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written by reader Real Estate

By SoGiAm, July 19, 2016

I enjoy real estate also.
A number of people have indicated
preference for tangible assets so I think there
would be a fair number of participants. – Hendrixnuzzles
So here we go:

This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.

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Vijay
July 19, 2016 10:02 am

Hi Ben, Where is the subscribe button? TIA

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Vijay
July 19, 2016 10:03 am

Thanks, it showed up after I asked the question.

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hendrixnuzzles
July 20, 2016 12:24 am

Hi everyone. Some thoughts and stories from my first modest activities in real estate.

A while back I became convinced that world central bank and government policies will eventually result in high monetary inflation and loss of value in fiat money, and that real tangible assets would benefit. And there were bubbles in the assets that are attracting the cheap money and benefitting from low interest…specifically stocks, bonds, and real estate.

The risk in the bubble assets is mostly interest rate related, and this is especially true for real estate. Yet I still decided that direct ownership of real estate was attractive. And I have read several advisories that warn readers in the strongest terms AGAINST
real estate.

My situation is that I am retired, I have modest assets, and I need income. My thinking was as follows:

1. I enjoy shopping for and evaluating residential real estate, and I am in an area that I believe will have good residential and demographic growth.
2. If the purchase can be for cash, I do not run the risk of overleveraging, but I can still get capital appreciation if I buy cheap enough in the right location.
3. The income available as a landlord compares favorably to instruments available in the stock and bond markets, and I need income.
4. Selection of the proper tenant can mitigate the risk of an overall downturn and increasing unemployment or under-employment.
5. Real estate is unlikely to be confiscated by the government.
6. While relatively illiquid, lines of credit against owned real estate can be opened to give access to cash if needed.
7. Even if the nominal resale price goes down, there will be rental income; assuming one can find a good tenant.

General caveats:
–One needs to be interested in residential real estate.

–I think you must be in an area that has at least a moderately favorable growth outlook.

–It is adviseable to own property that is nearby and therefore manageable.

–The property must have prospects of good cash flow.

–Pastience is a virtue. Find a situation where the other side is under time pressure, or has capitulated and lost patience. If you buy “at the market”, then be very confident of the future prospects and growth of the area.

I am in North Carolina, which is a good target area for northern tax refugees looking for places to retire. So I felt the future prospects of the region were good enough to take a chance.
When I moved here, there was still a fairly large overhang of foreclosures from the 2008 crash.

CASE #1. The developers like to build and sell detached homes because they make more money. However, I believed that a lot of
retired people would prefer townhouses or condos that require less maintenance effort and a more carefree lifestyle. They are also easier to maintain for the landlord. But there is a relative shortage of these, compared to detached houses.

Accordingly I targeted townhouses and condos. Three years ago, I found a 1200 square foot townhouse that was 7 years old, in a convenient location and in good condition. It was a foreclosure and my offer to the bank was accepted. The price was $84,500, or about $75 dollars per square foot…below the cost of new construction.

On the income side, the unit is rented for $950. My tenant is a married couple, both working, one in government. My HOA is $175 per month and my taxes are $95 . So I am grossing $950×12=
$11,400 per year and my expenses are $270×12=$3240.
This is a net of $8160. On the purchase price, this is a net return
of 9.65%, much better than I can expect from a bond or stock dividend; and I also might benefit from price appreciation.

It is true that there are other expenses; this unit required a new
major appliance, and also some HVAC repair.

But it is also true that I have gotten some price appreciation.
Identical new units in the complex are listed at $120,000, so my opinion at the moment is that I could realize $105,000 or so if I sold my older unit. After an agent’s fee, let’s call it $100,000…a gain of $15,500, or 18.3%. But why should I sell it ?

CASE #2. I ventured into a small undeveloped subdivision of six lots. The original developer had failed. There were no buildings on the lots, but there were approved plans, environmental and zoning approvals, state standard road, streetlight, water, and electricity. The HOA was also filed and set up.

I bought the lots for $48,000, which I thought was a bargain as the original developer had sunk over $300,000 into the plans, approvals, and improvements.

But on this one I lost patience, and sold out for a very small profit. My timing was just off, three months after I sold, land prices exploded. I broke even, but could have doubled my money if I had waited a few more months. The buyer developer immediately started building and the six houses are sold.

CASE #3. I took the money from the lots and found another townhouse. The condition was only fair but it had 1500 square feet and four bedrooms. I was able to buy it for $66,000, or $44
per square foot. HOA is $150 and taxes are $90.
It is rented for $900 a month.

