Single Family with low GRM in West Oakland?

Question

To introduce myself, I am a valley engineer who is tired of working on software and wants to put his money to work. Towards this end, a few weeks ago, I started looking at investments in the bay area. Since this is my first investment and I have no experience in screening tenants, maintenance etc., and I really want an investment, not a second job. :-)

Looking at SFRs in West Oakland area, the GRMs I am able to calculate are around 5.6% (e.g. gross annual rent of 36,000 on a purchase price of 657,000). My reasoning behind the SFR was:

a. SFRs in that part of the city are a limited commodity, where as a lot of condos can be built vertically and compactly.

b. No rent control on SFRs.

c. Can do OMI eviction on SFR (though I hope it never comes to that).

d. Rents will be so high that it will make sense for a renter to buy their own in a few years.

e. Really no other place for people in love with SF to go to.

The rents just about cover the mortgage and taxes. This means I will only have internal returns for a while, and Ill have to rely on appreciation for the investment to make any sense. Am I missing some crucial piece of information here?

One question I have is, how close to BART is close? Is an SFR about a mile away from BART close enough?

Account Closed · Answer

"I'll have to rely on appreciation for the investment to make any sense" is a recipe for disaster, my friend. We are quite possibly at the top of the market, so relying on appreciation, especially in an area like West Oakland which has seen values double over the last 5 years, is extremely risky and irresponsible.

There are plenty of multi family properties that will provide cash flow in West Oakland that will give you a return on Day 1, or perhaps with a value add component to give you double digit CoC returns.

Keep looking.

J. Martin · Answer

@Sudeep Jain,"The rents just about cover the mortgage and taxes. This means I will only have internal returns for a while, and Ill have to rely on appreciation for the investment to make any sense. Am I missing some crucial piece of information here?"

@Andrew Muff,"The condo we have just appraised for slightly less than your target for the SFR and as that neighborhood improves we expect the appreciation we've experienced to continue."

Hard to decide which signs are the best indicators of the beginning of the end of this cycle: the data, or the speculation and optimism! (it's different this time! ;) Account Closed - which do you think? hehe

Andrew, you expect condo appreciation since 2012 in West Oakland to continue?
Sudeep, we are in the late phase of an expansionary cycle, and appreciation rates are slowing. In addition, West Oakland has some of the more volatile prices in the SF Bay Area, which is why I bought a duplex up by Andrew's place in 2014 for $300K. You will be negative cash flow on your SFR as it sits after paying for maintenance, even more negative cash flow if the significantly increased rents in West Oakland soften, and are buying at a time of the economic cycle that tends to produce the least large appreciation gains, based on history.

The best appreciation gains tend to come after the unemployment rate hits a peak, and the economy starts to improve. They tend to be lower or negative after the unemployment rate hits a low. Look at which years in history have the same jobs characteristics as today and ask yourself if you would have also liked to buy in those years. If your answer is you're a baller tech employee who can afford whatever monthly shortfall, and are holding for 20 years and you don't care, then go for it..

Ray Lai · Answer

@Sudeep Jain

We are really late in the cycle and this is your first deal so please be extra cautious.  I know other people are still finding deals as there are deals in any part of the cycle if you work hard enough, get lucky and no where to look but losing money on your first deal would be a really really big delay on your journey into real estate.

Being negative cash flow and banking on appreciation late in a real estate cycle is probably the worst thing you could do in terms of starting in real estate.

Why not look into awesome cash flowing properties in the midwest? Hell, even a good turnkey company would better suit you than buying late in a market cycle.

Have you listened to the podcasts? Or if you want a super quick education on cycles, realwealthnetwork has some high level posts by Kathy that are pretty solid.

Really love J. Martin's sexy info from FRED :)

Sudeep Jain · Answer

Those are some 'cold light of day' charts :-) What am I thinking! Unemployment cant go any lower, Fed's interest rate trajectory is upwards, investors in the big boys of tech are soon going to be/are already in a 'show me' mode compared to a 'tell me' mode. Those are the realities going against buying in W. Oakland.

So I guess the decision depends on answers to the following questions:

a. Does West Oakland have something unique that can't be had elsewhere?

b. How long does this cycle continue and is the next downturn going to be a normal, one or two quarter, fed induced slow down? Or a serious balance sheet recession with forced liquidation of assets?

c. Are the 'holders' in Oakland strong hands? who wont sell until they get their asking price? Or hard money/ARM buyers with poor quality mortgages who will have to go through foreclosures?

