Condo in Lake Merritt or SFH in Fruitvale?

Question

Hey  Bay Area investors, I've been spending the last couple weekends driving  around Oakland and going to open houses. My partner and I are intent on  buying in Oakland as our primary goal is winning the 2 - 3 year game on  appreciation. We may hold longer than 2 - 3 years depending on where life/jobs take us. For now, we rather bet on housing than stocks.

Here's the dilemma. Do we buy a condo in Lake Merritt or a SFH in Fruitvale?Lake Merritt Condo:Pros:  less maintenance than a SFM. Lake Merritt, especially Adam's Point, is already a gentrified area. Uber is moving in just a  20 minute walk from Adam's Point in 2017. This could cause prices to inflate to SF levels.Cons:  HOAs are extremely high making most properties in Adam's Point cashflow  negative. Plus, we may have missed the boat in terms of appreciation. Right now a 1bd 1ba  is going for $550k. Will they get to SF levels where 1bd condos are going for $800k or more?Fruitvale SFHPros:  more likely to get a deal on a place that needs some renovations. We  could get a place for $500K or less. Could renovate and add value. No  HOA fees. Potentially cash flow break-even.Cons: more maintenance  costs for a SFH. Less sure what type of person our renter would be.  Plus, the area feels like it's in the early stages of gentrification,  but I don't have evidence that it will be more gentrified 3 years from  now. Many parts still have higher crime and  lots of unsightly buildings and businesses. Will it change?I'd  love to hear your thoughts about these two areas and about the two  types of properties in them. Thanks so much in advance everyone!

Arlen Chou · Answer

@Tea Houck you are asking a very generic question and looking for a very specific answer.  There is so much more detail needed about your situation to answer that question with any real clarity.  In general most everybody will tell you that if you can find a real deal then maybe it is worth it and they will tell you to be careful of the pending market correction.  The question then becomes, what is a real deal...

For what it is worth, I am putting an offer out this week on a property in Fruitvale.  I am in no way saying that you should do that because I don't know the details of your financials, risk tolerance and a myriad of other nuanced details.  I am just saying that I am confident enough in the building that I found and my skill sets to pull the trigger.  If I cannot negotiate the deal I want, I am prepared to walkaway from the building.

There is a meet up this Saturday by @Juan Diaz in North Oakland.  He is an incredibly knowledgeable and open host.  I suggest that if you have the time you and your partner should get out to see what he is doing.  If you do go, look for me and I would more then happy to talk to you further.

-Arlen

Tea Houck · Answer

@Chris M., @Arlen Chou @Amit M. and @Edward Sittler

Thank you all so much for your input! I tend to agree with you as well about the short time frame. That's one area where my partner and I differ, but I think he is willing to hold longer term if prices drop after we buy.

The insights about HOAs have also been eye-opening.

We initially considered multi-family but decided against it due to strict rent control laws in Oakland and the significant premium on multi-families that don't currently have tenants. Our budget is small and the type of multi-families we can buy are in areas we don't think will appreciate. We can put down about $100K and have extra cushion for renovations/closing costs.

In your experience, if you were advising  two newbies, would you WAIT to buy in Oakland until prices drop? We are not likely to be able to score good deals off the MLS and we don't have the financing to buy a fixer-upper. We have to buy something in decent shape (in order to get a loan) and there is heavy competition for these residences. The idea to add value to the residence is one that could potentially work.

Because of high prices/competition and our newbie position, my risk-averse side is telling me to wait, but then again, I can't get over the open houses we went to for renovated SFRs in East Oakland. Absolutely swarming with people (techie/millennial types), even in areas I didn't think were very nice. Seems like good signs for appreciation (and as Chris said, the FICO scores are proof).

Amit M. · Answer

your biggest risk is "our primary goal is winning the 2 - 3 year game on appreciation."

How do you know prices won't flatline or drop in 2-3 years?  That's a short (and risky) time horizon, especially given that we are at top (or close to) top of market.  But if your intent is to keep and rent the property (in the event of job reloc, etc.) then you'll reduce your risk. So then the issue becomes, IF you do move out, are you ok with handling a negative cash flow?  What's your down payment?  20%?  Will a fruitvale SFH break even with an 80% loan?

