Bay Area FHA triplex sanity check!

[Luke Mccandless]

I am fully underwritten for an FHA loan to buy a 2-4 unit property in the bay area up to $550,000 ( possible higher depending on the income of the other units).

I am considering a place in West Oakland, currently a slightly high crime area, but strong rental rates and low vacancies. The property is a 3 unit place. There will be very little work required at move in. I will live in the 1/1 and rent the other units. My agent and I feel it will go for ~500k. I am committed to buying a 2-4 unit property and want to be sure I have thought of everything.  My commute will not be great, however, I only have to live in the property for 1 year, 2 if I want to avoid taxes. 

Mortgage with taxes and insurance and PMI is $2800 utilities are $300. No capital improvements needed for some 5 years + I will live in one unit and the rent on the other units will total (currently ) $2300 (market) $3700. As some people may know it's difficult to get market rents due to rent controls tenant's rights etc in California. Over the next year after move in I will work on getting rents up to market.

Questions:

1: If you you know of another property that better fits my needs let me know! 

2: Does anyone else own property in West Oakland? I am very interested in your thoughts.  

[J. Martin]

@Luke Mccandless

Welcome to the game! And good luck on your deal!
I have bought a 2-4 unit with an FHA loan in the Bay Area, and own a 2-4 unit property in West Oakland with a partner.

A couple observations/opinions on your plans, comments, and questions:

1: If you you know of another property that better fits my needs let me know!
- You didn’t say much about your needs. So hard to tell. You are right you don’t have to stay there forever, and the cash flow will be better there than almost anywhere in the South Bay, especially after getting market rents. The owner-occ rent control exemption on triplexes in Oakland gives you a unique opportunity to reposition this property to increase value, IMHO.

2: Does anyone else own property in West Oakland? I am very interested in your thoughts.
- I own a 2500 sq ft duplex near 32nd & Chestnut St. Rent controlled tenants. I’m not moving in. We bought it for $300K just over a year ago. Sweet off-market deal. A lot of young tech folks have moved in, and rents are WAY up for nicely remodeled units with parking. ($2k+ for 2br apt). I think West Oakland has established a new higher “low bar,” as the gentrifying is accelerating. It will always be a bit better than it was. For this reason, I believe that it will have higher “baseline” percentage increases in prices than many other nearby areas for the next decade (personal opinion). The geographic location is fantastic, surrounded by great neighborhoods, gentrification with higher incomes and rents, etc. 

On the other hand, I think West Oakland will continue to have volatile prices over economic cycles. People are still getting shot on street corners. The walkscore still isn’t that great. You have to drive or bike somewhere to get everything you need. Hopefully those things will change more over time. But they still exist. I think both my duplex and your (future) triplex will be at a lower value at some point in the next 5 years than they are today. I also think that in 10-15 years, the prices will very likely be significantly higher. I do not plan on selling my West Oakland unless prices get REALLY crazy. Given that you are going to re-position to market rents, you will be ahead of everyone else, and should have decent cash flow, just eyeballing it.. So should do you well over the long run, knowing that the price take a bit of a hit in the next downturn…  Maybe @Daniel Shepstone can chime in also.

3 – Offers with no Financing Contingencies on FHA - ****DANGER DANGER!!**** WATCH YOUR ***!!! You seem to have focused mostly on the underwriting of YOU, whereas there are many property-specific risks to FHA financing, primarily regarding condition, that you do not seem concerned about. Primarily, a sealed envelope of building, 2 years of roof, health & safety items like adequate heating, venting, no visible discoloration (mold), egress from each bedroom, termites, peeling lead paint, drainage issues, secured railings, and as miniscule as trip hazards if they are having a bad day. You may not find some of these issues out until after the appraisal or appraisal review. So keep that appraisal contingency in as long as possible.. and watch your ***!
https://www.lender411.com/mortgage-articles/4476/h...
“I am working with a lender that has taken me through the full underwriting process so we are comfortable removing the financing contingency ( keeping the appraisal and inspection contingency )”

4 – Rent control / Listen to @Arlen Chou. He’s experienced with rent control in Oakland. Everything he said is consistent with my understanding.

5 - Difficulty Getting FHA Offer Accepted
 @Patrick Quinn, you are correct that it can be very difficult to get an FHA offer accepted, especially in a hot time of the market in West Oakland. I submitted many offers on 2-4 units in West Oakland in 2011 and 2012 as the market was picking up. From what I've heard, it can be just as hard now. The selling agents' main worries have been that FHA buyers have little/no wiggle room to make up any difference in the appraisal, the longer close time, and the extra requirements of FHA that can kill the financing (usually due to condition of property - see financing contingency portion above).

6- Good Time to Get In?
 @Jonathan Payne – Did Arlen say it was a great time to get in? I didn’t notice that in his comment. Personally, I think most Bay Area real estate is overvalued right now, based on historical indicators, and I am not buying (except for the very rare great deal). And I have been a huge cheerleader for everyone buying real estate for the last half decade until late last year and this year. In this particular case, there will be a lot of value added in moving to market rents as an owner-occupant, so it might really make sense, and $500K sounds like a pretty good deal for a triplex in West Oakland, depending on the circumstances.

“I will concur with @Arlen Chou - great time to get in and great advice on the Landlord Exemption Cert.”

@Dina Eisenberg
I hope you're not planning to use an FHA loan to buy a duplex or triplex in the Piedmont/Grand Lake area, because I think you'll quickly be over the FHA maximum price limits! That happened a couple years ago in the those neighborhoods! :(Good luck on your search though! Please see my comments on "Good time to get in? also". But beautiful area, and great place to live. I think the 2-4 units are definitely a better value than the SFH over there..

Good luck Luke and Dina!