Sudeep Jain · Answer

Thanks a lot for responding Sajal ! Can you give some examples of such properties? The only downside I can see of multiplexes though is increasingly draconian tenants rights.

Andrew Muff · Answer

@Tim McGarvey I haven't checked the MLS recently, but I just literally closed yesterday on a duplex in East Oakland. Purchased at $630k. Projecting to cashflow $2200 net after ins, taxes, and mortgage. The owners delivered it empty as they are moving to New Orleans so no past tenant issues. The deals are out there still.

@J. Martin I get what you are saying about the market conditions. My comments are more focused on that specific 10 blocks of W Oakland where I used to live. Given a flat market (i.e. All other factors being equal) that neighborhood will appreciate relative to the rest of the market because of the dramatically improving conditions on the ground. It used to be a place where people routinely dumped their trash on the streets. If you drive through there today, there are massive construction projects going on everywhere. Two years ago we had prospective tenants call to cancel their screening apointments after driving through the neighborhood. Now it's becoming a hipster destination for ex-SF transplants. If I keep finding good cash flowing deals, I'll continue to buy in the face of softening market conditions.

That said, you are correct. I would never buy a negative cash flowing investment.

Andrew Muff · Answer

Hey Sudeep. Welcome to RE Investing. I've owned a condo in what I think is the exact neighborhood you described since 2012. It's on the Target end of Mandela Parkway and my wife and I lived there for 3 years before moving to the Oakland Hills. It's just over a mile from the W Oakland BART station and I can say from experience that it's close enough to walk if you have no other choice, but a mile is too far to do every day for your commute. My wife just weighed in on this and said a 10 mins walk (about a 1/2 mi) is acceptable. That said, if someone was less lazy than I am, a mile is an easy bike commute and there is plenty of secured bike parking at BART.

Other than that I think you have your bases covered. The condo we have just appraised for slightly less than your target for the SFR and as that neighborhood improves we expect the appreciation we've experienced to continue. It was a VERY rough neighborhood when we originally purchased, but now most of the homeless are gone, they knocked down the abandoned warehouse they were living in, and some of the recycling centers are closing up and leaving. There is a lot of new construction going on there and in another 1-2 years it will be a completely redeveloped area close to BART and freeways.

I say you'll do just fine on that purchase although I can't imagine that rents can continue to climb. But then I've been saying that and have been wrong for years as well.

I could go on about tenant selection as well, but I think that is enough for one post. Best of luck!

Tim McGarvey · Answer

Account Closed I'm interested in investing/living in Oakland but based on my research (similar to what you describe above), it seems we are at or near the top of an appreciation cycle. How would you recommenced a new investor to get active in a climate like this? Be patient and sit on the sidelines for a while? Out of area/state until the dust settles in the Bay Area?

Sudeep Jain · Answer

Thanks Sergey! I visited a few Oakland open houses this weekend and for sure, the deals are out there.. Especially if one can do some OMI evictions and get to market rents. Unfortunately, that phase of my life when I could take such a task on is gone but I am sure enterprising young bp members can make it happen. Hundreds of thousands of dollars on the table if you can.. For a couple of years worth of disruption in your life. :-)

One interesting thing I saw in Oakland was unpermitted duplex conversions of old Victorians. Basically, an unpermitted apartment has been created under the permitted space, within the footprint of the old house. Unpermitted is unpermitted, and a huge liability if one were to rent it, but a few of the places looked like they were up to code.. Is it possible to get a permit for such a unit after the fact? I supposed inspectors would want to peek behind the walls etc. Just how difficult is such a thing? Is it as simple as taking down the sheetrock at a few places for the inspection, fixing up any issues and putting it back up again? Or more difficult than that? Any interesting stories to share? :-)

Sergey Tkachev · Answer

@Sudeep Jain - nothing new I can say but just support what some of the other BP'ers have said.  Yes, deals are definitely out there but in the current market, it is much tougher for a new investor to find them and very easy to end up with a bad "deal".  That's the main reason everyone is cautioning you.

I would say just be careful of jumping into a deal without doing a proper analysis using actual and real numbers, not imaginary "what could be" numbers.  In this market this is especially dangerous because good deals are hard to come by and you want to "make" the deal look good - so keep emotions out and analyze what your goals are and abilities are.

If you want cashflow and can't find anything in the bay, it might make sense to also start researching other cities or even out of state markets.  Sometime it is worth taking a little more time to find the right deal than jump into a bad one prematurely.  Wish you much success in your search, you are already on the right track :)

Single Family with low GRM in West Oakland?

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