As for which area will appreciate best, it's hard to say.  When we do get a down turn, usually the lower end areas drop the most (i.e. fruitvale more than Merritt).  OTOH having the condo HOA is like carrying around permanent dead weight.

My gut says go with an SFH on a decent street in fruitvale, within walking distance to the Bart station. THAT will help you get better quality tenants in the short term.  Try to get a decent deal where you can add value (remodel, plus maybe expand into the basement, attic, etc.)  don't over spend on renovations (as it will possibly become a rental in the future.)  depending on the market, you may have to hang on to this thing for 5-7 years, but if you set it up so you can do so, I think it will reward you significantly.

Edward Sittler · Answer

I agree with everything said so far by Chris Mason. Especially Amit's point about your appreciation time frame -- I think we are most likely at a short to mid-term top in prices, and don't expect to see serious appreciation for a few years. Your best bet is probably going with a property on which you can force appreciation through renovations. I certainly wouldn't count on Adams Point reaching SF levels any time soon.

Also, have you considered multifamily? That could get you significantly better cash flow that an SFH -- IF you can get market rents (no small feat in Oakland).

Tea Houck · Answer

@Arlen Chou you are definitely right about that. Still being new here I'm not sure of how many personal details are acceptable to share (or that I want to!).

I think meeting up is a great idea. Thanks for letting me know about this weekend's and for the offer to chat. Quite unfortunately we'll be out of town this weekend but I have been wanting to go to one. I've joined two groups on meetup.com that were created by BiggerPockets members, and I'll keep my eyes peeled on the forums for any upcoming ones.

Leslie Bandy · Answer

Hi Tea,

If you're open to areas a bit outside of where everyone seems to be looking, Eastmont Hills is a nice neighborhood and has a few 2 units around $500K.  I know that inventory is ridiculously tight right now which is fueling the overbidding.  Hopefully inventory will open up a bit in the spring and summer.

There seems to be growing belief that there will be a deflation of prices this year due to big losses in VC funding for tech companies, but I'm curious as to how large a part of our economy that is.  I think, if anything, that will bring selling prices closer in line with listing prices, but not bring listing prices down.  But, that's my guess and unfortunately I don't have a crystal ball.  I have a number of first time home buyer clients that have the same question as you.

Good luck to you!  I know it's a tough market.  Feel free to get in touch if you ever have any questions.

Leslie

Arlen Chou · Answer

@Tea Houck I fully agree with @Chris M., stay away from HOA's.  The real question is more along the lines of what type of pain are you more comfortable dealing with...  i.e. level of renovation and tenant class.  You can still get a SFR in the Adams point for less than $700k, your cash flow will initially suck, but your tenant class will be higher.  I don't think it is wise to loose money on a monthly basis waiting for appreciation.  You could look in the Merritt, Clinton, Peralta areas and pay less but have a slightly different tenant base.  You might be able to break even in these areas with the right property.  Or go all the way to Fruitvale and get more building for your money, but get a totally different rental demographic.  Personally I like the Fruitvale area for the upside potential and I am going to look at a property today.  If the deal makes sense on a cash flow basis, I will probably make an offer.  But I am also willing to deal with the tenant base and wait out the gentrification process to catch the upside appreciation.

Chris Mason · Answer

If it's an appreciation play, I'd go for Fruitvale SFR.

- Neighborhood is getting better. I know the FICO scores of folks buying there. :P

- SFR means there is zero possibility of a condo HOA doing something stupid that tanks values.

- In general it is said that condos are the last to appreciate, and the first to tank, when the economy turns south.

- Landlords often do not like condos because they have so little control over the HOA. Basically your authority as a landlord is shared with a committee of busy bodies.

- Another thing about the HOA that is unknown is how well it's finances are in order. A special assessment or HOA due increase, which you have close to zero control over, can make a cash flow positive property turn negative overnight. Compare to PITI - P&I, 30 yr fixed. Taxes, protected by prop 13 from massive increases. Insurance, you shop for yourself. HOA dues? Giant unknown where that will go in the future.

Condo in Lake Merritt or SFH in Fruitvale?

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