Income $10,800/yr, fixed expenses $240/month=$2800/yr,
net $8,000/yr. 8/66= 12.1% return, plus a chance of appreciation.

I have no firm picture of appreciation yet on this property, but if you can buy something halfway decent for less than $45 per square foot, you are doing OK, at least where I am.
+++++++++++++++++++++++++++++++++++++++++++++++++
In the other threads we try not to disclose position size.
I can refrain from disclosing prices if it offends, but I think that a
frank discussion of real estate will benefit from actual prices, as well as square footage and price per square foot.

I have only a few other properties in addition to those discussed, and my residence. I am sure there are many readers who have much larger investments than me, and by no means do
I disclose prices and financing to brag or show off.
If there is a consensus to discuss these matters without pricing,
I will refrain from disclosing prices in the future.

Hope this gets the ball rolling and is helpful to someone out there.

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hendrixnuzzles
July 20, 2016 10:39 am
Reply to  SoGiAm

What do you think the mistakes were on this property that you could have avoided ?

With $18 K investment, at the end were you able to break even ?

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Griffin
Griffin
July 20, 2016 11:40 am

I’l start by saying I’m looking to buy my first house at the age of 70. The one thing I’m not sure about is insurance just what does it normally cover, forget earth quake, flooding, and weather. What I’m concerned about is how much of the structure is covered from termites, dry rot, a tree falling on it, or a car running in to it.

HN started with some nice examples and mentioned pricing. I don’t know that we can get away from stating actuals in our area and from left to right coast. Even in the San Francisco Bay area from San Jose to SF (50 mi) prices will double, triple, and quadruple for the same relative accommodations. My Dads’ house (3bdr, 2ba, 1000sft, 2 car g) in San Jose when new was sold 6k, bought in 1968 for 28k, and sold in 2008 for 500k.

How much do you consider the buildings structure, is it enough to ask the owner if the building is structurally sound. I’m knowledgeable about a buildings condition as far as what can be seen.

I hope this isn’t far off topic and of some help.

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hendrixnuzzles
July 20, 2016 12:13 pm
Reply to  Griffin

I always get a professional appraisal and inspection. IMO it is a cost of due diligence that should not be dispensed with.

The SF Bay Area is so expensive and pumped up, I would not begin to offer an opinion about investing there.

I lived there for twelve years and benefitted greatly from rising prices. But they went even higher after I left. Thought I did well,
bought for $340 and sold for $750. But five years later the property sold for $2.5 million.

Right now, my daughter lives in San Francisco. She shares a modest and ordinary 4 bedroom railroad apartment with 3 other young execs. They pay $2,000 per month EACH.

How long and how high this can go on is anybody’s guess. Like I say, that market is so crazy there I would not venture an opinion.
These bubbles can burst with painful consequences. Entire towns can go under water.

Where I am, one can buy decent properties at costs not too far from construction costs, and I believe there will continued net in-migration from high priced areas. So I am in a much different area as far as price risk is concerned. Your San Jose example is instructive…a 1000 square foot home selling for $500 per square foot ! There is an inherent risk when paying such a high price for an ordinary commodity. Personally I would not consider anything so far from intrinsic construction/replacement value as an investment. If you are going to live in it, that is another story.

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hendrixnuzzles
July 20, 2016 12:24 pm
Reply to  Griffin

Griffin…why not google the San Jose house and see what it is worth now ? The people who bought in 2008 have likely taken a haircut.

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Griffin
Griffin
July 20, 2016 1:47 pm
Reply to  hendrixnuzzles

That was interesting. I was wrong on the sqf it is 1200. The house was sold 10/12 for 550k cash. The real estate companies are estimating current value at 900k, unreal. There is a track, 1/2 a block from a busy mall, and 4 blocks from 2 freeways. There is another house on the south(freeway) side of street 1800 sqf est price 1.2 mil. Oakdale is about 100 miles from the bay area, and I was a little surprised when the donut started opening at 4 in the morn to sell donuts. Now I have to go to the donut shop before 7 in the morn to get my favorite donuts. Whats the world coming too. :^(

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hendrixnuzzles
July 20, 2016 4:15 pm
Reply to  Griffin

$400 a foot…$450 a foot…$500 a foot…close enough for horseshoes. At over $400 a foot I am a seller.

When I say ” new construction”, I do not mean to say I think one should build. It is simply a measure of the intrinsic value of housing as a commodity…what it costs to replace.

