A Short Guide to Buying and Selling REN TAL PROPERTIES

There’s a lot to remember when buying and selling rental properties as an investment in the East Bay. And while rental properties as an investment can be an excellent way to build wealth and generate passive income, it’s not the same as investing in a typical residential purchase and sale.

Here Are A Few Guidelines To Help Get You Started

It goes without saying that before buying or selling a rental property, it’s important to research our local market. The demand for rental properties has varied in the East Bay, and a lot depends on income, location, local regulations, and constantly changing ordinances. All these factors will impact your investment and the ability to buy and sell. You will want to familiarize yourself with local vacancy rates and expected growth trends. East Bay housing prices are still higher than many can afford. As a rental location, we are experiencing strong demand, solid employment opportunities, and population growth. So far, so good. Let’s dig deeper: a) Our area’s population trends, income levels and job growth remain strong. It’s all about supply and demand: High demand coupled with low supply has led to high rents and low vacancy rates, making the East Bay an attractive investment market for investors. b) Although one can discover a lot online about property values and market trends using sites like Zillow, Trulia or Rentometer, it’s always a good idea to talk with other local real estate agents, property managers and investors. Ask for their insights into the market and what their future expectations are. c) As you look around the marketplace, compare rental rates, occupancy rates, and key features of similar properties. Spend time in various neighborhoods to observe the general condition of properties and the available amenities. d) Monitor local news, zoning changes and upcoming developments that may impact the rental market. Are there new infrastructure projects? Changes in public transportation or schools? New regulation controlling what you can do with your property?

Our local economy is in flux. Major tech firms are experiencing layoffs, while the job market appears robust. Even the weather is changeable, subject to ever more extreme seasonal factors. You want to make good decisions about when to buy, sell or hold rental property. In the East Bay, I recommend buyers consider areas without city/municipal rent and eviction rules; your operations will exist under the authority of the State of California Rent and Eviction Controls, which, for now, feel more balanced than local regulations.

BASIC QUESTIONS WHAT’S YOUR GOAL?

Once you have a financial objective in mind, you have to figure out how to get there. Are you looking for cash flow, capital appreciation or both?

The budget you develop should include all the costs associated with owning and operating the rental property. Tally property taxes, insurance, maintenance costs, and property management fees to determine the potential profitability of your investment. Account for any city fee mandates for rental control program management. Evaluate cash flow and expenses; analyze potential rental income against all your operating expenses to ensure the property can generate positive cash flow. Remember that investing for cash flow and capital appre- ciation are two different strategies, each with benefits and drawbacks. The choice between cash flow and capital appreciation depends on your goals, risk tolerance and financial circumstances. And you don’t have to choose one strategy exclusively. Many diversify their portfolios by including a mix of both.

Suppose you’re a young investor with a long investment horizon. In that case, you may be more willing to take on the risks associated with appreciation, as real estate has historically shown consistent growth in value over time. With a higher risk tolerance, you may be comfortable with potential fluctuations in property values. Especially if you have already achieved some degree of financial stability (read: an emergency fund, a stable income and manageable debt levels), investing for appreciation can be lucrative on its own, but I would advise always looking for some positive cash flow. Our future is uncertain, and nothing is guaranteed.

If you’re looking for a more stable and predictable income, investing for cash flow might be more appropriate if you anticipate needing access to your funds sooner. Note that cash-flow investing often requires more active involvement (think management and maintenance), so consider how involved you want to be in the day-to-day operations of your investment.

HOW DOES A PROPERTY SHOW POTENTIAL FOR POSITIVE CASH FLOW?

HERE ARE SOME ENCOURAGING SIGNS: Areas near universities, employment centers, good school districts, or transportation hubs are generally a good bet, as are low vacancy rates. Here the East Bay excels.

• Ideally, the property should generate positive cash flow from the moment you purchase it. To determine this, calculate the rental income and subtract all operating expenses, such as taxes, insurance, property management fees, and maintenance costs. If the result is positive, the property is likely to generate cash flow.

• Look for properties with below-market rents or outdated features that you can upgrade. You’re likely to have an opportunity to increase rental income over time, leading to improved cash flow.

• Choose properties in neighborhoods with stable or appreciating property values, as these areas are more likely to support consistent rental demand and allow for rent increases in the future.

• Opt for properties in good condition or those that have been recently renovated to minimize maintenance costs and maximize cash flow. Avoid properties requiring significant repairs. Ask about recurring maintenance issues, which can quickly eat into your cash flow.

• Securing favorable financing terms, such as a low-interest rate or an extended loan term, can reduce your monthly mortgage payments and improve cash flow. Shop around for the best financing options.

