Real Estate in Oakland

[genselecus]

All,

I'm looking into purchasing a first home (age 26) in Oakland, but I want to make sure I'm making an intelligent decision. I've done some research on the market, but I wanted to see if anyone on here is particularly familiar with the Oakland market. The research that I've done says that prices in Oakland will probably increase substantially over the next 5 years (7%+ per year), so I think it is one of those situations where if I can afford to jump into the market, I should, but this is a huge (terrifying) purchase. I'll try to break this down into an organized way:

Background - My girlfriend of two years and I live together in downtown Oakland in an apartment building (2BR/2.5B) for $1900 a month. We've been renting out the second bedroom on AirBnB as much as possible over the last 4 months or so, but if we buy a place we would be looking for 2+ bedrooms (the "+" is if the price is good). We moved to Oakland from Boston a little over 6 months ago, and our year lease ends at the end of September of this year. After that, I would say there is a likely chance that the rent will increase by $300+, to $2200+ per month.

New Home - I've got about $80k in assets that I could put into a down payment. I've been trying to look for places that are less than $300k, but there aren't too many (if any) of them that are in a safe, relatively convenient, neighborhood (the main criteria is that we are close to BART, as we work in the city). I've been thinking about increasing the price to as high as $450k, which should open up a lot of options for me. I've used the NYT rent vs. buy tool and it really boils down to what I expect the annual increase in property value to be. A 7% rate means I'll get a payout in as little as 2.5 years, even with a 10% down payment.

What I'm really hoping to get here is, if you are familiar with the Oakland market, do you think that rents and property prices are really going to increase at 6%+ per year over the next 4-8 years? If so, this is a pretty safe decision, right?

Thanks for all the help!

[Another Reader]

In 1996, I could have picked up all kinds of properties in Oakland for under $100,000.  It still hadn't recovered from the last downturn in the early 1990's.  Oakland is the first market to drop and the last to come back among the inner ring suburbs.

You are going to get nailed eventually on the AirBnB by your landlord, the city (they want the hotel tax) or your neighbors.  Don't count on that income.

Prices have increased dramatically in the last three years.  Real estate is cyclical.  With interest rates likely to rise, financing will become more difficult, and appreciation will slow or stop.  Can't say what will happen to rents as a result, that depends on the job market, which has been really hot.  That will slow at some point as well.  At some point, wage growth will not support rent increases. 

Ask yourself how you would feel if prices were going up one or two percent per year, rents were going up two to three percent a year, and your AirBnB income disappeared.  My opinion is that is a lot more likely and it would be wise to be conservative in your assumptions.

[Badass by 41]

Be careful with this kind of conjecture.  I think you really need to ask yourself "why" you want to buy.  If it is because of the appreciation, you are gambling.  I say this from experience.  I bought in SF in 2004 for almost exactly the reasons you've outlined here.

Within 2 years I was up 15%, within 1 more year I was -30%.  It took 5 more years for prices to come back, at which point I sold for a profit of $5k.  Granted, had I held on for another year I would have been up 20%, but that's my point.  If you think you can time these things, you're gambling.

Buy the house if it makes financial sense. If it's a great place that you want to live and wouldn't mind staying in for 10 years.

Don't buy because you think you should.  Because you're "sure to make a profit".  Or (especially) because a financial institution says "you can afford it!".

[dragoncar]

If these trends continue, yes.  But what if they don't?  Right now, Oakland is riding tech's coat tails.

[Lalo2]

I own a duplex rental in Oakland. We've raised the rents steadily with every new tenant, starting at $1400-$1550 in 2007 and now at $2000-2100 for the units. However i wouldn't buy anything unless you are ready to hold it for at least 8 years, 5 years in to our purchase we tried to sell and couldn't get a decent price for it.

Also, the City of Oakland caps the amount you are allowed to raise rent each year. It is typically 1 to 3%, and is posted on the City website. Good for you if you want to stay in your current rental, and a reason to look for tenants who wont stay for ever if you purchase a rental.

[arebelspy]

I own a duplex rental in Oakland. We've raised the rents steadily with every new tenant, starting at $1400-$1550 in 2007 and now at $2000-2100 for the units. However i wouldn't buy anything unless you are ready to hold it for at least 8 years, 5 years in to our purchase we tried to sell and couldn't get a decent price for it.

Also, the City of Oakland caps the amount you are allowed to raise rent each year. It is typically 1 to 3%, and is posted on the City website. Good for you if you want to stay in your current rental, and a reason to look for tenants who wont stay for ever if you purchase a rental.

That's funny.  I try and get long term tenants, but yeah, in a situation like that, you want ones that only live there a year or two.

[dragoncar]

I own a duplex rental in Oakland. We've raised the rents steadily with every new tenant, starting at $1400-$1550 in 2007 and now at $2000-2100 for the units. However i wouldn't buy anything unless you are ready to hold it for at least 8 years, 5 years in to our purchase we tried to sell and couldn't get a decent price for it.

Also, the City of Oakland caps the amount you are allowed to raise rent each year. It is typically 1 to 3%, and is posted on the City website. Good for you if you want to stay in your current rental, and a reason to look for tenants who wont stay for ever if you purchase a rental.

That's funny.  I try and get long term tenants, but yeah, in a situation like that, you want ones that only live there a year or two.

Yeah but he's not looking for a rental property... Unless your advice is to take advantage of rent control?  Or to buy a duplex?  I've seen some 4 units under a million near lake Merritt but no idea what condition.

[Lalo2]

Oops, reading error. I thought this thread was for investment property.

[genselecus]

Thanks for all the replies. And particularly about the maximum rent increase in Oakland. I didn't realize that exists (2014/2015 rent increases are capped at 1.9%), so my rent can't go up by more than $40 or so. Awesome! There's a place in my building that rented out a few months ago for 15% higher than my rent and it is a little worse than my apartment, so I'm dodging a bullet on that one.

Yeah, I've been trying to think about the potential growth conservatively as much as possible, and I figured if it made sense at 3-4%, then it would be particularly nice if it goes up to 7%+, and I definitely hear you on "riding the tech wave" and that concerns me. If I adjust the NYT rent vs. buy calculator to 2% escalation on property and rent, and fill in the rest of the numbers, I don't think I can break even for at least 5 years, which I think is past my timeline right now.

I appreciate the advice and feedback.