Hello bay area dwellers, I have been thinking of getting started in real estate by investing in a (MFR) in the bay area. I crunched some numbers to come up with cities that offer highest rent/price ratio (in theory) when looking from high level. I have only included BART cities in the east bay to limit my search to fewer markets. I have not included Oakland as I think that it's own beast with may sub-markets. Following is a compilation of data I came up with by using city-data.com. Pittsburg, Richmond, Hayward, Concord and San Leandro seem to be viable options for cities with median price ratio below $500,000, with Pittsburg offering highest rent/price ratio and no rent control. Rent control rules for all these cities are as follows: Pittsburg - None Richmond - Multi-unit homes (including duplexes) built before 1995 are rent controlled. Single family homes, certain small second units (“granny units”), and rental of a room within a home are NOT controlled. Hayward - A landlord must own at least five units in the City of Hayward for the Hayward Rent Ordinance to apply. a tenant who rents a single family home after January 1, 1996 cannot be covered by the rent protection Concord - No San Leandro - No rent control. But rent review board ordinance applies to complexes with three or more units Of course, good and bad deals can be found in each of the above cities. But, would love to know what others think on the ease of finding good MFR deals in any of the above markets? Any suggestions on how to chop up Oakland neighborhoods will also be appreciated so I can add it to the table above. Thanks much!!

Account Closed basically just about anyone with a due ballon loan from 2008-2011 was in serious trouble. I personally knew a few people who lost their MF's in Oakland, and there were many others too throughout the Bay Area. If they had a non portfolio loan they were in a significantly different position, as they weren't required to negotiate with their bank. So sure non portfolio loans are safer. But as I said, you still have to deal with the rate issue 3,5,7,10 years down the line. If you get stuck in an increased rate environment, then all those rent increases you enjoyed may be significantly reduced. That is a long term risk a 30 year fixed 2-4 loan doesn't have. As for future rent speculation, unless we have a sustained and robust general economy, I don't expect Bay Area rents to go up much over the next several years. We had incredible rent increases the last 5 years (basically Christmas came early for landlords :) So I could see a scenario several years from now where rents are marginally higher than today. As for the $1mil in the bank, I don't think that will mean jack sh*t to banks if they don't want to lend because liquidity is tight. But it may mean that you could pay off your note and save your building. Of course if you aren't forced to negotiate with a bank and the market softens, you'll have cash to make some good purchases. Though someone else not needing to grow their portfolio may prefer to own the building debt free. It really depends where you are in the arch of your portfolio. As you know Minh, there is no free lunch (but there are good deals and smart in investments to be made :) You are optimized for MF, adding value, working the loans, and getting cash out. And that's a great play for you. But don't forget that there are other good plays out there as well. For instance WRT residential loans, I happen to think that they have great advantages over commercial. Basically the government is willing to absorb the interest rate risk for you, for an incredible 30 years! I don't think there is another country on earth that allows for that. Plus the rates are good, again basically a gov subsidy to help people buy homes (and shrewd investors buy 2-4's.) And there are all sorts of creative ways to deal with qualifying for the loans. I think that if you're not trying to build a huge portfolio, are investing in higher end prime assets, and keeping for the long term (forever), than the 2-4 play has a lot of advantages. For even with a PM, the more buildings and units you own, the larger the headaches. I'm trying to simplify going forward, not push for more units. It makes life easier as I spend more time out of the country (like I am now.) Cheers.

