Rental Property Investor · Santa Clara, CA · Member since 2016 · 219 posts · 112 votes
I am negotiating for small apartment complexes in Oakland. The rents are down at least 20% now. There are more supply of deals. It is possible to break even and be slightly cash flow positive with a 25% financing for multi-families (immediate cash flow is rare in bay area in general)
My plan is based on the belief that as the tech companies reopens (most of them are planning to be) the area rents should bounce back to the original in 1-2 years. If you can hold through the time with current rents you will be fine. And there can be upside once market bounce back. For others here, how do you feel about the area? Is it a good time to get into a commercial multifamily? (Othner Oakland multifamily investors here?)
Flipper/Rehabber · Emeryville, CA · Member since 2017 · 58 posts · 50 votes
5y
Hi Raju,
Are you negotiating for 4 units and below or more than 4 units? If negotiating for more than 4 units, and cash flow is only around breakeven, you are almost certainly going to have to put down more down payment than 25% as banks usually want a debt service coverage ratio of 1.2 or more. I'm actually going through this myself with an 8plex for my parents next to Lake Merritt. Commercial lending interest rates are few percent higher too - meaning you will probably get something closer to 4-5% than 3%. And the loans are not 30yr fixed, they might be fixed for 5 years then reset and length may only be 15 or 20 years before a balloon payment is due. That's why you may see 4plexes that could sell at a higher price than a 5plex, since financing is cheaper, down payment is lower, financing options are more and whole process is a lot less complicated for less than 5 units.
I think a good strategy would be to try and purchase properties that are severely under market rent for a lower price and try to negotiate with tenants to leave. Once they leave, it automatically increases the value of the property by six figures which is a lot better than trying to cash flow a few hundred bucks a month in other parts of USA. Obviously in order to do this, you will have to be able to sustain the property with current rents in place. Also, I like looking for properties with under market rent but with tenants who are young enough that they will most likely move in a few years due to a job change, life event, or they want purchase their own house.
I do agree that rents should eventually bump back up but many companies (Square, FB, Twitter etc) are doing fully remote so I don't know if 1-2 yr time frame is reasonable.
Investor · Sacramento, CA · Member since 2020 · 105 posts · 48 votes
5y
@Raju Balakrishnan I think that's a very interesting play. In 10 years I'm confident rents/prices will be higher so with this temporary depression in both I think it would be a great time to get in. I always assumed you really could CF in the BA anyhow so if you're finding deals to break even or scratch out a little today then you'll probably be very happy in the future.
Personally I don't know the sub markets in the BA well enough to say if Oakland is a good spot but I like the concept you're describing
Flipper/Rehabber · Emeryville, CA · Member since 2017 · 58 posts · 50 votes
5y
Hi Raju,
Are you negotiating for 4 units and below or more than 4 units? If negotiating for more than 4 units, and cash flow is only around breakeven, you are almost certainly going to have to put down more down payment than 25% as banks usually want a debt service coverage ratio of 1.2 or more. I'm actually going through this myself with an 8plex for my parents next to Lake Merritt. Commercial lending interest rates are few percent higher too - meaning you will probably get something closer to 4-5% than 3%. And the loans are not 30yr fixed, they might be fixed for 5 years then reset and length may only be 15 or 20 years before a balloon payment is due. That's why you may see 4plexes that could sell at a higher price than a 5plex, since financing is cheaper, down payment is lower, financing options are more and whole process is a lot less complicated for less than 5 units.
I think a good strategy would be to try and purchase properties that are severely under market rent for a lower price and try to negotiate with tenants to leave. Once they leave, it automatically increases the value of the property by six figures which is a lot better than trying to cash flow a few hundred bucks a month in other parts of USA. Obviously in order to do this, you will have to be able to sustain the property with current rents in place. Also, I like looking for properties with under market rent but with tenants who are young enough that they will most likely move in a few years due to a job change, life event, or they want purchase their own house.
I do agree that rents should eventually bump back up but many companies (Square, FB, Twitter etc) are doing fully remote so I don't know if 1-2 yr time frame is reasonable.
Rental Property Investor · Santa Clara, CA · Member since 2016 · 219 posts · 112 votes
5y
Thank you @Jason Rhodewalt In my experience, bay area you can cash flow a tad on day 1 even for SFRs, but you have to look hard and low with a broad criterion.
@Hayden H. Thak you. Yes I agree, DCR may require more, I can put more too, but mostly for a criterion.
Yes the real returns for strict rent controlled markets comes from turnover. But there is no way for us to know if that works upfront since it depends on the tenant entirely. So for risk mitigation, I would like to make sure that its ok to hold the property for perpetuity with the current tenants.
Yes effect of an appreciating market on top of turnover is what we really need. I think some have shifted permanently from bay area, and some small and medium companies are remote fully as of now. There is some risk there. But there is plenty of cash in tech due to IPOs and tech stock appreciation. It should be coming back to valley as new startups or more hiring. But agree, there is some risk there so its good to make sure that price we pay can contain that risk.
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Raju Balakrishnan
As a former BA resident who moved to greener pastures. I still feel that the dip in rent in some BA cities I temporary. Even with several high profile companies announcing moves to other places and moving headquarters many employees will stay at their current locations in the greater Bay Area. In addition despite all of the negatives that pushed me from the Bay, the weather and geography aren’t easily matched meaning there will always be demand.
Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
5y
@Raju Balakrishnan the rent rate issue is actually kind of interesting in that it really is neighborhood specific. The focus on "tech workers" is kind of a limiting thought. The reality is that there is large requirement for "support workers" in the BA, that if addressed correctly can lead to steady income/value increases for you. I have 6 units in Oakland, 1 is vacant and 1 has not been paying due to covid. However, the other 4 tenants have consistently paid and recently went through CPI based rent increase. I rented out additional parking spaces and a storage space to cover the dip in rents received. Currently, the 4 tenants and the additional income cover my monthly nut and then some.
I have purposely been slow on filling the 1 empty unit because of covid, but now that CA is supposedly fully opening in June I plan to fill it on July 1. As for the tenant that has not paid, I expect that they will either pay the back rent or I will start the eviction process in June.
My point is that you need to get into the weeds and evaluate the buy opportunity based upon the location and the existing tenant base. If you can do this, I am sure you will do well in this competitive market.
Rental Property Investor · Santa Clara, CA · Member since 2016 · 219 posts · 112 votes
5y
Thank you for the insights @Arlen Chou. Yes hopefully the eviction moratorium will not be extended further. An interesting point in oakland markets is that vacant units are more valuable than occupied ones for investros. Definitely an implication of strict rent control in the city.
I will put the checking the screening records, and leases during due dilligence. The thing which confuses me most in Oakland is the location dependency. More than many other bay area cities, the cap rates of offering varies widely for different parts of the city.
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Raju Balakrishnan
Have you spent a lot of time driving through these neighborhoods?
Oakland is a very diverse city from an income perspective, I would actually suggest all of the large Bay Area cities are there aren’t any cheap areas typically. But rent and cost due have great fluctuations throughout Oakland, say near the Emeryville, Berkeley borders compared to the south or east ends of town adjacent to San Leandro and Hayward. You also have some areas right across the water from Alameda, say in Fruitvale that are in a rough area. Then across the water in Alameda and it’s crazy high rents and prices.
Investor · Fremont, CA · Member since 2012 · 7 posts · 2 votes
4y
@Raju Balakrishnan Good info here on Oakland and great thoughts. I have 4plexes in Oakland which i barely breakeven. Was just wondering, if you were able to find a decent deal and close.