Another simple measure is to compare what the rental value is compared to the theoretical selling price. The monthly rental should be
HIGHER than 1.0% of the selling price. Lower than this, one is counting on price appreciation more than cash flow to make anything.

Tell me, what do you think the $900k house can rent for ?

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Griffin
Griffin
July 20, 2016 5:23 pm
Reply to  hendrixnuzzles

I just took a quick look on craigslist and I’m shocked 2.5-3.5k a month and there seem to be plenty.

http://sfbay.craigslist.org/search/sby/apa

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hendrixnuzzles
July 20, 2016 12:18 pm
Reply to  SoGiAm

I agree about buying foreclosures. What is good about them is that the banks who own them are completely unemotional about the price and are relatively unfamiliar with specific attributes of the property. They only look at what their loan is, and have guidelines about the loss they can take. There is no emotional tie to the property, or subjective opinions about its worth.

The process takes a little longer, one needs to be patient.
And the very best ones get snapped up by agents or those close to them. But it is worth the trouble.

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hendrixnuzzles
July 20, 2016 12:22 pm
Reply to  hendrixnuzzles

Foreclosures…and one should make low all-cash offers, which the banks will pay attention to.

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Griffin
Griffin
July 20, 2016 1:13 pm
Reply to  hendrixnuzzles

I’m a firm believer in cash, cash will get you a discount more often than naught. I your interested in a used car and the owner is making payments check what the pay off is.

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Griffin
Griffin
July 20, 2016 2:02 pm
Reply to  SoGiAm

I’m too old to really consider new construction. If I was I think I would consider hay bales and adobe they are cheap around here. I’ve found several houses close to what I’m looking for. I missed one because it was originally listed too high, the price dropped. Before I could figure what stocks to dump it was sale pending.

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hendrixnuzzles
July 20, 2016 3:59 pm
Reply to  Griffin

So the market is hot where you are.
Are you going to live in it, or rent it out ?

I’ve had a few get away. It’s tough not to get stampeded in a hot market.

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Griffin
Griffin
July 20, 2016 5:04 pm
Reply to  hendrixnuzzles

As I understand it the Silicon valley never really cooled off that much. Thats why we have commuters driving into Silicon Valley for work, even with 2+ hr commute each way. The one that got away was .6 acre, 3br, 2ba, mfg, needs removed or repaired, and thats about all they said 179k. I emailed them for more info got zip for an answer, and then it was listed for 125k. It shows sale pending one Realtor (the originator) web and the others show available. There is another more in the country 1.3 acres, 3bdr&1bdr homes, shop, fruit trees, and some landscaping 169k cash, its been there a while. The are 2 & 3bdr homes from 110k up in town. I want .5 acre up, shop, trees(oak), 2bdr, in country.

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hendrixnuzzles
July 20, 2016 5:45 pm

Hi Griffin,

If you can only get $2500 to $3500 a month rent for a $900,000 real estate investment, you are going to come to grief on cash flow and profit (unless your cost basis is a lot lower than $900,000). You also need to know what the taxes are…more fixed expense that must be paid for from your rent receipts.

From what I understand you to say, there are lots of similar properties for rent. This means you will be stuck on the low end of the rent scale for similar properties.

If you paid all cash for a $900,000 property and got $3000 per month rent, you are making $36,000 clear. Thus you make 4.0% gross (36/900) and you still must pay taxes and whatever other maintenance expenses pop up.

On the other hand, suppose you found someone who was willing to lend you 100% of the price with a 4.0% fixed mortgage.
You can see that the debt service is going to be equal to the rent receipts, and you will be going into pocket for taxes and expenses. And you will have a severe problem if a tenant pays slowly, or not at all, or if the property is vacant. So there is no chance at all for positive cash flow, and profit will be a mirage unless you can sell for well north of $900,000 at some point.

There may not be sound investment property opportunities in your area. It may be too overpriced in relation to rental values.
From the sound of it, this appears to be the case to me.

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Griffin
Griffin
July 20, 2016 9:04 pm
Reply to  hendrixnuzzles

I only use Silicon Valley as an example because I was born and raised there. I move to Oakdale in 2004 and I’m much happier here. I have considered other areas and have been looking in Oregon on craigslist and at;
http://www.move2oregon.com/
The property there seems to be much more reasonable. I just haven’t found a place to get exited enough about to cut myself a little short. For the last week there has been more red in portfolios than I care for and MUX took a beating today.

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hendrixnuzzles
July 20, 2016 5:56 pm

Griffin…to earn 4.0%, you can buy PFE for $36 and take their dividend.