@Amit M. and @Robert C., Looks like both of you haven't dealt enough with commercial loans to know the delicacy of them. Inflexibility? These loans are more flexible than anything else. We can almost literally underwrite our own loan terms. Can you do that with Fannie/Freddie loans? I was going to let you guys have the last words, but the teacher in me suggests I should share it so others can benefit so here it goes ;) If history is any indication, rents and housing prices tend to rise first followed by interest rates. Interest rate increase tend to be a correlation of taming down inflation likely due to the hot economy. Thus, interest rate is a lagging indicator. For rents to stay flat or trend down while interest rates move higher, this condition tends to be short-lived. As we enter the recession, rents and housing prices tend to get soft, and interest rates would follow and drop shortly after. For anyone to argue otherwise, they're arguing against history. I'm an avid student of history and have benefit from it so I respect it. My thesis has been that we would see lower interest rate after the next recession. I wouldn't be surprised to see 30-year fixed mortgages in the 2%ish. I have shared my thesis with @J. Martin and @Johnson H. since we first knew each other several years ago. Thus, I believe getting 30-year fixed mortgages may not be a prudent move given the premium in rates. With respect to liquidity, say the building is worth $1M and we obtain a 70% LTV in today. When the 10-year balloon comes due, the loan balance is about $550k. God forbid the building is worth $700k when the loan comes due. Did you know you can actually go to the bank and negotiate for a 75-80% LTV and put 5-10% of the liquidity in the reserve account until the building reaches the desired LTV? Once the desired LTV amount has reached, the reserve will be released. $1M in liquidity is huge in this scenario. Can you do that with residential loans when your LTV is not there when you want to refinance because interest rate is at 2% instead of 3.5%? This happened during the GFC. Many people wanted to refinance to lower their mortgage payment but couldn't because they had no liquidity and the property value wasn't there. Johnson and I chat on a regular basis. He has watched how I've continued to modify my acquisition and loan strategies through the years to adapt with the market conditions at the given time. Johnson is always there to be sure I don't stretch myself too thin or do anything stupid. I'm going to continue to invest and finance based on my thesis while I suggest you do what you feel comfortable with. There's really no right or wrong answer. Someone reached out to me yesterday due to my post on this thread. He's been a 2-4 unit investor in the Bay. He recently got into 5+ unit and forced appreciate 50% on his recent acquisition just in a few months. He felt it was like cheating. He wish he got into commercial years ago. It goes back to the lack of knowledge that scares others. I won't try to convince anyone to get into commercial. Do what you're comfortable with as you're the one living with the consequences. This reminds me of the quote "Our lives are a direct result of our choices. If we don't like our lives, it's time to make better choices." Enjoy your time in Tel Aviv. See you in October at J's Summit in Oakland? Hey, have to make a plug for the brother. ;)

Minh,I agree that 30-yr rates will likely be lower at some time the next down cycle. It might be another question as to where banks are at on lending, where the person is at in their personal life/wealth/cash flow/documentation, etc. e.g., When I got my last 30-yr fixed, I was a working stiff that had great salary documentation. Now I'm traveling the world running my biz. And not all lenders look at that the same way. Lending terms are definitely different now than they were in 2010-12. Including in commercial loans. And there were a lot of losses on commercial loans also. I was one of the regulators in those banks looking at the individual deals and policy underwriting criteria (in addition to exceptions.) I go back and forth on the fixed vs variable. The fixed rate premium I see essentially as an insurance policy. I'm not super wealthy, so I like the insurance (as long as that premium is not too high. I think it was 75bp on residential last time I looked, but probably bigger spread for commercial) As long as I can pay my insurance and Prop-13-capped taxes, it doesn't matter what happens to market prices, lending/bank terms, personal circumstances, documentation, etc. Just pay the bill as it comes in and you don't have to worry about any of that. For those that are wealthy and better financial standing, their personal strength and overall LTV might better support lending in most or nearly all environments. But even very wealthy people ran into issues in the crisis. So never say never. In regards to term/length of loan, the bullet payments present some of the same risks (due in 10 years). The refinance depends partially on internal (you) factors and partially on external factors (bank lending terms, RE market price changes, personal financial turmoil, etc. ) - specifically at the time you are trying to refinance. On the multifamily vs 4plex.. I probably should have got into multifamily earlier. But 2-4 units were still more heavily discounted at the time. And I was definitely influenced by the 30yr fixed. Maybe partially because I saw so many people get burned during the GFC due to the clock running out rather than being on a fully amortized term. (back in bank regulation days.) It's like growing up during the great depression.. sticks in your mind.. I agree, there's really no right or wrong. But I think with 2-4 unit prices no longer providing the same market appreciation ride from the bottom, there is a lot more proportional opportunity in the 5+ unit buildings you can force appreciation on. And the fixed vs variable is more of a personal wealth/insurance issue, IMHO.

Hi Diane, It's the lack of knowledge that scares folks. Once you understand how commercial loans work, you won't go back to residential loans. You heard that right. As @Cody L. mentioned above, commercial loans are negotiable and quite flexible. Based on my experience, commercial loans are 3, 5, 7 and 10/1 ARM with a 10-year balloon if you go with portfolio lenders while there's no balloon with agency banks like Chase. Basically, your loan will become adjustable after year 5. In general, there's prepayment penalty. However, if you refinance with them after 2 years, the prepayment penalty will be waived as they want to keep your loan on their book. My partner and I don't fit in the W-2 box so we don't qualify for residential loans, but we can almost name our terms with our commercial lenders. It's quite cool when you can go into a bank and literally underwrite your own loans. Can't do that with residential loans. Competition for MF loans is fierce in our market so banks tends to put their best foot forward to compete for your business. That's not the case with residential loans. Each lender specializes in a niche. You just have to know which lender to go to get the loan you need. Real estate is a puzzle. Know which agents who have the best deals in your market; know which sellers to buy from; know which lender to finance your deal from; and know which buyers to sell to. Good deals don't tend to see daylight. @Fernando Enrile, regardless of what type of investment you want to get into, find your niche. Riches are in the niches. Otherwise, you'll be ordinary like all other investor wannabes. You'll be at the mercy of the market when you're paying retail prices and/or don't have multiple exit strategies. Best of luck.

Which city in San Francisco bay area should i start

Jerome KaidorPro Member

Investor · Hayward, CA · Member since 2013 · 122 posts · 65 votes

9y

Wow, this is interesting data! You might want to add greatSchools ratings. In my neck of the woods, Hayward is known to have bad schools - whereas neighboring Castro Valley has good ones.

1 Reply

Jeff Shenk

Real Estate Agent · Danville, CA · Member since 2016 · 6 posts · 4 votes

9y

And beware that some streets in Castro Valley actually belong to Hayward school district. :-)

1 Reply

Atish Shah

OP

San Francisco, CA · Member since 2017 · 18 posts · 16 votes

9y

Noted @Jerome Kaidor and @Jeff Shenk

0 Reply

Jorge Jimenez

Realtor · Alameda, CA · Member since 2013 · 8 posts · 0 votes

9y

Are you looking to live in the building? Or is this strictly a non owner purchase for you? Beyond raw numbers, what else are you using as criteria?

0 Reply

Account Closed

Investor · Santa Clara, CA · Member since 2014 · 138 posts · 54 votes

9y

Have you thought about out of state investments?

I live in Bay Area but invest only out of state.

The rent to price ratio doesn't make any sense in the Bay Area, and I prefer to invest in landlord friendly states (without rent control, and being able to evict within few weeks)...

I host a meetup about out of state investments. Feel free to check it out:

meetup.com/Los-Gatos-Real-Estate-Networking-Meetup/

0 Reply

Atish Shah

OP

San Francisco, CA · Member since 2017 · 18 posts · 16 votes

9y

@Jorge Jimenez I am looking for strictly non-owner occupied multi unit. Ideally a 4plex with monthly rent around 1% of the purchase price. I haven't been looking actively yet though.

0 Reply

Jerome KaidorPro Member

Investor · Hayward, CA · Member since 2013 · 122 posts · 65 votes

9y

Noted RE: Castro Valley schools - I believe everything south of 580 mostly belongs to Hayward Unified.

0 Reply

Atish Shah

OP

San Francisco, CA · Member since 2017 · 18 posts · 16 votes

9y

Thank you @Jerome Kaidor

0 Reply

Alex Capozzolo

Investor · San Diego, CA · Member since 2016 · 351 posts · 141 votes

9y

@Atish Shah There currently aren't any 4-plex (on the MLS) that meet that 1% rent to purchase price criteria unfortunately - at least not at the price the sellers are asking for!

0 Reply

Jerome KaidorPro Member

Investor · Hayward, CA · Member since 2013 · 122 posts · 65 votes

9y

This whole Castro Valley schools thing is of concern to me, because I have two preschoolers who - if we don't do something - will be going to Hayward Unified. We have investigated moving our housing development affiliation to CV, but the CV school district says they're maxed out.

0 Reply

Jerome KaidorPro Member

Investor · Hayward, CA · Member since 2013 · 122 posts · 65 votes

9y

@Atish Shah - what's the 1% criterion? I generally go with GRM - divide the yearly gross rents into the purchase price.

0 Reply

Atish Shah

OP

San Francisco, CA · Member since 2017 · 18 posts · 16 votes

9y

@Jerome Kaidor , as a rule of thumb, I am looking for the gross rent to be 1% of the purchase price. This is somewhat hard to achieve in the bay area with market deals

0 Reply

Diane G.

CA · Member since 2016 · 1k+ posts · 1k+ votes

9y

@Atish Shah

What planet have you been on? Other than war zones, you be lucky to get half of 1% today...

1 Reply

Atish Shah

OP

San Francisco, CA · Member since 2017 · 18 posts · 16 votes

9y

@Diane G. hahah, that is why i said that it is somewhat difficult to achieve in the bay area. Some some investors have been able to achieve that in Oakland, amongst other cities/towns

0 Reply

Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

9y

Interesting data...but I wonder how useful it is. If one community has a high number of sales of high-end homes it's median price will skew higher. Those high-end homes aren't typically in the rental pool so there wouldn't be a correspondingly high rental rate to skew the median rent in tandem with the price.

For example, in Santa Rosa the median price is $625,000 as of May 2017. But investors don't typically buy $625,000 houses to rent out (in Santa Rosa). Most would tend to buy in the $350K to $500K range. So comparing the price to rent ratio against the median is misleading.

The real question would be to compare rents at a specific price point. In other words, what does a $500,000 house rent for in Pittsburg, Hayward, etc. Then you can get a more accurate ratio...and the result may or may not surprise you.

Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)

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Jerome KaidorPro Member

Investor · Hayward, CA · Member since 2013 · 122 posts · 65 votes

9y

@Atish Shah - OK, a 1% monthly rent equates to a GRM of 8.3. Not gonna happen in the Bay Area. Too much money chasing too few deals. Maybe a mechanics special multifamily in the Valley. I bought my Hayward building in 2001 at a GRM of 10. Right now, I would jump on a multiple of 10 in the east bay, but that's not happening either.

1 Reply

J. MartinPro Member

Rental Property Investor · Oakland, CA · Member since 2011 · 3k+ posts · 2k+ votes

9y

@Atish Shah,

With your target GRM and desire for low-crime, good-school district areas, you sort of want the best of both worlds - high cash flow, and a good area likely to have strong single family home appreciation. And I want to be rich and famous. But we both have to struggle with reality hehe You would either need to go somewhere else, or decide which is more important to you (or at least compromise).

Like @Brian Burke is saying, you're looking at single family home prices, but trying to buy more than one unit. You probably need to go even further than what Brian is saying, and compare how much in rents you can get with $X00,000 of a multi-unit building in city 1, vs city 2, vs city 3, etc. Or just call up an agent that deals with them, and they should be able to give you a range of GRM's. CBRE and other commercial real estate brokerages also publish data on GRMs for large multifamily in different cities. You will have a higher GRM for 4-unit buildings and under than for large multifamily, but I think the proportions across different cities will be similar - as a place to start.

If you can get a vacant 4 unit in Richmond, you might be able to get close to 1% / 8-9 GRM(ish). Maybe in Vallejo also, but that's getting further out, and the city's all f**ked up after the BK and high taxes. (Richmond could be going that way too though! lol) @Diane G., play nice with the other kids in the sandbox ;) Atish is trying to learn. I could still buy under a 10 GRM today (especially after some transitioning). @Arlen Chou did the same last year in Oakland, when everyone said it couldn't be done. Given, they aren't in Silicon Valley...

@Arlen Chou

9 Reply

Diane G.

CA · Member since 2016 · 1k+ posts · 1k+ votes

9y

@ j. Martin -I was not being mean... I was joking with Op.... he had no issue with it... where did your sense of humor go??? Lol

1 Reply

Nick James

Investor · Oakland, CA · Member since 2016 · 13 posts · 15 votes

9y

Thanks for the info @Atish Shah. I agree with others here, finding a multiunit property that meets the 1% rule here in the bay is damn near impossible, however, it can be done. I cannot speak for all cities in the bay, but as you said, others have done it in Oakland. I just got through driving by a triplex yesterday that was acquired for $375k, the owner put in $175k for rehab, and the rents sit right around 2k per unit. Just as an example, I have linked the exact property.

