The comparison of San Francisco against Atlanta is one that juxtaposes major cultural and technological epicenters from opposite sides of the country. San Francisco sits in California, and plays host to the innovative culture of Silicon Valley. A vast array of highly acclaimed technology companies such as Apple, Google, and Facebook are headquartered in the San Francisco bay area. This creates a major nexus of highly educated people that contributes to the region’s world-renowned culture. On the other side of the comparison is Atlanta, Georgia. The city is situated in the heart of the Southeastern United States, and is the home of headquarters for many other Fortune 500 companies such as Coca Cola, Home Depot, Delta Air Lines, and UPS. With major corporate representation across a broad array of companies, Atlanta serves as the economic capital of the South.
When comparing two markets against one another, it is important to take a balanced, long-term perspective. This means building a comparison that crosses a reasonable amount of time such as ten years or more. It means including things like cash flow and leverage into the Total ROI calculations between the markets. It also means looking at different time intervals to see how sensitive each market is to the timing of when investors buy, and when they sell.
In comparing the market price levels for San Francisco and Atlanta from January of 2003 through January of 2014, there are a few things that are immediately apparent. The first is that market values for San Francisco rose precipitously during the real estate bubble in the mid 2000’s, fell sharply, and is in the process of recovering. Conversely, Atlanta followed a steady uptrend through the mid 2000’s until it encountered a steady decline that has recently resulted in a price recovery to approximately the same level as they were in 2003.
At first glance, this seems like a “slam dunk” in favor of San Francisco. However, there is much more to income property investing than just price appreciation. If you are looking to purchase a property, there are other factors to consider such as Cash Flow, and Leverage on the price appreciation. In the case of San Francisco, the price appreciation leverages out to a significant gain over the 10-year time horizon. However, the persistent negative cash flow brings the Long-Term estimated ROI of investing in San Francisco down to -3.9%.
On the other side of the ledger is Atlanta, which generates an estimated cash flow rate of 3.6% that is partially offset by modest negative leveraged price appreciation for a Long-Term estimated ROI of 3.0%. As an appreciation market, Atlanta is not particularly interesting. However, the city is much more appealing when viewed as an investment market by analyzing it in light of the total estimated ROI.
What this tells us is that successful investing in a cyclical market such as San Francisco is a matter of successfully timing the market cycles so that the leveraged price appreciation between when you buy and when you sell is sufficient to offset the negative cash flows that you will experience while holding the property.
Changing the time frame of our analysis changes the results significantly. If we shift the purchase timeframe to the aftermath of the financial crisis in January of 2009 through January 2014, the price appreciation picture runs strongly in favor of San Francisco, with Atlanta experiencing a dip in 2012, and a recent regression back to 2009 price levels.
To the casual observer, this provides ample evidence of San Francisco’s relative strength as an investment market. Being a destination city for educated professionals has driven a sharp recovery from the lows experienced after the global financial crisis. However, there is much more to understand if one is to see the full picture.
Examining these markets through the perspective of estimated ROI shows us the impact of leveraged appreciation when the purchase timing and sale timing are conducted perfectly. In this case, San Francisco experiences significant leveraged appreciation, which offsets its negative cash flows to net a positive 18.9% estimated ROI.
On the other side is Atlanta, which is still generating positive cash flows, but is now experiencing a modest amount of leveraged price appreciation to arrive at a 6.4% estimated ROI.
What this comparison shows us is the factors of success when investing in either type of market. When investing in a cyclical market such as San Francisco, success is a matter of correctly timing the market by buying at the bottom and selling at the top. The reason for this is because the negative cash flows experienced over long time horizons erode the price appreciation. On the other hand, success in a linear market such as Atlanta is a matter of patience. By holding onto a cash flow producing property for the long-term, you will be placed in a position to capture the benefits of leveraged appreciation when it occurs, while being protected by cash flows to pay the carrying costs of the property.
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