If you are looking to buy a residence for yourself to live in, the main question is whether you want to live there and can afford it. At my age I am not do concerned with the resale of my residence because I intend to live in it.

Question for you. Since you want to be in the country anyway,
why not consider other areas in the US where there are lower costs ?

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hendrixnuzzles
July 20, 2016 9:39 pm

Hi Griffin. I looked up Oakdale and see it is near Modesto.
I am somewhat familiar with that are, my Dad was there for a while.

Glad to see you are not in Silicon Valley…unless you bought property years ago. If you like being in the country but near a small town, there are a lot of great choices for you all around the country. If you like where you are, at least the San Joaquin Valley doesn’t seem completely insane on price. Hot in the summer, though.

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Griffin
Griffin
August 28, 2016 12:34 pm

Interestin article on organics. One of the properties I’m looking at is five acres on a road that runs along side a water reservoir, good fishing. I’ve had thoughts of a victory garden, produce stand, and certified organic, I wunder.

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hendrixnuzzles
August 28, 2016 2:42 pm
Reply to  Griffin

Is the acreage farmland ?

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Griffin
Griffin
August 28, 2016 3:09 pm
Reply to  hendrixnuzzles

I think it has to be, as in pasture. There is a lot of checking I’m going to have to do. I’ll have to check to see what the building code is, how good the well is, and what limits there are on habitation. I haven’t actually seen it in person, but I will make a point this week to visit it and take some pictures.

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Griffin
Griffin
August 28, 2016 3:33 pm
Reply to  SoGiAm

I hope as in ARTH.:)

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arch1
August 28, 2016 3:16 pm
Reply to  Griffin

Before committing yourself you need to find what the zoning is on the land, how much road access is allowed , if structures are allowed such as a produce stand , if a parking lot is allowed and required and how large, if water is available for irrigation and vegetable cleaning. if a well is allowed, how water runoff from the land is handled ( that close to a reservoir that could be a major concern) how fertile the soil is ( you should get it tested for mineral content. If you need to have your own lane to access your growing areas with equipment such as tillers and produce wagons and tractor, if a residence is allowed, if sales of secondary produce that can be eaten on premises is allowed( salads cooked-sweetcorn, baked potatoes, soups etc).
Remember commercial gardening is labor intensive and if you work the land yourself you are competing with those unlawfully in this country and if you hire them you are breaking the law. By the way you are not allowed to ask them but must accept whatever they show you as proof of legal status. Those are a few things to be aware of but be aware that every year brings more regulation and restriction of what you can do on or with your land.

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Griffin
Griffin
August 28, 2016 4:08 pm
Reply to  arch1

I’ll be checking into all of that except the run off, with organic that shouldn’t be a problem. The property is almost six acres on a gentle to medium slope with a 3bdr, 2bath house. The house appears to be vacant but who knows for how long. Considering the drought here in California, and the way they have been planting almond orchards no telling what the flow rate on the well is unless tested. I’ll have to consult with the local AG authorities for land and crops and who knows what else.
Considering the slope of the land I don’t know what labor might be involved. I’m 70 years old so I’ll need help. I might be able to kill two birds with one permit. The front part of the property has some nice trees on it that would provide shade for parked RVs. My Dad rebuilt a trailer park so I kind of know what’s involved to do that. I may also put some RV pads further back on the property. There is a rumor that migrants like RVs. There are a lot of possibilities and a lot of check to if it can be done.

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hendrixnuzzles
September 29, 2016 9:26 pm

What I intend to do with real estate…fall 2016…cash, farms, and REITS

Hi all. I am a typical retired guy with modest assets. I believe in hard assets.
And I need income. Accordingly, more than 50% of my investment capital in residential income property, which makes sense given my outlook and needs.
.
The rest of my investment capital is in gold and silver (or surrogates), resource assets, small cap biotech, and some conventional stocks. Not a lot of income there, and capital appreciation is possible but not a sure thing.

I have become a little uncomfortable with my total allocation to residential real estate, Were interest rates to rise, or were there to be a real estate bust in my market, it would be bad for me.

I do not think either negative scenario is imminent. But real estate transactions take a while to complete, if I wait it may be too late to get out at a good price. So I have decided to sell one of my properties.

The property in mind has both the largest dollar appreciation and worst cash flow of the properties I own. Even though it is a desireable property, I am going to sell it.

I intend to use the proceeds in a combination of ways. The exact allocations are not decided yet. All opinions subject to change.

The categories I am considering are as follows:

1. Cash reserve
2. REITS…backed by real estate and they provide some income with more liquidity than a direct real estate holding
3. A smaller-priced income property…smaller capital risk with higher % return
4. Farmland or agricultural investments, if I can find suitable ones in the securities markets.
5. I might deploy some cash into the stock market, if there is a severe decline in prices of income stocks that I like.

Open to suggestions and ideas.

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jimt47
jimt47
January 14, 2017 3:05 pm

I don’t know if anyone is still checking this thread, but I am curious about opinions concerning renting versus buying in the S. F. Bay Area (east bay). We will probably move there in two years – I will be 72 and my wife 65. Our current housing in a CA coastal area is provided for us as part of our job compensation (for past 30 yrs). Buying is financially possible, but is it smart at our age? I realize there is no perfect answer, just curious if there are opinions from those with more experience in real estate.

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Griffin
Griffin
January 14, 2017 7:14 pm
Reply to  jimt47

Jim, I can’t recommend the SF Bay area unless you have some particular reason to be there. The traffic is going to bad after work hours. What ever you price now won’t be the same in 2 years. Start with San Fran as your highest prices and radiate out for lower cost, the east bay is lower than the SF pennisula. If you don’t mind living on the coast check Half moon bay south to Santa Cruz even as far south as Watsonville. Might look at the north bay there are area there that might be reasonable.Since the late 60s I’ve worked with people that commuted 50-60 miles to work. From 1997 to 20004 on occasion we would travel from San Jose to Sacramento on hwy 280, 580, and 99. The traffic starts building about 2:00pm and is bumper to bumper from Pleaston-Livermore to hwy 99. There are now people that commute as much as a 100 miles. Check out this house in San jose at 656 North Clover San Jose, CA 95128. It originally sold new for $6K. The Executer of my dads estate had Century 21 sell in 2009 for $550K. IIRC it sold again about 2013 for $775K. Look at craigslist SF bay area you should be able to find rentals and houses for sale. I’ll be glad to help you in any way I can.

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hendrixnuzzles
January 14, 2017 9:38 pm
Reply to  Griffin

The prices there give vertigo. They could stay high or even go higher…it’s just hard to imagine.

When I left the Bay area, and the sales price of my property was one reason…of course, prices went even higher after I left.

Today’s world is very unpredictable. I worry about higher rates, so I am even concerned about much less expensive real estate that I own in the Southeast. In a devaluation, economic crisis, or other higher-interest scenario, liquidity and nominal prices will be smashed. But I need income, and at least rental property is a real asset that provides income.
But no ARMS or big mortgages for me.

Of course, if you can afford it, the Bay area has some wonderful places to live. It is one of the few places I have been to where people will make career, lifestyle, and income sacrifices in order to live there.

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jimt47
jimt47
January 15, 2017 9:16 am
Reply to  hendrixnuzzles

If the next two years are kind to our biotech holdings, the sacrifice will have less of a sting. $AKAO has been a nice start.

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jimt47
jimt47
January 15, 2017 9:13 am
Reply to  Griffin

Thank you, Griffin. Our reason is the desire to be near our children, simply and essentially. So there will be no work commute involved, and, while traffic is always an issue, being retired gives you timing flexibility. We know that it makes no pure economic sense to retire in a CA metro area, but hope that a solution (either buying or renting) can be found.

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hendrixnuzzles
January 15, 2017 9:54 am
Reply to  jimt47

Live with the children !

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Griffin
Griffin
January 15, 2017 12:56 pm
Reply to  jimt47

I thought there might be a particular reason. Then thinking ahead as your are is good as there are always deals to be had for those with patience or time. I moved to the Central Valley about ten years ago and haven’t been back much since. The coast may still be the best place to look again if you like the coats. Santa Cruz is about 30 miles from San Jose has a board walk and Yacht harbor. Has always been a fun spot for a day trip so much so that they did a study of the ‘undesirable transient element’. I’ve always for some reason thought of it as a retirement spot. A little further south is Capitola a nice littel beach resort a few amusements next to the beach. A creek that feeds into the bay at the beach. A bunch of little rentals right on the beach. When I was growing up some of the rentals were rented on a yearly basis. I mention these as they mighht be a fun place for the Grandchildren(?). The East Bay, Milpitas to Oakland, I’ve never really had any good feelings for it always seemed to be hotter and little more barren than the rest of the bay area. I would check craigslist regularly, and Good Luck.

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