Here is the before https://www.redfin.com/CA/Oakland/2518-Seminary-Av...

Here is the after https://www.zillow.com/homedetails/2518-Seminary-A...

Are you ok with a building that needs a lot of rehab? I live in East Oakland but would be down to help you divide it up Oakland to get it on the list. Just message me.

4 Reply

Arlen Chou

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

9y

@Atish Shah I posted yesterday about the 6 plex in Oakland I purchased last year in another post from @Diane G. Admittedly that was not 1% it was only .9% at time of acquisition. The deals do exist, but they are not laying around for the average person to pick up. Anybody who is familiar with the area will know that my building is not in a "war zone". Again, admittedly it is not downtown Los Altos, but it is not Baghdad either. The housing market that we are in will freeze anybody who lives in the world of generalities. A generalist, will only see the impossibilities and the be stopped by the perceived barriers to success. Dig deep and find your "unfair advantage" and apply it to well researched specific markets and properties.

Good luck to you Atish,

Arlen

3 Reply

Arlen Chou

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

9y

@Nick James are you involved in that building? That is a great bit of tracking. I remember when that building first came on the market. It looks great now!

0 Reply

Nick James

Investor · Oakland, CA · Member since 2016 · 13 posts · 15 votes

9y

@Arlen Chou, I am not unfortunately :( I own a duplex about half a mile away from it and saw the progress they were making. I am trying to buy triplex or fourplex in Oakland so I reached out to see what they planned on doing with the building. I agree, it does look great and it will be right next to the new East Oakland retail center http://www.eastbaytimes.com/2017/02/02/east-oakland-retail-center-finally-breaks-ground/. Congrats on getting a 6 unit building in the Fruitvale area that cashflows! I would love to be able to pick up a multifamily in that area.

2 Reply

Account Closed

Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes

9y

Originally posted by @Atish Shah:

A grand total of $1495 for a house in Pittsburg CA? It seems you have an error in the tabular data -- two 'median house price' columns. Is one of the columns supposed to be median rent for the city?

0 Reply

Jen L.

Realtor · San Francisco Bay Area, CA · Member since 2016 · 123 posts · 48 votes

9y

@Atish Shah Thanks for sharing the data. It's very interesting. I also looked at East Bay and haven't pull any trigger because of the price. You may want to look into the appreciation % too. I was surprised by some of them.

1 Reply

Account Closed

Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes

9y

@Atish Shah,

Based on my experience, invest in the market you know best would give you the highest chance of success. I've known a few BP members who have done the "impossible" investing in the Bay.

@J. Martin is renting a couple of units from us on buildings where we're getting 0.9x% and 1%. We bought these in summer and Christmas of 2015. Hope to get the RTP ratio a little higher in the near future on some natural turnovers. It also helps that J is paying us above fair market rents. LOL! Just kidding there.

@Jen L., thanks for hanging out and bought me lunch the other day. Sorry I couldn't show you the buildings around SJSU. My favorite building by far is right across from SJSU. I love that building more than our Japan town buildings. My friend is in contract TODAY on the 12-unit Japan town building. I didn't want to show it today because it would make your heart melt. I've been trying to get her into something and finally was able to.

@Diane G., we bought a 6-unit building in March of this year at 0.8% ratio. Not the greatest, but not too bad given where we are in the cycle of the housing market. Wait until I stabilize this babe and refinance her with First Republic Bank next year at 3% interest rate for a 5/1 ARM with a 10-year balloon on 30-year amo. This baby will cash flow alright.

There are several pieces to the puzzle. How to find the deals; how to finance them; how to stabilize them; how to get the equity so you can rinse and repeat; how to have agents/brokers keep bring deals to YOU. Deals rarely make it on the market. They are reserved for players in the inner circle and established closers. Given what you know now, go get them.

We bought this 8-unit building in almost turnkey condition in summer 2016 for $1.86M. Eight months later, we had an unsolicited offer for $2.5M. We turned it down. Jen saw it in person a couple of days ago. Unlike others, I don't make crap up, and this is not even my favorite building. ;)

7 Reply

Which city in San Francisco bay area should i start

Which city in San Francisco bay area should i start

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