Commercial Multifamily in Oakland/San Fracisco

[Raju Balakrishnan]

I am negotiating for small apartment complexes in Oakland. The rents are down at least 20% now. There are more supply of deals. It is possible to break even and be slightly cash flow positive with a 25% financing for multi-families (immediate cash flow is rare in bay area in general)

My plan is based on the belief that as the tech companies reopens (most of them are planning to be) the area rents should bounce back to the original in 1-2 years. If you can hold through the time with current rents you will be fine.  And there can be upside once market bounce back. For others here, how do you feel about the area? Is it a good time to get into a commercial multifamily? (Othner Oakland multifamily investors here?)

[Hayden H.]

Hi Raju, 

Are you negotiating for 4 units and below or more than 4 units? If negotiating for more than 4 units, and cash flow is only around breakeven, you are almost certainly going to have to put down more down payment than 25% as banks usually want a debt service coverage ratio of 1.2 or more. I'm actually going through this myself with an 8plex for my parents next to Lake Merritt. Commercial lending interest rates are few percent higher too - meaning you will probably get something closer to 4-5% than 3%. And the loans are not 30yr fixed, they might be fixed for 5 years then reset and length may only be 15 or 20 years before a balloon payment is due. That's why you may see 4plexes that could sell at a higher price than a 5plex, since financing is cheaper, down payment is lower, financing options are more and whole process is a lot less complicated for less than 5 units.

I think a good strategy would be to try and purchase properties that are severely under market rent for a lower price and try to negotiate with tenants to leave. Once they leave, it automatically increases the value of the property by six figures which is a lot better than trying to cash flow a few hundred bucks a month in other parts of USA. Obviously in order to do this, you will have to be able to sustain the property with current rents in place. Also, I like looking for properties with under market rent but with tenants who are young enough that they will most likely move in a few years due to a job change, life event, or they want purchase their own house.

I do agree that rents should eventually bump back up but many companies (Square, FB, Twitter etc) are doing fully remote so I don't know if 1-2 yr time frame is reasonable.