Bay Area FHA triplex sanity check!

30 Replies

I am fully underwritten for an FHA loan to buy a 2-4 unit property in the bay area up to $550,000 ( possible higher depending on the income of the other units).

I am considering a place in West Oakland, currently a slightly high crime area, but strong rental rates and low vacancies. The property is a 3 unit place. There will be very little work required at move in. I will live in the 1/1 and rent the other units. My agent and I feel it will go for ~500k. I am committed to buying a 2-4 unit property and want to be sure I have thought of everything.  My commute will not be great, however, I only have to live in the property for 1 year, 2 if I want to avoid taxes. 

Mortgage with taxes and insurance and PMI is $2800 utilities are $300. No capital improvements needed for some 5 years + I will live in one unit and the rent on the other units will total (currently ) $2300 (market) $3700. As some people may know it's difficult to get market rents due to rent controls tenant's rights etc in California. Over the next year after move in I will work on getting rents up to market.

Questions:

1: If you you know of another property that better fits my needs let me know! 

2: Does anyone else own property in West Oakland? I am very interested in your thoughts.  

@Luke Mccandless West Oakland is a great place if you are going to house hack.  I have property North of 580 in the Santa Fe neighborhood.  

You are not under rent control if you are buying a property that is 3 units and under AND living in it.  BUT check the existing leases and make sure that none of the existing tenants are under "protected" status that may change things for you.  

Once you move out of the property, it will fall back under rent control, so time your renovations and rent adjustments accordingly.  Go and apply for a "landlord exemption certificate" at RAP.  They will tell you that you don't need one but insist you want one.  However, the process is free and will give you the piece of mind of being able to physically show potential tenants that the property is not under rent control.

Good luck to you!

-Arlen

@Luke Mccandless I'm actually looking to do the same exact thing but in a few months from now. Looking for a duplex or triplex in west Oakland for about the same price and "House Hack". My financing will most likely be almost identical to what you listed above using an FHA loan. Have you put in an offer yet? I've heard that it's very difficult but not impossible to have an offer accepted using a FHA loan with a minimum down payment (5%-10%). What are the other unit types (2bd/1ba?), current rents for each, and expected rents at market value? Curious to hear what others think as well as your outcome.

Hope it works out for you because it will give me hope that it's a doable!

-Patrick

@Patrick Quinn  3% of the purchase price as ernest money in order for the offer to be considered ! I am working with a lender that has taken me through the full underwriting process so we are comfortable removing the financing contingency ( keeping the appraisal and inspection contingency )  Other units are 3/1 and 2/1.

@Arlen Chou Do these fees looks correct? $500,000 purchase price:

All Closing costs : 

Underwriting $1485 

Home inspection $600

Appraisal $510

Title $2485

Notary $250

City transfer $3750 

County transfer $550

FHA UFMIP $8750

INS impound $265 

Tax impound $3125 

Total $21170

@Luke Mccandless  

Closing fees seem about right, maybe a tad high for Title and Underwriting, but nothing shocking.

I will concur with @Arlen Chou - great time to get in and great advice on the Landlord Exemption Cert.

@Patrick Quinn Oakland is the place. My search this afternoon brought up 46 multi-unit properties in Oakland under $525K. I've seen some amazing deals in the last 6 months despite the climate of increasing prices. Multi-units get overlooked. Just got a client into an amazing fixer duplex in Glenview where they look to double their investment in 2-3 years.

I'm following your journey with interest @Luke Mccandless  I'm trying to house hack in Oakland as well. I'm looking in the Piedmont/Grand Lake area for a duplex or triplex.  

Great to see there's so muchsage advice around. Fingers crossed.  Please keep us posted.

@Jonathan Payne thanks for the comment / info on closing costs. Yeah, the multi units seem like they are being keep at reasonable prices since it's generally investors who are looking.  For a sense of how out of touch prices are getting, this house in Oakland just went for $1000 per square foot : 5597 Lawton Ave Oakland CA. 

@Dina Eisenberg I will keep you updated,  thank you!

@Luke Mccandless

Welcome to the game! And good luck on your deal!
I have bought a 2-4 unit with an FHA loan in the Bay Area, and own a 2-4 unit property in West Oakland with a partner.

A couple observations/opinions on your plans, comments, and questions:

1: If you you know of another property that better fits my needs let me know!
- You didn’t say much about your needs. So hard to tell. You are right you don’t have to stay there forever, and the cash flow will be better there than almost anywhere in the South Bay, especially after getting market rents. The owner-occ rent control exemption on triplexes in Oakland gives you a unique opportunity to reposition this property to increase value, IMHO.

