2% Rule IS possible in SF Bay Area!

2% Rule IS possible in SF Bay Area!

Ori SklootPro Member
Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes

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:

30Reply
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Most Popular Reply

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
8y

@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

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61 Replies

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  • Developer · Pleasant Hill, CA · Member since 2016 · 12 posts · 1 vote
    8y

    Great work Ori!!! happy to see you nailing down amazing deals with lots of determination!!! congratulations!!!

  • Ori SklootPro Member
    OP
    Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes
    8y

    @Sean OToole cage homes, coffin homes and capsules....that's frightening to me.  I hope our area doesn't go down that road.  I would like to see more policies supporting small and micro homes.

    @Randy Gleysteen  Cabinets and the quartz counter top are from Granite Expo.

    @Arpan Gurung There are lots of online services that allow you to input an address and find the owner and contact info.  Do a search here on BP and you will find many recommendations. 

    @Yoav K. Good to hear from you....I thought you dropped off the face of the earth, or perhaps went back to Israel. 

  • Investor · Truckee, CA · Member since 2013 · 546 posts · 445 votes
    8y

    @Ori Skloot yes frightening. Or perhaps cautionary. ;-)

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    8y

    You could have bought a C quad OOS and had more cash flow, oh well. I am kidding, the thing about the initial 2% is in places like Bay area it actually is a serious accomplishment. Congrats.  

    Now 2% or 1% peeps might understand these are initial starting points, and many times .7% futures will end up 3%+. Sometimes more important than the initial % is the direction up or down and why these initial percentages are not reliable indicators of future profits or taught in formal university settings, nor found in any textbooks etc. What they might cover instead is spatial relationships (location). 

    Good luck!

  • Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Sean OToole:

    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.

     https://sf.curbed.com/2017/3/30/15127760/homeshare-startup-partition-luxury-apartments-sf

  • Real Estate Technology · San Francisco, CA · Member since 2016 · 262 posts · 265 votes
    8y

    @Ori Skloot

    Ori: Great to see a fellow bay area investor finding deals! Would like to buy you a coffee sometime - will DM.

  • Member since 2018 · 10 posts · 2 votes
    8y

    Killer deal, but I like your appetite for risk and persistence!

  • Real Estate Agent · Pittsburgh, PA · Member since 2014 · 81 posts · 56 votes
    8y

    Congrats and thanks for sharing! This truly shows that with a lot of hard work and determination you can achieve great things. Keep the momentum going!

  • Member since 2018 · 15 posts · 8 votes
    8y

    Ori - First of all, great job. Also living in the Bay Area myself, you are surrounded by sharks - very experienced investors etc. that know how to take foreclosed properties and find other deals to quickly turn them around. I would say you definitely did hard work but there was a little luck involved. Very difficult to get deals like this in the Bay Area - especially on the Peninsula. Glad you had success - Out of the 100 was this the only one that seemed like you could make it work?

  • Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    8y

    I gotta LOL a bit at the kitchen. That's some of the same stuff I use.  Looks like my home depot white shaker cabinets and same SS appliances.  Can't tell by the countertop but I use a lot of white quartz so it looks very similar :)

    Well done!

    You did what most people don't.  You got on the phone (or had someone) and really worked those leads.  Most people just blast out 100000000 postcards (I got 6 of them today!).  Those end up in the trash which makes people think finding a property is 'too hard'. 

    Congrats on showing how it's done.

  • Real Estate Agent · Martinez, CA · Member since 2015 · 13 posts · 7 votes
    8y

    Wow congrats!!  

  • Rental Property Investor · Nevada City, CA · Member since 2017 · 74 posts · 70 votes
    8y

    Great deal! I imagine though you're actually paying more than $390/ Mo on insurance, taxes and HOA fees. Are you assuming holding no reserves for maintenance or capex since you just refurbished everything? Either way, still pretty great numbers, but I'm curious about taxes, insurance and HOA.

    Charlene

  • Jon PetersonPro Member
    Real Estate Agent · Saint Paul, MN · Member since 2015 · 24 posts · 8 votes
    8y

    Awesome work! Its good to know that there are still deals out there for people willing to put in the time/effort!

  • San Francisco · Member since 2018 · 7 posts · 2 votes
    8y

    @Ori Skloot Great post and simply just WOW. Congrats.

    Looking forward to hearing more about your future home runs.

  • Investor · Medford, MA · Member since 2017 · 56 posts · 27 votes
    8y

    Nice job!

    Why did you decide to go all cash?  

    Any reason why you didn't want to save some of it for another property to expand faster?  

    What was your reasoning behind this? 

  • Member since 2016 · 13k+ posts · 12k+ votes
    8y

    @Charlene McNamara

    "I imagine though you're actually paying more than $390/ Mo"

    Valid point, no rental on the planet has expenses that low long term. Probably closer to 40%....$996

    Couple of other minor calculation mistakes.

    2% rule.. gross rent $2490 / $350,000 = .7%

    ROI ($1494 X 12) / $350,000 = 5.1%

  • Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Great story.  It says persistence pays. Congrats.

    Would you say is this a C class Richmond, CA neighborhood?

    Sam

  • Ray DipasupilPro Member
    Investor · Los Angeles, CA · Member since 2016 · 149 posts · 51 votes
    8y

    Inspiring work! Saved your story for future reference!

  • San Luis Obispo, CA · Member since 2017 · 40 posts · 14 votes
    8y

    Hi, I'm new to this, so I don't understand some of the numbers here. You said that you hired  a probate lawyer. How much did that cost you and where is the cost included; in the $95k? Also, the family paid the $50k in back property taxes. Why would they be willing to do that and where did they get the money, since it doesn't look like they could afford it? In any case, nice job and congratulations.

  • Walnut Creek, CA · Member since 2017 · 15 posts · 4 votes
    8y

    Great job!  Awesome education for your nephews!

  • Investor · Lynchburg, VA · Member since 2017 · 1 post · 0 votes
    8y

    How did you access the phone number for the owners of the homes you targeted?

  • Rental Property Investor · Gulfport, MS · Member since 2018 · 113 posts · 133 votes
    8y
    @Ori Skloot I work in Richmond and know this market. If you are willing to make investments in the iron triangle, good for you. This is a D (F if your scale goes there) area. There is always money to be made in war zones, but let’s be clear to everyone that this is the epitome of a war zone.
  • Investor · Los Gatos, CA · Member since 2014 · 14 posts · 4 votes
    8y

    Ori that's fantastic!  Great work.  And just when I thought it wasn't possible to even get close to 1%!  Congratulations!

    - Janet

  • Real Estate Agent · Sacramento/Placer ~ San Francisco Bay Area counties · Member since 2012 · 1k+ posts · 743 votes
    8y
    Originally posted by @Glenn Sullivan:

    How did you access the phone number for the owners of the homes you targeted?

     While Ori was searching the probate file he came across the court-mandated document Duties and Liabilities. This document displays the PR's name, address, city, state, zip code and phone number. One of his nephews more than likely cold called the PR.

  • Real Estate Agent · Los Angeles, CA · Member since 2015 · 218 posts · 111 votes
    8y

    what's a protracted probate?

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