2% Rule IS possible in SF Bay Area!

61 Replies

I’ve heard many times on BP that the 2% rule is impossible in the SF Bay Area…if you are lucky, maybe you can break 1%. But my recent experience has shown me that with a lot of hard work and perseverance it is very possible. I wanted to share with you all my success story.

I found the property through the hard work of my nephews (age 16 and 17), who I tasked with some D4D (Driving for Dollars) last summer I paid them a low wage, but promised a percentage bonus if I closed a deal within a year on any of the houses they found for me. They got a map of the area and drove around Richmond and Oakland taking notes on any worn-down properties that they spotted. They used Property Radar to get any pertinent information and to assign the properties to a list. They worked for me for two weeks and by the time they were done I had a list of over 100 properties.

Next, I started mailing and trying to contact the owners of the properties. A buddy of mine on the East Coast was looking for part-time work, so I hired him to look up property owners and call them. Once he established contact he would connect me with them so that I could get more info and make a purchase offer.

This led me to talking with the “owner” of one particular property, a condo, in the Iron Triangle area of Richmond. The owner on title was deceased which led me to speaking with the owner’s ex-wife and two grown children. It turns out that the owner’s estate had gone through a protracted probate, but the property was never dispersed through the probate process. The ex-wife thought the children got the property, and the children thought the property had been lost to tax default. It was news to all of them that this house was still sitting there and technically didn’t belong to anyone. I got their permission to go into the house, so that I could assess the repairs needed before giving them a purchase offer.

The house had been abandoned for years and had been seriously vandalized (see Before Photos below).  The walls had massive holes where all the electric wiring and copper had been ripped out. There was trash everywhere. Someone had set a small fire in the kitchen and scorched the floor and some of the surrounding walls. The bathroom was a hazardous waste site. In short, I had plenty of work cut out for me if I bought this property.

I negotiated with all of them a purchase agreement, which would involve my hiring a probate lawyer to help unravel the probate that occurred and try to get them the legal authority to sell me the house. I knew there was a chance that I would spend a lot of energy and money to make the purchase happen, and so I offered a price that was well-worth the risk to me. They signed the purchase agreement in November of 2017 and I opened escrow with a local title company.

The title company told me what documents I would need to show them from the probate case to allow the heirs to sell the property. With the guidance of the probate lawyer, I went down to the Solano County court and pulled the old file (which was in “deep” storage because the case had closed ten years prior). I shuffled through hundreds of pages and learned all about probate by reading this one case. I kept providing the title company with the documents they requested, they would forward it to their underwriting officer, who would then request further documentation. It was a painfully slow and convoluted process, but finally culminated in my buying the house in May of 2018, six months after I signed the purchase agreement.

It took me another three months to finish the rehab and get it back to brand-new condition (See After Photos Below). Finally, I was able to rent it out on August 01, 2018.  Phew!

Here are the numbers on the deal:

Property Details

  • 1.Condo in 4-condo building.
  • 2.3 bedroom, 1 bathroom
  • 3.2-level. 3 bedrooms and bathroom all upstairs
  • 4.Laundry closet
  • 5.900 square feet

Purchase and Rehab Details

  • Bought for $95k (including fees) all-cash
  • Sellers paid $50k in property back-taxes to bring property to good standing
  • Had to get a bond because there was a small loan against the house still on title and the note holder had since gone out of business and could not be located.
  • Rehab ended up costing $36k. I am a contractor and had my own guys do all of the work. I had hoped to spend $20k but underestimated some of the costs and also splurged on some of the rehab (I installed a new high efficiency central furnace, on-demand water heater, all new appliances, etc)

Rental Details:

  • I posted the property on craigslist for $2,490 and had one open-house
  • Found great tenants who signed for a year lease at $2,490. Tenants pay for all utilities.

The Numbers:

  • Gross Rent $2490
  • Net Operating Income: $2,100 (I am managing myself)
  • All in Cash: $131,000.
  • 2% Rule - Gross Rent of $2490 / $131,000 = 1.9%. Close enough!
  • ROI (return on investment) – ($2,100 x 12)/$131,000 = 19.2%
  • ARV (after repair value) - $350,000
  • Current Equity - $219,000

Before Photos:



After Photos:

@Ori Skloot that is a GREAT story, especially the part about getting the teens to work for you!  I am sure that the long term positive effect you had on them was probably even greater then the transformation of the condo!

Congratulations!

-Arlen

@Arlen Chou    Thanks Arlen!  Indeed, you are right about nephews.  The older one is starting college in the next week at Macalster College in Minnesota.  He now wants to buy a house when he moves out of the dorms and house-hack his way through college.   I wish I had done that when I went to college!

Great job.. there are deals every where and what I am seeing is contractors like yourself are starting to become investors more and more.. this Is one reason in our area investors who have to hire a GC are having a hard time competing against GC/investors who can do it all themselves..  

the east coast people are going to go UGH 350k ARV for THAT lol..

@Ori Skloot strikes again! Love hearing stories like this.. 

