Does this bus look familiar?
If you live and work in Silicon Valley, chances are you’ve seen these buses around or even commute on one to work.
This post is for you if you have been thinking about real estate investing in Silicon Valley.
My #1 tip for your family if you are looking to diversify into your portfolio from stocks into real estate:
Due to the lack of supply of single-family homes in Silicon Valley, and continued demand from high paying jobs and wealth creation from the stock market, prices might continue to increase at favorable rates if history is any guide.
- Good School Districts → Research areas that have good school districts such as Los Gatos, Cupertino, and Palo Alto. Demand for single family homes in these areas should remain strong, as families will most likely tend to prefer to live in these areas to help give their kids access to a good education and a positive learning environment.
- Close to Company Headquarters → Since traffic in Silicon Valley is heavy, commuting can be a drain, even if you are riding one of the many silver commuter buses driving through the Bay Area. Try to locate properties within a 20-minute driving radius to Big Tech companies that are requiring their employees to return to the office, even if not full-time, at least part-time.
- Average Square Feet and Two Bathrooms → This credit goes to @Brad Pickens, who shared with me in a recent podcast that we filmed, that you want to look for single-family homes that are around the average square feet for the neighborhood and with at least 2 bathrooms. You don’t need to go with anything that is significantly larger or smaller than the average in terms of square feet, but having at least 2 bathrooms is important for most renters.
So, what exactly is the strategy?
Using the tips above, identify a single-family home that is within your price range. Work with a good real estate agent to negotiate and close the property for you.
Utilize a property management company to rent out the property to good tenants.
*Pro-Tip* if your spouse doesn’t currently work, and is interested in managing the property, then you can save on the expense of hiring a property management company, while also being able to apply for the Real Estate Professional Status if 750 hours per year or more and spent on active real estate activities. This turns the income and losses from passive to active which can then use the losses if active to offset against the other spouses W-2 or RSU’s income. This is a strategy that tends to work well in this instance.
The entire point is to grow your long-term unrealized gain through appreciating while you are working, which in Silicon Valley, growth on single-family homes tends to be strong. I wouldn’t focus on cash flow right now; that’s something that you would want to do when you end up retiring and want to replace your income.
When you do retire, look at areas in other states where cash flow is higher like Cincinnati, Ohio, where there are good paying jobs, but the real estate is less expensive.
Instead of selling your single-family residence and potentially exposing yourself to long-term capital gains, consider doing a 1031 exchange instead to defer the gain. If you hold the property until you pass away, it will get a full step-up in basis and then your kids could inherit it without paying a large tax bill on the gain. This helps you and your spouse and leaves a great legacy for your kids and grandkids.
At Pesta & Pesta Wealth Management, most of our clients in Silicon Valley are engineers, sales, or management executives. If having a diversified, tax-efficient portfolio, that aligns with your goals to include stocks, real estate, and other assets, is something that you are looking for, reach out to our team to schedule meeting.
I’m curious to hear your thoughts, questions, or suggestions in the comments below.
Brad Pickens and Ten31 Real Estate are not affiliated with CWM, LLC.This is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
