A lot of people say that investing in a rental property is one of their best investment decisions. Since I also own investment properties in addition to selling residential real estate, this is a topic that’s very near and dear to my heart. So if you’re thinking about buying your own investment properties in East Bay, here is a list of things to think about before you start shopping for your first investment home.
1. What your goal is with the property
The first thing you should think about is what your goal is with the property. Are you looking for cash flow to add to your current monthly income? Are you looking for a place to park your money where it’s going to appreciate over the next 5-10 years? Or are you looking for a place to live that serves your needs which can also partly (or fully) pay for itself? These are three completely different needs. They also require three different strategies you should know about if you want to succeed in renting out your home.
Investing in Real Estate for Additional Cash Flow
A strictly cash flow goal means you want money coming in every month. You probably want to have the rental payments as a passive income so you don’t need to work forever. If this is your goal, single family homes is not the direction you want to go.
For you to have a steady cash flow every month, you’ll most likely need multiple rental units. Moreover, you’ll also most likely need to buy them at a discount. After all, it’s going to be challenging to get a loan and have a positive cash flow if you’re required to pay full market value.
Buying at a discount means you’re going to be looking for fixer uppers—something you can fix or upgrade to increase its value and then rent out to accomplish your goal.
Investing for Property Appreciation
On the other hand, if what you’re looking for is a low risk investment where you can park your cash and where it will appreciate in value while allowing you to enjoy some benefits, you may be a bit more willing to buy something that’s closer to retail value. For the benefits, being able to collect some depreciation on your taxes is an example.
With this arrangement, you’ll be paying someone who have already fixed the property. However, a possible upside will be all that will be left to do is find a tenant.
Living in the Property with Tenants
Lastly, living in your property and having tenants at the same time means that you have to think of a rental arrangement that works for both of you. This is in addition to looking for a location you love and a house that has the things you need to have in your home.
2. Rent control and tenant laws
If you’re looking for investment properties in East Bay, another thing you need to keep in mind is that Berkeley, Alameda, Oakland, and several other cities all have rent control ordinances. In addition, different cities also have varying rules and regulations when it comes to evictions, raising rent, and more.
When it comes to rules about evicting tenants, you have to find out what your city says you can do if they don’t pay rent, for example. You might want to look at the process and the timeline of evicting tenants, as well as some other rules for other possible scenario you can think of. For example, if you inherited tenants when you purchased your property, what would be the process to move them out if you want to move in in their place? Or if you eventually decide to sell the property?
Since rental property owners can find themselves in complicated situations, and because laws about rent control are also constantly changing, an upside can be inheriting a tenant can entitle you to a discount. This will more likely be true if they’re not paying market rent. From what I’ve observed, there’s usually a 10% difference if you’re buying a tenant occupied vs an unoccupied property.
3. Start thinking about financing
When you’re done with the first two in this list, it’s now time to explore financing.
Something you should keep in mind is not actually living in your property would mean that you’ll have higher down payment requirements than if you’re going to live in it. Real estate investors who are potentially going to live in the property may be able to get a low 3.5-5% down FHA loan, assuming the property qualifies for the county’s conforming loan limits.
On the other hand, a duplex or triplex that is not occupied by its owner would usually require a 25% down payment. Also, owner-occupied vs un-owner occupied properties will also have very different financing and underwriting standards—something you should absolutely talk to your lender about.
Since most mortgage loan officers and banks often focus primarily on single family properties, it will not be unusual if they will not be very competitive and knowledgeable when it comes to multi-family homes. Either way, what is important is to make sure you’ll get a good grasp of the different available products that will match your preferred living arrangement and rental situation. Doing this means you can properly underwrite your holding costs, operating costs, and all those other good stuff that comes with managing your own rental homes.
I hope my tips for buying your own investment properties in East Bay has helped you.
If I can give you more context on the process of buying or selling your home, please do not hesitate to reach out. My information is below.
Here’s to all your success!