• A well-managed property is more likely to generate positive cash flow. If you don’t plan to manage the property, find a management company with a good track record and reasonable fees. (You should expect to pay 6% to 8% for a reputable property manager.)

• High property taxes or insurance premiums can impact your cash flow. Our local tax rates and insurance costs are higher than most areas, so account for that.

• Overall, the East Bay, with its strong economic indicators, low unemployment rates and diverse industries, makes for a healthy rental market.

What To Look For

Rental properties can be single-family homes, duplexes or apartment buildings. Each has advantages and challenges, so consider your investment goals and risk tolerance. Apartment buildings offer economies of scale, lower vacancy risk, and higher cash flow potential. They also make it easier to hire professional property management. However, they require a larger initial investment, more complex financing, and can be more challenging to manage.

On the other hand, duplexes typically require a lower initial investment and simpler financing. They are also easier to manage and can provide the option to live in one unit while renting the other. Drawbacks include limited economies of scale, higher vacancy risk, and lower cash flow potential due to the smaller number of units. Your financial capacity and goals will determine what kind of property is best.

Assessing Financial Options

Keep in mind: You may face a sizeable down payment and have stricter lending criteria than residential properties. Lenders typically require a down payment for investment properties ranging from 20% to 30% or more of the purchase price. Investment properties usually have higher mortgage interest rates than owner-occupied residential properties. And while closing costs and fees are standard for both types of properties, some lenders may charge higher fees for investment property loans, further increasing the initial costs. Your lender may also require cash reserves available, typically equal to several months’ worth of mortgage payments.

The Vacancy Factor

Ensure your rental rate is competitive within the local market; overpricing can lead to extended vacancy periods, and underpricing may result in lower rental income. Regularly re- view and adjust your rental rate based on market conditions to minimize vacancies.

Always factor in the possibility of vacancies to build a realistic financial projection and ensure you can cover expenses. This is essential. You should set aside 3% to 5% of the annual rental income for potential vacancies.

To assess vacancies in the East Bay rental market, check online rental platforms, such as Zillow, Trulia, RentCafe, or Craigslist. Ask real estate agents, property owners and property managers to provide rental demand and occupancy data or get reports from the Urban Land Institute, Marcus & Millichap or CBRE.

And check out these opportunities to exchange information with colleagues:

• Meetup.com can help you find local real estate investing groups like the Oakland Investor’s Network or Women in Real Estate.

• BiggerPockets.com is a real estate investing platform where investors, property owners and property managers connect. Look for a California or East Bay-specific forum to find relevant discussions.

• Facebook groups can be useful. Search for “East Bay Area Real Estate” (3.5K members), “Pick a Realtor’s Brain” (1.1K members), or “East Bay Real Estate Investors” (1.7K members) as a start.

• LinkedIn groups related to East Bay real estate investing and property management include BOMA Oakland/East Bay (1,415 members include owners, managers, developers, and brokers related to commercial buildings), SJREI Discussions (The East Bay chapter meets in Pleasanton), and the “Bay East Association of Realtors” with 927 members.

• Consider attending a conference like the Bay Area Real Estate Market Expo or events hosted by the NorCal Real Estate Investment Association (NorCal REIA).

• And, most importantly, seek out an expert real estate agent that understands real estate investing, Cap Rates and financing standards, such as a team member at our firm.

Bottom line: Informed decisions are smart decisions.

Do Your Homework

Just as with residential properties, you’ll have to thoroughly inspect the rental property and review relevant documents like property taxes, rental agreements and maintenance records. You will look for clues to identify potential issues or liabilities. Hire a professional inspector to help you identify potential issues and assess the property’s overall condition, allowing you to make good decisions about repairs, maintenance, and improvements.

Consult with a tax professional to understand the tax implications of owning rental properties, including deductions for expenses, depreciation and potential capital gains tax when selling the property.

Always have a plan for selling your investment property, whether it’s due to market conditions, personal financial circumstances, or reaching your investment goals. You might hold the property for long-term appreciation, sell for a profit after improvements, or conduct a 1031 exchange to defer capital gains tax.

Danny Winkler is Founder and President of Winkler Real Estate Group in Albany, CA where he helps clients throughout the Bay Area buy and sell their homes. Danny loves interacting with buyers and sellers and has 35 years of experience as a licensed real estate agent. He also manages all phases of the company’s real estate marketing and development, including multiple large sales management projects for various Bay Area builders and developers. More than 50 agents in the office share impeccable integrity, enormous passion, and a drive to deliver the best possible outcomes for clients. Under Danny’s leadership, collaboration and congeniality allow agents to offer dependable real estate advice.