Lakeshore, Temescal and Upper Dimond neighborhoods all rank in the mid- to high-80s.
Proximity to Public Transit
Related to walkability is proximity to public transit. Not everyone can live in a 20-minute neighborhood, but that doesn’t mean that they want to jump in their car and sit in traffic, either. Demographic shifts and concerns over quality of life have made living near public transit more desirable. Studies have shown that consumers are willing to pay more for housing located in areas located near public transit.
The gold standard is buying property near one of the Bay Area’s BART stations. East Bay is home to several BART stations, and during rush hour trains come every 2 to 3 minutes. Depending on which neighborhood you’re coming from, this means you can get to downtown San Francisco in less than 20 minutes. Riders can catch up on social media, respond to emails, play games or read the news – sure beats a stressful bumper-to-bumper commute each day! Residents are willing to pay a premium for the convenience of living near public transit.
What’s more, a recent analysis finds that residential properties located in proximity to fixed-guideway (e.g. light or heavy rail rather than bus service) transit maintained their value better than those without transit access between 2006 and 2011. The study concluded that San Francisco-area properties located within a transit shed outperformed the region by 37% during that time. This confirms our on-the-ground experience: buying rentals near public transit helps to preserve value despite the market’s ebbs and flows.
The Starbucks Test
It can take years (decades, even) for neighborhoods to transition. But for investors with a long term buy-and-hold strategy, owning in a transition neighborhood can pay big dividends in the long run.
Look at who’s investing and where. In an upcycle like we’re in today, investment starts percolating into neighborhoods on the fringe. We’ve seen this happen right here in our own backyards. For years, investors would think long and hard before buying rental property in Oakland. It was considered one of the most dangerous cities in the U.S. Fast-forward a few years: real estate investors priced out of San Francisco started scooping up properties in Oakland at bargain prices. Rents in Oakland have subsequently experienced year-over-year double-digit gains. Today, Oakland is considered one of the nation’s hottest rental markets.
Identifying East Bay’s next trendy neighborhood can be tricky. One strategy is to use the Starbucks test: where is Starbucks opening its newest locations? In their own words, Starbucks calls its real estate decisions “as much an art as a science.” Indeed, Starbucks and other upscale retailers do extensive research before making their location decisions.
In a perfect world, you’d buy real estate in these areas just before Starbucks, Trader Joe’s, Whole Foods and the others start to put down roots. Gentrification moves through neighborhoods in wavelike patterns; buying right in front of the wave helps to maximize value. Investing in rental property near a new Starbucks is a good strategy nonetheless; research shows that homes located near a Starbucks appreciate faster than average. The East Bay area is peppered with opportunities like these.
Investor’s Risk Profile
All investment decisions are personal. As you evaluate where to buy rental property, consider how much risk you are willing to take. Your risk profile (and related, investment time horizon) will influence where to buy.
For instance, if you have a high risk tolerance, you might consider investing in rougher transitional neighborhoods. With high risk comes the opportunity for high reward. But keep in mind: these are usually the first neighborhoods to lose value during an economic downturn. Let’s compare San Francisco and Antioch as illustration. San Francisco real estate values dropped by about 20% during the 2008-2010 recession, and quickly recovered. Meanwhile, property values in Antioch plummeted by about 70%, and have yet to fully recover. The longer your investment time horizon, the easier it will be to weather the market’s ebbs and flows.
Conversely, if you have a low risk tolerance or shorter time horizon, it makes sense to buy income property in more established locations. More desirable core areas maintain their value well even in a down market, and recover quickly on the upswing. It comes as no surprise that these areas tend to be located near the jobs and amenities downtowns have to offer—including walkability, public transit, and of course….a Starbucks.
Whether you’re a first time investor or seasoned vet, finding a well-located property is essential for maximizing value. As you set out in search of your next East Bay rental property, keep these guiding principles in mind.
Part II of this series will look at the types of real estate and property features you may want to consider if you’re contemplating investing in the East Bay area.
Stay tuned for more!