2: Does anyone else own property in West Oakland? I am very interested in your thoughts.
- I own a 2500 sq ft duplex near 32nd & Chestnut St. Rent controlled tenants. I’m not moving in. We bought it for $300K just over a year ago. Sweet off-market deal. A lot of young tech folks have moved in, and rents are WAY up for nicely remodeled units with parking. ($2k+ for 2br apt). I think West Oakland has established a new higher “low bar,” as the gentrifying is accelerating. It will always be a bit better than it was. For this reason, I believe that it will have higher “baseline” percentage increases in prices than many other nearby areas for the next decade (personal opinion). The geographic location is fantastic, surrounded by great neighborhoods, gentrification with higher incomes and rents, etc. 

On the other hand, I think West Oakland will continue to have volatile prices over economic cycles. People are still getting shot on street corners. The walkscore still isn’t that great. You have to drive or bike somewhere to get everything you need. Hopefully those things will change more over time. But they still exist. I think both my duplex and your (future) triplex will be at a lower value at some point in the next 5 years than they are today. I also think that in 10-15 years, the prices will very likely be significantly higher. I do not plan on selling my West Oakland unless prices get REALLY crazy. Given that you are going to re-position to market rents, you will be ahead of everyone else, and should have decent cash flow, just eyeballing it.. So should do you well over the long run, knowing that the price take a bit of a hit in the next downturn…  Maybe @Daniel Shepstone can chime in also.

3 – Offers with no Financing Contingencies on FHA - ****DANGER DANGER!!**** WATCH YOUR ***!!! You seem to have focused mostly on the underwriting of YOU, whereas there are many property-specific risks to FHA financing, primarily regarding condition, that you do not seem concerned about. Primarily, a sealed envelope of building, 2 years of roof, health & safety items like adequate heating, venting, no visible discoloration (mold), egress from each bedroom, termites, peeling lead paint, drainage issues, secured railings, and as miniscule as trip hazards if they are having a bad day. You may not find some of these issues out until after the appraisal or appraisal review. So keep that appraisal contingency in as long as possible.. and watch your ***!
https://www.lender411.com/mortgage-articles/4476/h...
“I am working with a lender that has taken me through the full underwriting process so we are comfortable removing the financing contingency ( keeping the appraisal and inspection contingency )”

4 – Rent control / Listen to @Arlen Chou . He’s experienced with rent control in Oakland. Everything he said is consistent with my understanding.

5 - Difficulty Getting FHA Offer Accepted
 @Patrick Quinn , you are correct that it can be very difficult to get an FHA offer accepted, especially in a hot time of the market in West Oakland. I submitted many offers on 2-4 units in West Oakland in 2011 and 2012 as the market was picking up. From what I've heard, it can be just as hard now. The selling agents' main worries have been that FHA buyers have little/no wiggle room to make up any difference in the appraisal, the longer close time, and the extra requirements of FHA that can kill the financing (usually due to condition of property - see financing contingency portion above).

6- Good Time to Get In?
 @Jonathan Payne – Did Arlen say it was a great time to get in? I didn’t notice that in his comment. Personally, I think most Bay Area real estate is overvalued right now, based on historical indicators, and I am not buying (except for the very rare great deal). And I have been a huge cheerleader for everyone buying real estate for the last half decade until late last year and this year. In this particular case, there will be a lot of value added in moving to market rents as an owner-occupant, so it might really make sense, and $500K sounds like a pretty good deal for a triplex in West Oakland, depending on the circumstances.

“I will concur with @Arlen Chou - great time to get in and great advice on the Landlord Exemption Cert.”

@Dina Eisenberg
I hope you're not planning to use an FHA loan to buy a duplex or triplex in the Piedmont/Grand Lake area, because I think you'll quickly be over the FHA maximum price limits! That happened a couple years ago in the those neighborhoods! :(Good luck on your search though! Please see my comments on "Good time to get in? also". But beautiful area, and great place to live. I think the 2-4 units are definitely a better value than the SFH over there..

Good luck Luke and Dina!

I feel like I just got my MBA in house hacking. Thanks @J.M. and everyone else for generously sharing. I'm crossing my fingers but also looking at Grand Lake and Bella Vista as alternatives.  Your take? 

Interesting thread.  Best of luck to everyone out there.  Keeping my eye on the local market but thinking more and more that I will be looking to invest out of state instead.

@J.M. Thanks for the great info! When you were submitting your FHA offers in Oakland in 2011 & 2012, how many offers did you have to submit until you got one accepted? Did you have to offer over market value/have the highest offer in order to beat out other competitive offers? Any advice on methods for submitting FHA offers or finding ideal properties for FHA offers?

