I recently purchased a vacant duplex in Oakland and I expect the total rent to be around $4500 per month. I noticed that the rent increase cap is 2.7% per year. I’m scared that if I decide to sell the duplex in the future, it won’t be market price, because there are below market rate tenants. Can you all give me some advice?
@Alex Huang 2-4 units are a bit tricky when determining value since they aren't evaluated like commercial, which depends on NOI. So, don't be too worried about the sale value potentially being low because of below market rates. Especially for a duplex where an owner-occupant has the right to ask a tenant to move out when they move in (as far as I know), then you only have one tenant to worry about.
Since you’re coming in with no tenants, as long as you keep up with yearly rent increases it’s going to take quite a while to get behind market rates, especially because everyone else will be abiding by the same rate increase rule. Can’t fall behind the market if you’re updating your rents each year along with the market!
Hi Alex, If the duplex is vacant, you can raise rents to market rate. If market rent grows at a larger pace then the 2.7% annual increase, then you are out of luck. But that's the way it has always been in rent controlled cities. You can buy out your tenant if they agree. Its probably better for you to move in as well so that when you sell you can have 1 unit vacant at least and get the 250K tax exemption.
Thanks for all the replies! Unfortunately, the chance of me moving into the property is very low in the future. I just don't know if it'll fall behind if it only increases by 2.7% per year. My mortgage with insurance and property tax is $3300 per month, so there is $1200 left over, do you guys think this is a good investment?
@Alex Huang whether it’s a “good investment” is fairly subjective and depends entirely on what your goals are. Are you looking to bring in cash flow to supplement/replace income? Are you looking for appreciation and equity that you can draw on 20 years from now? Will you be house hacking and living for free?
Biggest question for determining whether it's a good investment for cash flow is how much are you into the deal for? Then supplementary questions are: Will you be PM-ing yourself, how much are you setting aside for CapEx and reserves? Once you have those answers you can calculate your return on investment (ROI) and compare that to potential returns of other investment vehicles like index funds and bonds, then decide whether that ROI suits your long term goals. Shoot me a DM if you would like help with the calcs or would like to discuss.
Hi @Alex Huang ,
Michael and Hayden made some great points. There are a lot of factors to consider to determine if this is a good investment. You're in a good place because the units are vacant allowing you to collect market-rate rents. I agree with Micheal in terms of calculating your cap-ex, reserves, and property expenses (excluding mortgage and insurance) to measure your ROI against your goals. It appears to be a good investment if your NOI is healthy and property values increase significantly over the next few years, regardless of rent control requirements. Besides, Oakland is changing rapidly due to gentrification in many areas, property values are increasing at an enormous rate. I would hold the property for a few years before selling to max on appreciation and equity. Be careful when asking tenants to move out for owner occupancy. Oakland has strict laws for termination of a tenancy for the owner's benefit and is a very tenant pro City. My two cents . . . Good luck!
Alex, based on your number I guess your rental to value ratio is between 0.6-0.70. This is a pretty common scenario for Oakland area Duplex.
If you want to be profitable, you have to manage it yourself, it's pretty easy. That NOI (1200x12) is okay but not the best. Actually, some other area beyond Oakland could give a better return than that but it's okay.
When we're buying a rental investment, what we are buying is actually pre-determined math calculation, there's no magic,the exception is if you do BRRR.
The best return of any SFR/MF investment generally would be like this :
- The best cash return is always on entry home price, mostly in C/B- neighborhood.
- Duplex is always better than SFR with 10-20% NOI difference
- If it's local, you increase your profitability by 1 cap rate compare if you buy OOS if you manage yourselves.
- The best place to buy is always the area that has large appreciation AND at the end still give you good or acceptable cash-flow, such as in Oakland California
- Oakland appreciation by average is 7-8%
- Rent growth is not too high, maybe 1-3%
Having said that, if you have a pre-plan to sell this property after 6-7 years or meeting 20% IRR in year 6, you are all good.
Thanks for all the replies! I'm not sure how to price one of the units in my duplex. The unit is 1030 square feet, 2 bedrooms and 1 bathroom, however the ceiling height is 7 feet. A normal ceiling unit with the same size will probably go for around $2300. Does anyone have a suggestion on what I should price the unit?
What part of Oakland are you in? That will dictate how much you can get for your 2/1. Also, the 7' ceiling is going to be a challenge, especially now when tenants have many more options on the market. Do you have in-unit W/D? Dishwasher? Parking?