Sell or keep property in San Fransico

[EvenSteven]

My in-laws are deciding what to do with an inherited property in SF, outer mission neighborhood.

If they were to keep it, they would need to take out a mortgage to buy out half from other sibling, and do some rehab. This would also be managed from a far, so a property manager would need to be used.


What information would need to be collected for all you intrepid real estate moguls to give an opinion?

Expected sale price of the home
Expected rent
Renovation costs
Mortgage size and rate
Taxes (virtually nothing, inherited property taxes)

[mm1970]

For ME, a non real estate mogul - zillow is showing about $1M in that district, I'd sell in a hot minute.  Depends on the size of the house, etc.  I'm not sure how landlord friendly San Fran is.  Though, it's a tight market.

[fattest_foot]

Absolutely I'd sell.

We live in California and have a house, although not in a major metro area like San Francisco.

Every month it seems like I see some new law passed by the state that makes me nervous that we'll get stuck holding a rapidly depreciating asset.

If I were them, I wouldn't want anything to do with California. The state is an absolute mess.

[Another Reader]

From whom was the property inherited?  If it was the parents, that transfer can be excluded from revaluation for property taxes through a parent-child exclusion (aka Prop 58).  However, if they buy the 50 percent interest from the sibling, the 50 percent interest they buy will be reassessed at market value, because that transfer is not parent to child.  The taxes will likely rise dramatically in that scenario.

Rental rules in SF are complex and favor the tenant.  You would have to find a property manager that can select good tenants and keep the owners out of trouble.  Renovations and repairs are expensive, and good contractors are hard to find. 

I would be inclined to sell and take advantage of the stepped up basis.

[nancy33]

Sell. Rent control, taxes! Earthquakes homeless issues crime human feces patrols and residents trying to protect their homes with boulders was just on the news

[ericrugiero]

Most high cost of living areas don't have great return on investment for rentals.  It's probably not going to be a great return for the value you have in it. 

Also, that area has lots of laws making it less attractive for landlords and it's very valuable property which could potentially drop in value.  Managing the property from afar just makes it that much worse. 

Personally, I would sell for sure and invest the money.  If you want to be a landlord there is a very good chance your local area has better investments that you can buy with your half of the money. 

[Another Reader]

Most high cost of living areas don't have great return on investment for rentals.  It's probably not going to be a great return for the value you have in it. 

Also, that area has lots of laws making it less attractive for landlords and it's very valuable property which could potentially drop in value.  Managing the property from afar just makes it that much worse. 

Personally, I would sell for sure and invest the money.

The return from cash flow is usually anemic, but the appreciation often (but not always or predictably) makes them successful investments over time, at least historically.  Too much risk for my taste, especially as we appear to be at the top of the cycle now.

[Villanelle]

Another question to ask is what your parents needs are, and what their longer term goals and prospects are.  If they are elderly and probably don't have a ton of years left, then maximizing longer term profit seems pointless.  If they likely have decades left and money it tight, then maybe you want to maximize profit and it's worth the not-insignificant headache they will face while doing long-distance renovations and being absentee landlords. 

All other things being equal, if they don't really need the absolute most money, I'd sell.

[partgypsy]

Another question to ask is what your parents needs are, and what their longer term goals and prospects are.  If they are elderly and probably don't have a ton of years left, then maximizing longer term profit seems pointless.  If they likely have decades left and money it tight, then maybe you want to maximize profit and it's worth the not-insignificant headache they will face while doing long-distance renovations and being absentee landlords. 

All other things being equal, if they don't really need the absolute most money, I'd sell.

I agree with this assessment.

[EvenSteven]

Thanks for the feedback all.

I was unaware, and I think they are unaware, of the property tax consequences of buying out half from the other sibling. That might change things.

They are retired and I think pension + SS covers their current living expenses, but I am not privy to their financial details.

They are thinking of relocating in a few years, but probably won't do that until their family obligations in their current city are finished (parent in a long term care place). The relocation targets are currently fluid, but SF was one of the possibilities with current friend networks there, but they haven't lived there for 40 years.

I'll give my opinion to sell. If they want to move back they can always buy (or rent) another place.

[Bernard]

I cannot think of a single good reason not to sell that property. Not. One.

[FINate]

I'm not sure how landlord friendly San Fran is.

Friendly? SF is landlord hostile! Seriously, it has some of the strictest pro-tenant laws in the state. A person would have to be insane to enter into the business there.

For so many reasons I would sell.

[undercover]

It’s impossible to know whether the “top is in” in SF but now’s probably as good a time as any to sell. And why inherit a headache instead of just taking the payday? The numbers might help sway the decision a bit but I doubt it.

FinancialSamurai made some good money from buying/holding/renting property in SF but probably made most of his money from appreciation. Nevertheless, he has many articles about landlording with some specific to SF so there’s that if they’re interested.