@Luke Mccandless

Buying something like that sounds like crazy talk. The area and #'s do not make financial sense for an investment.  You might want rent and invest somewhere else.  Don't get caught up in all the smoke and mirrors.

Keep the momentum.


Frank

@Frank R. Can you elaborate on why it sounds crazy? I am happy to get your feedback. I know the prices are very high in the bay area, but this is where I live and the owner occupied path gives me access to better financing options. As well as the ability to bring rents up to market. 

@Frank R. I don't understand what you mean by "smoke and mirrors" for the Oakland market.  Oakland has all the infrastructure that SF has, but costs are much lower.  The city is drawing in substantial amount of investment in industrial space renovation.  Developers are making "tech" spaces that looks like they belongs in SF.

First tier companies are in and around Oakland: Pixar, 99Designs, Ask.com, Pandora and Uber is coming.  Additionally, many philanthropic organizations that have been pushed out of SF have moved to Oakland.  The point being is that high paying jobs are moving into Oakland.  Along with those jobs is an army of young people needing housing.

The fact that @Luke Mccandless is willing to get in before the area is totally gentrified is a gutsy move.  Sure there will be issues with existing tenants and the mix of the neighborhood.  There is always a level of risk, but the size of that is risk is managed by the knowledge a person has of the market and their personal skills.

I am not sure how familiar you are with the specific area that Luke is looking at, but there are young people riding bicycles to tech jobs, young women rollerskating through the neighborhood with Beats headphones on, and trendy little hipster bars and restaurants popping up nearby.  There are also families hanging out on their front porches and neighbors greeting each other as they pass on the sidewalks.  These things and many more indicators point to a city that is moving toward a brighter future.

The old image of Oakland with guys sitting around drinking 40's and wasting the days away are starting to fade away.  Sure there are parts of town where street shows still take place and walking/driving around at night is probably not advised, but that scene is being replaced by a more positive atmosphere.

-Arlen

Originally posted by @Frank R.:

@Arlen Chou @Luke Mccandless

What I mean is this deal doesnt make financial sense for a investment.  The current rents do not support a +500k purchase price.  

Frank

I think you're not giving Luke enough credit. As a hockey analogy, "A good player goes where the puck is while a great player goes where the puck will be." From a risk/reward perspective, I'd take this Oakland bet anyday. 

Luke, based on the numbers you provided, I wouldn't be surprised this triplex will sell for $1MM in the next 10-15 years. I know it sounds like smoke and mirrors now, but bookmark this thread and pay me my royalties in the future.

@J. Martin knows where I live. Don't sit on the sidelines for too long while life passes you by. Don't be afraid of asking questions. It's not a sign of cluelessness, but rather a sign of wisdom. :o)

Best of luck. 

Originally posted by @Arlen Chou :

@Frank R. I don't understand what you mean by "smoke and mirrors" for the Oakland market.  Oakland has all the infrastructure that SF has, but costs are much lower.  The city is drawing in substantial amount of investment in industrial space renovation.  Developers are making "tech" spaces that looks like they belongs in SF.

First tier companies are in and around Oakland: Pixar, 99Designs, Ask.com, Pandora and Uber is coming.  Additionally, many philanthropic organizations that have been pushed out of SF have moved to Oakland.  The point being is that high paying jobs are moving into Oakland.  Along with those jobs is an army of young people needing housing.

The fact that @Luke Mccandless is willing to get in before the area is totally gentrified is a gutsy move.  Sure there will be issues with existing tenants and the mix of the neighborhood.  There is always a level of risk, but the size of that is risk is managed by the knowledge a person has of the market and their personal skills.

I am not sure how familiar you are with the specific area that Luke is looking at, but there are young people riding bicycles to tech jobs, young women rollerskating through the neighborhood with Beats headphones on, and trendy little hipster bars and restaurants popping up nearby.  There are also families hanging out on their front porches and neighbors greeting each other as they pass on the sidewalks.  These things and many more indicators point to a city that is moving toward a brighter future.

The old image of Oakland with guys sitting around drinking 40's and wasting the days away are starting to fade away.  Sure there are parts of town where street shows still take place and walking/driving around at night is probably not advised, but that scene is being replaced by a more positive atmosphere.

-Arlen

Arlen, have you been drinking too much of my Oakland koolaid?!? lol I remember not even a year ago when we were sitting in the little Vietnamese restaurant next to my master lease talking Oakland, looking at those condo listings.. And now you can answer everyone's Oakland questions for me! lol  Glad I met you Arlen :) Keep rockin!

