Local landlords and San Jose property managers already know that San Jose is one of the hottest rental markets in the country. This has prospective investors knocking at the door, trying to get in on the action. But what does it take to get into the local market? Most people understand that the real estate market is expensive, but how far will your dollar take you?
Here is A Look at What is on the Market Today
We decided to take a look at a few of the small (2 to 4 unit) apartment buildings on the market for sale in San Jose today. We put together a pro forma and ran a quick analysis on each of the properties below using tax, insurance, monthly rents and other publicly available information. We then used a set of the same assumptions for each, including a 30% down payment, $10,000 in closing costs, 5% interest rate for financing, and 5% annual vacancy.
Naturally, these numbers are flexible and subject to each investor’s specific deal. However, we thought this would give investors and San Jose property management companies at least a basic understanding of the small, multifamily market in San Jose today.
So, without further ado, let’s jump right in.
1262 Palm Street, San Jose, CA
List Price: $673,500 | 1,155 total SF | $583/SF
Two Units: (1) One bed / One bath; (2) One bed / One bath
Current rent: $3,400 per month | Estimated Cap Rate: 3.6%
Based on our analysis, this deal offers a 3.6% cap rate at existing rents of $1700 per unit. Given the local market conditions, there could be some flexibility to increase these rents, which would be necessary for an investor to realize positive cash flow. At this purchase price and existing rents, an investor would have negative cash flow to the tune of about $500 per month. This does not assume enlisting the help of a San Jose property manager, which would skew the numbers downward even further.
Although the numbers don’t work great on this property, as is, this duplex offers a value-add opportunity for investors. The home does not have a rear yard, but there is a small parking area in the back of the property which has room for a possible addition to the rear unit. See more.
219 Parmer Ave., San Jose, CA
List Price: $888,888 | 1,620 total SF | $549/SF
Two Units: (1) Three bed / One bath; (2) Three bed / One bath
Current rent: $3,500 per month | Estimated Cap Rate: 2.9%On the surface, the numbers on this duplex aren’t that attractive for a prospective investor. The upfront costs alone (nearly $300,000 between down payment and closing costs) are enough to scare off some investors. That said, each unit has three bedrooms and one bathroom, and based upon our understanding of San Jose’s rental market, the current rents are well below market value. The front tenant has occupied that unit for more than 20 years, and the rear tenants are relatives of the current owner so they’re paying below market rents. The listing suggests rents for each unit could be doubled, which would bring this to a 7.4% cap rate and 9.2% return on equity. At the current rents, an investor would have a negative $1,195 cash flow each month; if rents were to double this would turn into $2,130 in free cash flow each month. Investors and San Jose property managers should familiarize themselves with local rent control regulations to determine when rents can be increased and by how much.
1012 Chestnut Street, San Jose, CA
List Price: $999,888 | 1,672 total SF | $598/SF
Four Units: All four units One bed / One bath
Current rent: $5,200 per month | Estimated Cap Rate: 4.4%The numbers on this four-family apartment building work better than most of the others we’ve looked at here today – at least based upon current rents. Once again, it appears that the building has long-term tenants but it is not clear how long those tenants have occupied each unit. The property is located in a light industrial area, which may hinder a San Jose property manager’s ability to attract tenants in the future (or at least, may impact how much tenants are willing to pay to live in this neighborhood).
The listing calls this a “low maintenance” property, but does note that the owner spends about $1,800 per year for landscaping services alone (and the backyard is small). It is not clear whether the current owner has hired a San Jose property management company to maintain the property, or whether he enlists service providers on an as-needed basis. We suspect there may be some wiggle room in the purchase price of this apartment building; it was originally listed in October 2016 for $1,083,200 before the price was dropped in March 2017. A further price adjustment may be warranted. See more.
318 N 13th Street, San Jose, CA
List Price: $1,088,888 | 3,142 total SF | $347/SF
Four Units: All four units Two bed / One bath
Current rent: $7,166 per month | Estimated Cap Rate: 5.5%Although this is the most expensive multifamily property we look at here today, the numbers are most appealing from an investment perspective. This is the only property featured here that has a positive monthly cash flow based upon current rents and projected expenses. Two of the four units are priced below market and are eligible for 5% annual rent increases per San Jose rent control laws. If those two units were to become vacant, a San Jose property manager or landlord could rent them for market rate. If we assume the market rate is what the owners are currently getting for the other two units ($2,395 per month) this would increase the cap rate to 8.1% and an 11.5% return on equity. These numbers do not include the 1,333 square foot partially-finished basement which could be rented out as storage for additional income. For all of these reasons, we see this fourplex as a solid opportunity for investors with a long-term approach. See more.
Perhaps most surprising thing we learned over the course of this exercise is just how few small multifamily properties are listed for sale in San Jose right now. That certainly helps to drive up sales prices, which is why the cap rates are lower than some investors might be willing to accept. Nonetheless, San Jose’s rental market fundamentals are strong so the potential for upside remains significant, particularly for those with a long-term, buy and hold strategy.