What do you think of this deal?

Question

Hi Guys,

I'm about to go into contract on a property, and want a second pair of eyes on this deal:

The property is a duplex in Oakland CA in the San Antonio park Neighborhood in the 94606 zip code. One unit is a 3/1 the other unit is a 2/1.

I offered $546,000 with a 10K credit from the selller. My total loan amount is 536,110.

I'm using an FHA loan, and the mortgage breakdown looks like this:

Mortgage

$3,938.97

Principle & Interest

$2,669.67

PMI

$468.65

Property Tax

$650.65

Fire Insurance

150

I'm estimating $2,000 in rent from the 2/1 unit and I would live in the 3/1 unit with 2 rooms mates. Room mates would pay $800/month each. So total income when I live in it is 3600.

Other expenses look like this:

Property Management 11%

$550.00

Vacancy 5%

$250.00

Repairs 5%

$250.00

Total Monthly Mortgage + Expenses+ Utilities

$5,308.97

I would have the tenants pay Electric and Gas. I would pay water and trash.

I would also plan to move out in 1-2 years. When I move out, I'm projecting being able to get $3,000 a month for a 3 bedroom unit.

Another opportunity I have, because of how the property is laid out, is to convert a storage room into a studio or 1 bedroom unit. And I can get extra income from that.

-Danny

Account Closed · Answer

You don't need Property Management at all. You are living in the property. Read this website inside and out, read some books, and bam, you've saved thousands a year in PM fees.

Even when you move out, why would you need to hire a Property Manager? Do it yourself, until you reach 20 units, or get to a point where you can't stand being a landlord anymore.

DG A. · Answer

Thomas S.

No, I don't have a sizable reserve right now. But, I do plan to move in and get room mates. So, I should be able to carry a loss for the first few years. Also, the house should appreciate, and I should be able to remove PMI from my loan ($468/month).

I make a pretty good income, and I have access to credit in a major emergency.

Right now appreciation in Oakland CA is pinned at about 7% per year for the next 2 years: http://www.bizjournals.com/sanfrancisco/blog/real-...

If that holds true, I should be able to roll out of PMI in 2 years, as I am getting the property at a small discount. I believe it will appraise for ~9% more than my offer.

DG A. · Answer

@Ben Rice

It turns out I moved into a completely different duplex. Everything seems to have worked out. @Conor Hesch is the man!

Ben Rice · Answer

@Daniel Gonzalez - How did things turn out?

@Wes Brand - Have you used or have experience with the PoppyLoan? Recently heard about that.

Conor Hesch · Answer

I have a good idea....can you message me about it?

Joshua David · Answer

Its all about the numbers. It's good to be ambitious but by your description of that deal, I'm estimating that you should have at least 20-30k in reserves minimum.

DG A. · Answer

@Wes Brand

Roger that. I intend to move into the larger 3/1 unit. So when I move out, I can kick out the room mates, and rent the property out at market rate in 1-2 years time. Assuming tech-job growth flattens, and does not take a down turn, rent should continue it's climb.

Also, there are a couple opportunities to expand this property. There is an existing "storage room" in the lower unit that you have to walk "outside" to get to. The entrance to that storage room is 3 feet from the back door roughly. So, I just need to enclose the entrance to that room by building a 6/7 foot long hallway, and adding a closet in the storage room (it has a window). That lower unit can become a 3/1. Part of the upstairs unit over-hangs an empty space in the back. I can potentially build a studio or a 1/1 in that space to turn the duplex into a triplex.

Lastly there's enough room for an "in-law" unit to get built in the backyard. I can probably drop a pre-fab in there and get all the way up to a 4-plex. The property is zoned RM-2, I should be able to expand it up to a 4-plex with that zoning right?

These are the expansion opportunities. I gotta figure out how to get the money to build that stuff though.

Wes Brand · Answer

@Daniel Gonzalez Be aware that when you move out the unit becomes subject to rent control in Oakland, which means "set the prices where you're happy BEFORE you move out". it's reasonable, I'd try to get closer to lake merritt or a bart station if I were you. If you're willing to put up with a rougher neighborhood there are places near fruitvale and coliseum that would be cashflow positive from day one (but they're rough areas and might not appreciate). You can also do a decent job with a large SFH near one of the west oakland bart stops, something a rougher area where you rent rooms on airbnb. Most things in west oakland near bart are going to be appreciating.

Also, if you have income but low-ish reserves, make sure you check out poppyloan.

Chris Mason · Answer

@Daniel Gonzalez assuming your P&I payment and loan amount were accurate, you should be doing a little bit better in interest rate that I just backed into. Not "zomg!!!!" better, but about $100/month or so.

FHA doesn't (or at least shouldn't, individual lenders can add on whatever BS they want) have a loan level pricing adjustment for unit count.

David Ferrette · Answer

@Daniel Gonzalez

If you have an FHA loan then you cannot get rid of PMI unless you refinance the loan. But it looks to me like you are buying for appreciation (aka hoping/praying prices will go up) and not for cash flow. You will be hemorrhaging cash each month as the rent you take in doesn't come close to covering all of your costs. Also, your vacancy and repairs should be closer to 8-10%. I also don't see a cost in there for Landlord insurance which you need and the bank will make you have. You won't find may pros (I am not one) saying that buying a negative cash flow property hoping that it appreciates in the long run is a wise investment. Many many people have been burned by just this scenario.

What do you think of this deal?

What do you think of this deal?

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12 Replies

Mortgage	$3,938.97
Principle & Interest	$2,669.67
PMI	$468.65
Property Tax	$650.65
Fire Insurance	150