First rental investment in a "rougher" neighborhood in Oakland

[Robin J.]

Hi all,

New Oakland investor here and was hoping to get some advice/thoughts from experienced multifamily experts in the Oakland area. I've been looking to house-hack my first investment, as a means of utilizing max leverage, and looking for properties where cash flows cover debt service and operating expenses. However, unsurprisingly most properties in generally nicer/safer areas don't meet these cash flow requirements for me to house-hack and the ones that DO have cash flow are generally run-down and in lesser housing quality neighborhoods. 

My question to folks here is: if these multifamily properties meet cash flow requirements, should I forego owner-occupant/first-time home buyer benefits and buy them at 20% down? I'm excited by the prospect of buying a cash flow positive property out in Oakland, but I'm well aware that there is no such thing as free lunch and that these properties are priced like that for a reason. My thoughts organized below and I'd welcome any input or challenges against my assumptions/questions:

Key Question: "Should I invest in a positive cash flow MF rental property in a C-class Oakland neighborhood (where I'm assumed to not live in the unit)?"

Cons:

• C-class neighborhood and the downsides of having to get involved as an owner, even with a property manager
• Risk of rent control expansion, limiting upside
• Unknown tenant quality --> assumes greater vacancy risk/lower stability/increased maintenance costs
• Using 20% down, rather than owner-occupant 5% down, limiting ability to utilize leverage for additional investments sooner

Pros:

• Cash-flow positive at day 1, even at current rent control rates and assuming property manager expenses
• Speculation: Bay Area macro-trends where housing supply is limited in the Peninsula, driving renters and homeowners eastward --> long-term Bay Area appreciation bet

Ultimately, I know for deals I find on the MLS, most properties will cost me more and provide less cash flow for the benefits I'd want:

• Better neighborhood and more appreciation potential
• Better quality tenants and less management headache
• Lucky to hit breakeven on operating expenses and debt service

Given this, should I be focusing my efforts on finding better deals in B-B+ neighborhoods, rather than trying make the sole criteria "cash flow from day 1"? I'm leaning towards being patient with deals rather than pulling the trigger on a C-class neighborhood because I do understand that I'm purely speculating an appreciation in neighborhood/tenant quality. I'm also aware of a case where I'd have to sacrifice cash flow and optimistically hope that even making $1 per unit in a great neighborhood is better than making $300/unit in a C-class neighborhood out here in Oakland.

Welcome, again, any thoughts/challenges you'd have on my thought process. I'd love to have an active and productive discussion amongst the BP community. Thanks for taking the time to read this post.

[Adrian Chu]

I think you should consider what you can tolerate in terms of tenant quality.  

[Adrian Chu]

Originally posted by @Brian Garlington:

@Robin J.

Not sure if your mortgage person told you but it's actually 25% you need to put down if it's a small multifamily.

As for the "rent control" problem.....just do what I did and rent out to someone that's on Section 8. A lot of people don't know this but if a tenant's rent  is subsidized by the government then they do NOT fall under the rules of rent control. Last year I was able to raise the rent of my section 8 tenant in Oakland by "more than the rent control limit".

Freddie Mac conventional allows for 20% down.

[Brian Garlington]

@Adrian Chu

20% Down on an SFR,..yes....but on a duplex, triplex fourplex it is definitely 25% down if you don't want to pay PMI