W Oakland/Lake Merritt vs. Central San Jose vs. Bay View areas of SF for next investment

[Arlen Chou]

Hello Everybody,

I have replied to a few question, but this is my first question to BP.  My back ground is in house hacking and most recently into buy/holding a few small MF on the SF peninsula, specifically Mountain View.  I am now ready to purchase my next property and I am looking for some comparisons between Oakland, San Jose and SF.  All three markets have rent control and they have "feeder" economies that bring renters into these areas. Specifically I am looking for some first hand insight regarding "real appreciation" vs. what they say in the news and also what current rents are for 2/1 and 3/1 units.  Also any comments about the planning/permitting departments in these cities would be appreciated.  

Thanks much!

[Arlen Chou]

Hello Guys thanks for the great input.

@David C.I appreciate the positive comments.  I still have many things to learn and I know that this is a great place to expand my knowledge base.  I like small MF properties right now exactly for you the reasons you pointed out; economies of scale.  Also all of my tenant issues are focused in a single physical location.  If I get a call for a problem from one tenant, I can also easily see what is happening with my other units.  I also like the fact that when I am doing renovations, I am learning about the building as a whole. 

@J. Martin thank you for details regarding your "backyard".  This is exactly what I want to better understand.  I know that I need to spend some time there and walk/drive the streets of the areas the areas I am considering.  However, commitments at home have me tied down right now and I really cannot explore all of the areas that interest me at this point.  But your information definitely makes me more interested in Oakland and I think I need to make the time to drive across the bay.

@Manch Hon  thank you for giving me some real life appreciation numbers.  I agree with you that this rise cannot continue forever, but it sure feels like it has been going on for a long time in the BA.  Hopefully we have some more time to pull in appreciation.

@Amit M. I totally agree with you that this is more of an intellectual question than a practical question.  My view is that each of these markets have a potentially strategy to be used.  Mountain View has been great for buy and hold and cash flow but it is way too expensive for me now.

The properties I purchased last year were held by an older brother/sister team from over seas, Philippines to be exact.  They filled their units with Filipino nationals and treated them more like family than customers.  Needless to say the tenants were long term, one family has been there for 20 years.  Their children are grown adults now and still live in the same 1 bed 1 bath unit with the parents.  All 4 units of each 4 plex are 1 bed 1 bath with the same layout, in single story buildings.  The previous owner deferred maintenance for what looks like decades.  The roof in 1 building had a hole the size of a watermelon. Needless to say, this was a case of the owners cash-cowing the property to the point where they just wanted to get their decades of equity and move back to their home country before the buildings collapsed.

Rents at the time of purchase ranged from $850 to $950 per month.  Here again was a classic case of the owner not wanting to raise the rents because they were afraid they would have to do repairs, and the tenants not complaining about the property because they knew the rents were very low.  

Each building was purchased for $840k.  I did a full cash purchase with the plan to refi my cash out after 1 year and completion of renovations.  Because all of my cash was in the buildings, I had very little working capital for the renovations.  Therefore, 100% of my rent on a monthly basis became my working capital for the renovation work. 

Due to the tight nature of my budget, my only option was to do the work myself, while I was also working a day job.  This included: full demo and rebuild of kitchens, demo/rebuild of bathrooms except tubs, replacing sheet rock on ceilings from water damage, new flooring or refinishing flooring dependent upon the condition of existing floors, light fixtures, plumbing, correctly installed GFI outlets into bathrooms and kitchens, painted the interior of all units and replaced all interior doors.  The only things I had subcontractors handle were the new roofs, termite fumigation, rodent abatement and lead testing. First unit took nearly 2 months to complete, but the last unit took 3 weeks.  For those who are wondering, I did get the appropriate permits from the city for my work.

I have not done any landscaping at this point, nor have I painted the exterior of the building. My rents now average $1575 and the plan is to get them all to $1700 within the next 2 quarters. I have not had an appraisal done on them at this point. However, I have not seen any small MF's in Mountain View south of $1M. My total rehab for both buildings total is well south of $100k, this includes new appliance for each unit. I believe that at a conservative ARV of $1m per building today, minus the rehab costs, my sweat equity is over $200k total.

To answer your final question, I am actually trying to get out of my comfort zone. I feel that it is important to explore other markets and diversify my holdings in-case my local economy goes bad.  I have been in the Mountain View/Palo Alto/Los Altos area for a long time, but finding a deal here is impossible now.  So the intent of my post is get a further feel for the different micro RE economies so that I can start to focus my time on a new area to discover.

Sorry for the really long post. I appreciate all of the comments.

Thanks again!