First rental investment in a "rougher" neighborhood in Oakland

[Robin J.]

Hi all,

New Oakland investor here and was hoping to get some advice/thoughts from experienced multifamily experts in the Oakland area. I've been looking to house-hack my first investment, as a means of utilizing max leverage, and looking for properties where cash flows cover debt service and operating expenses. However, unsurprisingly most properties in generally nicer/safer areas don't meet these cash flow requirements for me to house-hack and the ones that DO have cash flow are generally run-down and in lesser housing quality neighborhoods. 

My question to folks here is: if these multifamily properties meet cash flow requirements, should I forego owner-occupant/first-time home buyer benefits and buy them at 20% down? I'm excited by the prospect of buying a cash flow positive property out in Oakland, but I'm well aware that there is no such thing as free lunch and that these properties are priced like that for a reason. My thoughts organized below and I'd welcome any input or challenges against my assumptions/questions:

Key Question: "Should I invest in a positive cash flow MF rental property in a C-class Oakland neighborhood (where I'm assumed to not live in the unit)?"

Cons:

• C-class neighborhood and the downsides of having to get involved as an owner, even with a property manager
• Risk of rent control expansion, limiting upside
• Unknown tenant quality --> assumes greater vacancy risk/lower stability/increased maintenance costs
• Using 20% down, rather than owner-occupant 5% down, limiting ability to utilize leverage for additional investments sooner

Pros:

• Cash-flow positive at day 1, even at current rent control rates and assuming property manager expenses
• Speculation: Bay Area macro-trends where housing supply is limited in the Peninsula, driving renters and homeowners eastward --> long-term Bay Area appreciation bet

Ultimately, I know for deals I find on the MLS, most properties will cost me more and provide less cash flow for the benefits I'd want:

• Better neighborhood and more appreciation potential
• Better quality tenants and less management headache
• Lucky to hit breakeven on operating expenses and debt service

Given this, should I be focusing my efforts on finding better deals in B-B+ neighborhoods, rather than trying make the sole criteria "cash flow from day 1"? I'm leaning towards being patient with deals rather than pulling the trigger on a C-class neighborhood because I do understand that I'm purely speculating an appreciation in neighborhood/tenant quality. I'm also aware of a case where I'd have to sacrifice cash flow and optimistically hope that even making $1 per unit in a great neighborhood is better than making $300/unit in a C-class neighborhood out here in Oakland.

Welcome, again, any thoughts/challenges you'd have on my thought process. I'd love to have an active and productive discussion amongst the BP community. Thanks for taking the time to read this post.

[Arlen Chou]

@Robin J. I own properties in North Oakland and in the Fruitvale area and last night I had some interesting conversations with a few BP'ers that have units in deep East Oakland.  The general consensus is that appreciation can be had and cash flow can be found in all of Oakland.  The real question is what level of involvement do you really want to have.  That should really determine your search criteria.  

As an example, I was really surprised by the rents and the cash flow that can be had in deep East Oakland without very much direct interaction.  I am not sure if I would want to house hack in those neighborhoods, but good money can be made.  Moving up to Fruitvale, West Oakland or North Oakland, the margins are tighter but after talking to these other investors the headaches don't seem to be any less painful.  However, I would definitely do a house hack in these areas.

I wish you good hunting,

Arlen