@Minh Le , I agree with you on the 10-15 years to $1MM in W Oakland. I think the same $1MM or so on my (and K's) duplex over 15 years. with my caveat above that I think the future price will dip below today's market price in the next 5 years (not below my $300K purchase price last year lol), because I think it's a bit overvalued right now (looking at the cycle). Again, I think the most important thing about this deal is there is a unique opportunity to reposition the property due to the triplex owner-occ exemption in Oakland. So Luke, in a smaller way, would be doing the same type of repositioning you're doing down in SJ, Minh. A relatively known increasing rent trajectory. A good plan in this circumstance, IMHO. $500K still sounds cheap to me (relative to current market prices) for a triplex not in bad condition in West Oakland unless its tiny w/ no parking. Or tell me it's not the one with that church building! lol

Luke, feel free to send me the subject property address at my email address if you want my 2 cents. Not knowing anything about it, I wouldn't be surprised to see it sell over $500k for a triplex in W Oakland. A lot of the large duplex comps in my West Oakland neighborhood have been selling around $500K or more..

Originally posted by @Patrick Quinn :

@J.M. Thanks for the great info! When you were submitting your FHA offers in Oakland in 2011 & 2012, how many offers did you have to submit until you got one accepted? Did you have to offer over market value/have the highest offer in order to beat out other competitive offers? Any advice on methods for submitting FHA offers or finding ideal properties for FHA offers?

I would guess I probably put in 8-10 written full offers in Oakland (was using agent at the time, and they get tired of it). And dozens of other serious verbal offers and back and forth. I eventually went further out to Richmond and bought a 4plex there instead for my first purchase due to inability to get in contract in West Oakland or around Lake Merritt with FHA financing on triplex and fourplex properties.

I tried all strategies, including having the highest offer. It is a catch-22 w/ FHA. If you offer the highest, in a high market where everyone is overbidding, a lot of the appraisals just don't keep up. And the listing agent knows you don't have the funds to make up a shortfall in the appraisal. And other offers do. And take less time. And your FHA offer has additional requirements as far as condition, and takes longer to close. So when you try to overbid to get it, you're also increasing the odds of the transaction not being consummated. (at least, how most listing agents seem to *appropriately* view it).

They get done. Don't let this scare you off. It's just difficult to find the right seller to take it in a hot market with many better-qualified buyers.. Maybe try the "love letter" too..?

Originally posted by @Dina Eisenberg :

I feel like I just got my MBA in house hacking. Thanks @J.M. and everyone else for generously sharing. I'm crossing my fingers but also looking at Grand Lake and Bella Vista as alternatives.  Your take? 

 Glad you can take some things away Dina...
Grand Lake and Bella Vista are both very nice. Still unclear if you're trying to use FHA?.. If so, again,will be tough with price points work in those neighborhoods (but better luck than Piedmont for sure). Limits for 1, 2, 3, 4 units in high-cost Alameda county are:

625500 800775 967950 1202925

http://portal.hud.gov/hudportal/documents/huddoc?id=14-25mlatch1.pdf

Not much that will fit in your price point in adequate condition for FHA, unless you do the 203k..

Good luck out there though! And if you're not using FHA and have loads of cash, you will have better odds..

Thank you J.M. I will keep trying with FHA unit I find a fit. I have thought about the "love letter" and will probably try it. The market for these multi units seems a lot less crowded than the single family houses, so hopefully FHA will be ok for at least one seller.

@Luke Mccandless listen to @J. M. and @Minh Le, these guys seriously know their stuff.  Like J had mentioned, a year ago I had a stack of printed out data sheets on various properties that I was considering in Oakland but I was afraid to pull the trigger. 

My only previous experience in Oakland was from 30 years ago going to a Warriors game with some friends.  My wife, parents and family friends tried to warn me off of the city, even though they new nothing about the daily happenings of the various neighborhoods.

I sat down with J and he explained to me what he saw in the market.  I did a deep dive into the city: drove the streets, walked the neighborhoods, talked to shop owners, mail carriers and anybody who would give me time.  

I pulled the trigger in February and I am happy with my decision.  I do have my issues with the current tenants and the city.  But most of that was anticipated and calculated into the purchase price.  I am still under market rents, but comps and agents who want to sell my recent purchase price the property at over 40% higher then the original purchase price.  Sure I will not realize that number unless I actually decide to sell, but it does give me a warm and fuzzy feeling inside.

In the end it is all about risk/reward: manage the risk/plan the reward.

Keep us in the loop on what you decide with this property.  

-Arlen

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