Goes to show that there are cash flow possibilities (and huge value add) in the Bay Area, and all you have to do is work to find them. 

Congrats my bro! 

Originally posted by @Ori Skloot :

@Chris Mason I'm going to come knocking on your door to get a loan on this so that I can close on the loan after 6 months from purchase date.    

 I'm going to email your "before" photos to our appraisal management desk and say something like "hey guys, we should be able to finance this right?" and get a response of something like "um, Chris, we need to talk..." Then after the refi closes I'll dig up that email and forward it back to them. :P

Grats, by the way. Killing it... again!

@Chris Mason   So we should start the process in month 4-5 right?

@Jay Hinrichs  I sometimes can’t believe the prices myself in this area.  Rents in Richmond make it a great place to buy/rehab/hold.   When are we going to do a pre-fab ground-up deal together?  I still think that’s the way to go. 

Originally posted by @Ori Skloot :

@Chris Mason   So we should start the process in month 4-5 right?

@Jay Hinrichs  I sometimes can’t believe the prices myself in this area.  Rents in Richmond make it a great place to buy/rehab/hold.   When are we going to do a pre-fab ground-up deal together?  I still think that’s the way to go. 

 having dinner tonight with my partner that has the pre fab container manufatoring company.. don't know if he can deliver to Richmond though he is approved in Oregon..  those would be perfect. for Richmond skinnies.. 

Account Closed Thanks brother.  So glad to hear about your successes in Oakland. Next lunch is on me.  Keep up the good work!

Originally posted by @Ori Skloot :

@Jay Hinrichs oh man, if we could plop those things on a 2500 sq ft skinny lot in Richmond we could be killing it.  Keep me posted. 

 here Is the link check It out

https://www.relevantbuildings.com/   

Originally posted by @Ori Skloot :

@Chris Mason   So we should start the process in month 4-5 right?

@Jay Hinrichs  I sometimes can’t believe the prices myself in this area.  Rents in Richmond make it a great place to buy/rehab/hold.   When are we going to do a pre-fab ground-up deal together?  I still think that’s the way to go. 

 Yup, six months is closing to closing.

You're a few months out, peruse this thread to get the most out of the appraisal. 

  • Gross Rent $2490
  • Net Operating Income: $2,100 (I am managing myself)

All Operating Expenses are 16% of rent. That's pretty good. I've had condos with HOA costs more than 16% before, so you selected a good property.

@Matt K. yeah I guess rents don’t scale as much percentage wise compared to prices...it’s crazy that I’m getting $3,000 for 3/1s (800 sq ft)  in deep East Oakland. And these are in apartment buildings not SFRs. 

Originally posted by Account Closed:

@Matt K. yeah I guess rents don’t scale as much percentage wise compared to prices...it’s crazy that I’m getting $3,000 for 3/1s (800 sq ft)  in deep East Oakland. And these are in apartment buildings not SFRs. 

 I was in jack london 08/09 .... 1250 for a freshly remodeled one bedroom... then moved to WC to a 2/1 for 1500 lol. Looking back, really should of kept the jack london place (actually had chance to buy it).

Originally posted by @Matt K. :
Originally posted by @Saj Shah:

@Matt K. yeah I guess rents don’t scale as much percentage wise compared to prices...it’s crazy that I’m getting $3,000 for 3/1s (800 sq ft)  in deep East Oakland. And these are in apartment buildings not SFRs. 

 I was in jack london 08/09 .... 1250 for a freshly remodeled one bedroom... then moved to WC to a 2/1 for 1500 lol. Looking back, really should of kept the jack london place (actually had chance to buy it).

Same time I was just across the estuary in Alameda, high rise with a great Jack London view. SFRs in East Oakland going for $50K and I made the dumb move of buying $5K houses in Detroit instead.

We all have our regrets... but it looks like both of us found a market we like and have begun to capitalize...

What an inspiring story. I lived in the Bay Area for 30 years and know how rare those gems are; finding it and polishing that turd took determination and skill! Congrats! If that can be found and harvested in the Bay Area it can be done in any market! Thanks for going into detail including pictures with your story. I am going out to look for some kids with a drivers license right now! Kudos!!

Congrats @Ori Skloot ! Amazes me how many people pass deals down the street for stuff across the country.

While the prices may seem crazy to those elsewhere, I think cage homes (yep that's a thing) will be part of the story by the peak of the next cycle in Bay Area. Check out: https://www.facebook.com/Vox/videos/18316085836022.... A friend's kid working in tech is renting a master bedroom CLOSET (walk in) in SF for $900/mo. In the right location you could probably rent the nice cages shown in that story already. Having visited Hong Kong, it opened my eyes to where we may be headed. Makes SF today feel quaint, and relatively cheap.

@Ori Skloot , Nice work Ori. I was scratching around the bay a couple weeks ago, and it sure looks like you found a nice property. And what a great experience dealing with probate situation. Hey, out of curiosity, where do you get your cabinets. They look a lot like the ones I have been using?

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