The San Francisco Bay Area, also known as the Bay (and Silicon Valley) is a thriving metropolis, home to some of the largest tech and biomedical companies in the world and a major American seaport. This has been a great place to be for real estate investors, terrible for renters. But is now a good time to buy, either as an investor or a home owner?
In this month's meetup, we covered the real estate trends, challenges and opportunities of investing here in the Bay. (Special thanks to Jim Light of Century 21 for the educational and entertaining real estate stories from the last 3 decades.)
First, let's address the obvious risk - earthquakes. In 1906, San Francisco experienced a major earthquake for less than a minute, which caused multiple fires and destroyed nearly 500 city blocks, due to ineffective building codes and unsophisticated fire fighting technology. The next major earthquake hit in 1989, resulting in over $5 billion in damages. Thankfully many lives were saved due to the Oakland A's and San Francisco Giants World Series baseball game as many avoided the dangerous freeways when the quake hit.
According to many websites, the Bay is due for another earthquake in the next 30 years. Check out the below map with the probabilities of the next major quake...
So what buildings (e.g. new, old, tall, short) are safest during an earthquake? Depends. Building codes are not uniform throughout the Bay and modernization of existing buildings to today's building codes may not be required until the buildings are modified or renovated, depending on the locality. If you see a red “Earthquake warning!” notice on a building, that means the building is noncompliant in reinforcing structural walls so think twice before entering. Fortunately, this accounts for less than 1% of brick buildings in San Francisco.
What are the most dangerous buildings? Those with soft story openings, i.e. where there is a garage or large window with multiple stories above them, especially those that are not reinforced. A close second would be hillside homes not anchored by steel or in compliant with the Los Angeles Hillside Code.
How are buildings in earthquake zones made safe? Investors and home owners should look for the following to be in place or retrofit to make the living spaces safer:
- Anchoring bolts fastened to the sill plate (the horizontal member that supports the floor joists and wall studs) of the foundation. The bolts are secured every four to six feet along the sill plate.
- Reinforced concrete foundations instead of brick or unreinforced foundations.
- Cripple walls as exterior foundations that carry the weight of the house above them, and surround the crawl space. They behave like shock absorbers during an earthquake and must be well braced with plywood on the inside to avoid side to side swaying and collapse during an earthquake.
- Proper drainage is a must as soils with high clay content (i.e. California) need to be kept at constant moisture to prevent expansion and contraction.
- Earthquake activated shut-off valve on the main gas line along with flexible gas and water pipe fittings to all appliances to avoid ruptures during ground movement.
- Bracing kits to secure water heaters to the walls.
Based on the above, what is the best type of home to live in during an earthquake? Single story, ranch style homes on solid foundations with very little slope. Plus if you are investing, they avoid rent control as per the Costa Hawkins law.
Now that we know what to buy, is now a good time to buy?
Barring the next big earthquake happening, the major down cycles in the Bay Area in recent decades have all been tied to a national or international economic crisis. Many experts are saying our economy has another 1-3 years before the next recession. Yeahhh.... That window doesn't help very much if you need a place to live today.
What is your timeframe?
During our meetup, some good advice was given: "If you are going to get into real estate, the shortest timeline should be 10 years." That is the typical period for a full real estate cycle.
Another interesting point during our discussion: The Bay housing is transitioning to more of an European model. That means it is becoming generational, being handed down from parent to child and so forth. With that long term mindset, buy and hold has become a means of creating wealth. Due to this intergenerational holding and the lack of geographical square footage, supply will remain low, continuing to force prices upwards or stabilize fairly quickly in the next recession.
Fix and flips will also continue to be profitable in the near future but as many investors can attest to today, they are harder to find.
In our discussion, we also talked about the various Bay Area meetups occuring and where they are investing in 2018, both in the SF Bay Area and beyond. Links to their presentations and videos can be found here.
Look forward to seeing you at the next meetup.
Kevin + Kiri