Existing Rents turn a Great Deal into a Bad Deal

[Daniel DiChiro]

Hello BP Community,

This is an interesting scenario and I would love to hear your feedback. At first glance this 4-plex in Oakland, CA would appear to be a steal for $750,000! It is in relatively good area near downtown and is fully functional. 3 of the units are already occupied and the 4th is newly renovated, making it the perfect house hack opportunity... sounds too good to be true, right?

Well I reached out to the selling agent to understand how this seemingly fictitious deal could be real? Turns out the building is rent stabilized (no surprise for CA) and the existing renters have been in there for so long that the existing rents are well below market (~1/2). As a result, the tremendous deal analysis I originally ran with market rent values, actually turns out to be a terrible negative cash flow deal!

So what's up fellow investors? The asking price is so low it seems irresponsible to pass up on this deal, but the existing rents make it a deal breaker. Are there any other considerations to make? Have you experienced this situation and if so, what did you do?

[Ethan Plaza]

Hi Daniel, I used to live in Oakland and while I don't know the people who live in that quadplex. My guess is they won't be leaving anytime soon, regardless of who the new owner is. They know they're paying well below market rates, and they know they don't want to be paying current market rates. If what they're paying is less than 1/2 of market, I'm assuming they've been living there at least 10 years. And probably will still be living there in 10 years.