Bay Area Sweet Digs

August 5, 2008

Would You Buy Now to Invest and Rent Out?

for rent Would You Buy Now to Invest and Rent Out?Yesterday, I was talking to an East Bay real estate agent who knows Oakland like the back of her hand, particularly East Oakland, and she described a lot of investment activity going on right now. Basically, folks seem to be snapping up homes for under 200k, doing minimal renovation, then renting them out at rental market rates. (She has one client alone who bought three 200k homes in the span of a couple months and then rented them all out just as quickly). And now today, my fellow blogger Janis Mara asks Would You Ever Rent Out Your House? So we have some interesting phenomena dovetailing: folks who bought at the height of the bubble barely able to hold on to their homes and considering selling or renting out along with folks getting into the market due to its bottoming out to invest but not necessarily to live-in the homes they are buying.

I checked out Craigslist for going Oakland rental rates. Yup, rents have gone up (some, way, waaaaay up) since I last rented  in Oakland (which was under 2 years ago).  While there are still “reasonable” rents out there (2-bed apartments going for $800-$1200) there are a lot of pristine SFR’s up for rent that are going for what must be “bubble” (e.g. height of the bubble pricing) mortgages. It seems that with home sales down, the rental market has gotten much tighter. Here are the rental ranges I found for 2-bedrooms renting in Oakland per the Craigslist categories:

Downtown: $1200-$2900
East Oakland: $850-$2450
Oakland Hills/Mills: $1050-$2995
Lake Merritt/Grand:$1050-$2595
North/Temescal:$950-$2400
Piedmont/Montclair: $1295-$3200
Rockridge/Claremont: $1590-$3150
West Oakland: $976 (3-bed listing)-$2200

So does it make sense to buy as an investor and rent out? I’m not sure.  While prices are diving like never before, you would still need to come up with 20% down, and on a 200k home that still ain’t cheap. The you would need to be able to find renters for the home and make sure you are charging enough to cover not only the mortgage but all other expenses (maintenance, utilities, insurance, etc.). Not to mention all the complexities that go with being a landlord. But then again, if you can find a home that’s in decent shape, it just might be a great investmet. Below I’ve included current homes for sale around town that could be good investment candidates: they appear to be in fairly decent shape and at decent prices.  Let me know what you think.

East Oakland: Fruitvale Area

2050 35th Ave.  2bd/2ba $199,900 742 SF

East Oakland:San Antonio District

2449 E 21st St. 2bd/2ba $190,000 792 SF
1950 E 20th St. 2bd/1ba $239,900

East Oakland: Maxwell Park

2947 Octavia St. 2bd/1ba $223,900 953 SF

Mills College Area

6139 Seminary Ave. 3bd/1.5ba $250,250 1252 SF

East Oakland: Eastmont

2692 76th Ave. 2bd/1ba $109,900 1080 SF

West Oakland

1131 Wood St. 2bd/1ba $187,900 765 SF
1137 34th St. 5bd/1.5ba $229,000 2015 SF
3012 Linden St. 2bd/1ba $129,000 1097 SF
3120 Linden St. 4bd/2ba $195,000 1124 SF

North Oakland

861 Apgar St. 3bd/1ba $255,000 1409 SF

Posted by Alison Ching on August 5, 2008 7:14 PM | del.icio.us | Digg

  • Alison
    Hello Curous:
    thanks for your comment. Good point about renting out until ready to move in; have any folks reading this done that before? Or considering it now? Also, thanks for the dose of realism: not being able to rent out due to lack of renters (or suitable ones) is a real concern.
  • curous
    In the 20 plus years that I have lived in the Bay Area, the purchase of a house to rent has never made economic sense. However, there are circumstances were buying and renting makes sense. Say you want to buy a house now in the down market to live in the future. Can you buy now, rent until you are ready to move in and take advantage of the limited tax benefits available? Sometimes.
    I have not done a survey of the rent control ordinances for the bay area, but in Berkeley, for example, the rent control provisions that apply to single family residences are relatively mild.
    If you are going to rent out a house, you really do need to be realitstic about the costs -- several months of a vacant property will bust your cash flow projections.
  • David
    Not really a pity-fest. I was doing my best to correct what I've seen as commonly held misconceptions about the tax benefits of owning property.

