2% Rule IS possible in SF Bay Area!
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: