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Investing for 9% Returns in San Jose

Despite its dubious reputation for being the most expensive place to live in the country, San Jose still offers opportunities for informed real estate investors to earn 9% on their invested cash. The key is to find the right properties with the proper cash flow characteristics.

At the moment, condos are offering some of the best returns. They are often very new, having been built recently in the housing boom. Hence, they don’t require much on-going maintenance for the first 4-7 years of ownership. With rental rates exploding in the double digits this year in San Jose from a limited supply of quality apartments, the returns on comparable condo

units are very attractive. Meanwhile, prices on condos have corrected far more than townhouses and single family homes, up to 70% down from the peak, making them very affordable investments.

Like many investments, the mechanics of the cash flow are pretty easy to grasp. For a typical investment property in San Jose, you are looking at a 5-6 year old one-bedroom condo.

  • Price is about $150K
  • Management and HOA fee is about $400 a month
  • Insurance is about $500 a year
  • Utilities and maintenance run about $500 a year
  • Financing 75% of the price at 3.5% for a 5/1 ARM loan

With typical rents of about $1350-1550 a month, the condo unit can return about 9-11% per year on invested cash. Compared to cash in the bank of less than 1% per year, this secured form of investment makes sense to many investors.

Of course, the caveats are in the details. Many of the desirable condos have financial restrictions from HOA litigation and other non-structural issues like being a short sale or REO. They make purchasing an investment property rather more difficult and risky. Plus, waiting 4-6 months for a distressed condo to close is a huge drag on motivation of the average investor to do good diligence, which is the difference between 9% returns and 4% returns. Making sure the condo doesn’t have additional costs like underfunded reserves is really a full-time job. So, plugging in accurate numbers to analyze properties is very difficult if not impractical for most passive investors.

The best advice is for investors interested in making a solid return is to find an experienced real estate broker who looks at potential investment properties on a daily basis. There’s really no substitute for time spent scouring properties to find the really good ones. And, specialized brokers can even provide insights into unique opportunities which are not otherwise posted.

Michael Cheng