    I agree there are opportunities out there to make a decent buy-to-rent decision. However, I really don't see the purpose in buying negative cash flow, and most properties, even foreclosures are still negative cash flow situations. You end up paying for your speculation as to when and how much prices will come back. And Michelle, you'll notice the property mentioned was in Oakland, not San Jose.

    With the credit situation the way it is, I understand you will likely have to put 30% down, your leverage benefits are reduced.

    Anyway, you can't just say that a foreclosure is a good investment idea or that it's automatically a great idea to be cash flow neutral. Run the numbers, and don't forget to make real allowances for maintenance AND vacancies.
  • Alison
    Thanks David, Michelle, Dave and Red! Great comments. I'm learning a lot. David: good point about renting out an SFR vs. a multi-unit; when you put it that way, renting out an SFR doesn't seem to make sense. Dave and Red: yes, there's so much to think about as a landlord; it makes me wonder if it's ever worth it. I don't think I would be cut out to be a landlord...Michelle: I think you're right in that this really is a rare situation we have right now in the Bay Area; what areas might you recommend to buy and rent out? Thanks everyone!
  • Michelle
    There is no rent control in San Jose on single family homes. Anyway what a pity-fest this is! The Oakland buyer Alison Ching wrote about in the blog has it right. Right now we have a rare situation, in that rents are high and real estate prices low. Why not take advantage of it? You can buy a foreclosure in a reasonable area today (I would advise a better area than some of those in Oakland), make a few repairs and rent it out for almost the mortgage payment. The ability to do this is rare in the bay area. Wait a few years and sell, or raise rents and achieve decent cash flow. Whats not to like about this? And to Red, on the earthquake damage, yes that was unfortunate but how much have you made on that house now, 19 years after Loma Prieta? A roof costs 6K and its a repair you need to make every 20 years, meanwhile houses are appreciating hundreds of thousands in the same period. Lets get some perspective here.
  • Red
    Being a landlord is WORK, believe me, I've been there. Try doing an eviction for fun. So just because buying and renting out a place might break even, you had better be able to see significant appreciation to make it worthwhile. In addition to that, there are risks, some you might not think about much; I got hit big time by the 1989 earthquake - one rental almost twisted off its foundations and it cost a fortune to jack it up and put it back. I was lucky, the house next door dropped into the basement. I've also had a tree fall on another place, taking out half the roof.
  • David
    There is no real tax advantage. You get to deduct mortgage payments, etc from the property's income. If your mortgage payment exceeds the income, you get to deduct the loss (but you still lose money, just less than the straight up loss). If they don't, you have cash flow, and you pay taxes on the income. The only additional tax benefit you derive, if you're cash flow positive is a depreciation benefit.

    Additionally, while rents are higher now than they were a couple years ago, they can drop, and more importantly, I believe just about every jurisdiction in the Bay Area has rent control, so you're going to be locked into the rent you charge.

    People often do not calculate the tax benefits correctly. For example, they always talk about the tax benefit to owner-occupation, however, they incorrectly calculate it.

    Everyone has a standard deduction, therefore, the tax benefit is the INCREMENTAL deductions gained by 1) having the mortgage interest & property taxes be greater than the standard deduction and 2) the ability to deduct state income taxes.

    Your correct incremental tax deduction for a, say, $400,000 loan at 6% is:
    $24,000 - $10,000 (or so, if married, can't remember the exact amount for standard deduction)
    + property tax ($5,000 for example)
    + state income tax (another $5,000)

    so $24,000 * tax bracket is the incremental benefit, not $34,000 which is how I usually see R.E. agents calculate it.
  • dave
    in response to Michelle:

    Yes, you have the tax advantage, but you also have the tax disadvantage, namely PROPERTY TAX (which in most cases comes out to be MORE than the savings in the interest tax-deduction). And don't forget homeowners-insurance, HOA, mello-roos, maintenance fees, buying and selling realtor costs... the list goes on.
  • Michelle
    remember you have the tax advantages so depending on whether you have other income coming in, you don't really need to cover the mortgage completely to break even.

    Rents are higher than I have seen them in some time, and rising monthly just from perusing Craigslist.
  • David
    It rarely makes sense from a cash flow perspective to rent out a single family house, even going back 10 years.

    Most SFR's purchased to rent out are done so on the expectation of cash flow neutral, with the kicker on appreciation. Therefore, right now, with any appreciation several years away, it's definitely a long-term investment, and one that might be worse than alternatives.

    However, I've seen several 2-4 units for sale on craigslist that should be cash flow positive and probably would be better investments.
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