Author Topic: Should I rent out my condo and rent a room in San Francisco?  (Read 4351 times)

psyclotr0n

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Should I rent out my condo and rent a room in San Francisco?
« on: October 13, 2015, 04:06:52 PM »
I bought my 2/1 condo three years ago before discovering the way of the Mustache. While it's appreciating nicely, it's hard to save much after the $2600 mortgage payment (and other costs). A friend will have a room vacancy in a rent controlled 2/1 flat in an equally nice neighborhood. The cost would be $900/month all inclusive. The rent I could get on my condo is roughly $4,000/mo.

I'm not super stoked on the hassles of being a landlord, but I figure that since I'm more inclined to rent out rather than sell when I reach FIRE in about 2 years, why not rent it out now.

What are the economic (and non-monetary) pros/cons for considering this? I know that maintenance will increase due to two tenants vs one owner (who's presumably more careful than a tenant). And presumably depreciation will offset all of the rental income.

msilenus

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #1 on: October 13, 2015, 04:44:40 PM »
On the face of it, it looks like you're asking if you should accept a $20k swing in after-tax savings, or turn it down.  It's hard to turn that down.  What's your hourly rate going to be like for that hassle? 

Though I think you need to do some SF-specific research on landlord/tenant law and how it's changing.  There's a big backlash against evictions right now.  I have no idea what's being proposed along those lines, but you would really need to in order to make a sound decision.  Would pending reforms keep you from being able to sell the unit to a family that wants to occupy?  Will owners retain the right to move back into their units?  How do units become rent controlled?  Those are the sorts of things I'd be worried about in SF.

I'd never seek to become a landlord in SF, but the arbitrage opportunity that's fallen into your lap demands serious consideration.

psyclotr0n

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #2 on: October 13, 2015, 04:59:22 PM »
Thanks. Well, one perk of a condo unit is that they're exempt from rent control. Yes, general laws are still extremely pro-tenant here (understandably), but the right for a landlord to "go out of business" (and pay a relocation fee of several thousand dollars per tenant), the Ellis Act, is state law, so I don't see how SF could enact anything that would undo that basic right. The only snag I could see is having a protected tenant (disabled, elderly, etc), and my place is inherently physically and economically not very tenable for either.
« Last Edit: October 13, 2015, 05:02:55 PM by psyclotr0n »

MgoSam

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #3 on: October 13, 2015, 06:44:30 PM »
All I heard was that you're paying $2600/month in your mortgage, and could get to oa place for $900/month and rent out your condo for $4000/month. That sounds like a no brainer to me.

Jschange

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #4 on: October 13, 2015, 09:03:25 PM »
How much could you rent your second bedroom for? And if you rent out the whole place, are you renting it furnished (assume your stuff will be ill treated) selling, or storing things?

brooklynmoney

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #5 on: October 13, 2015, 09:27:17 PM »
If you want to sell in next few years to retain the tax exemption on the gain you have to have lived in it for a certain number of years so check out the specifics if that's something you might do.

CanuckExpat

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #6 on: October 13, 2015, 11:43:43 PM »
You can rent for $4000, but what can you sell it for? Does the place make sense as a rental for the purchase/sales price, and what are the reasons you would rather keep it as a rental instead of sell it (it sounds like you will move in two years when FIRE anyways).

You can use depreciation to offset the rental income on your taxes, but then if/when you do sell you will be hit with a larger tax bill won't you? Or you have a property that you can't sell because of the tax bill. Someone more familiar with tax implications of rental property and depreciation can chime in here.

One other thought. Have you considered AirBnB? Knowing the price / rent ratios in the area now, I think  it might turn out that rental doesn't really make straight financial sense, but the premium that you get as a short term rental, especially in San Francisco, might make it much more attractive, especially since you will be living close enough to manage it.

psyclotr0n

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #7 on: October 14, 2015, 09:44:45 AM »
How much could you rent your second bedroom for? And if you rent out the whole place, are you renting it furnished (assume your stuff will be ill treated) selling, or storing things?

probably about $1800 for the second room, presuming I find a tenant I'd feel comfortable living with. I probably would rent it unfurnished since I doubt I could increase the rent based on furniture (someone else speak up if you've seen otherwise)
« Last Edit: October 14, 2015, 09:53:52 AM by psyclotr0n »

psyclotr0n

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #8 on: October 14, 2015, 09:50:15 AM »
You can rent for $4000, but what can you sell it for? Does the place make sense as a rental for the purchase/sales price, and what are the reasons you would rather keep it as a rental instead of sell it (it sounds like you will move in two years when FIRE anyways).

Leverage (for appreciation). Odds are no bank will loan me such a huge amount at 4% once I no longer am earning a lot. But yeah the cash flow pictures on its own wouldn't make sense as a rental property per se; but it just seemed like a stable asset in a recovery that only started 3 years ago and has no end in sight (at least in this metro area).

One other thought. Have you considered AirBnB? Knowing the price / rent ratios in the area now, I think  it might turn out that rental doesn't really make straight financial sense, but the premium that you get as a short term rental, especially in San Francisco, might make it much more attractive, especially since you will be living close enough to manage it.

That seems like a lot of work; having to find a new tenant every month essentially. Sure the cash flows would be higher but so is the overhead, and risk of all the people coming and going. Plus isn't there a risk of someone just squatting, or has that all been sorted out? It seems like the owner has more legal recourse with a proper lease, but have the terms gotten decent now with short term rentals?

On the other hand I could leave my furniture in place, most of which I doubt I'd need to bring with me to the room for rent (some nice stuff, and we know how much furniture depreciates...).

Anyone else have experience using AirBNB or VRBO on an ongoing indefinite basis?
« Last Edit: October 14, 2015, 09:52:56 AM by psyclotr0n »

Evgenia

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #9 on: October 14, 2015, 10:14:40 AM »
As a 10-year San Francisco resident (and my husband has lived here for 20 years), I'll reiterate what others have said, most of which comes down to: exercise caution. I say this as a former renter and as a former accidental landlord who rented her place in Chicago when she couldn't sell it during the housing crash. I lived both lives for many years. With that out of the way...

Even in non-rent controlled units, tenant protections in San Francisco are ridiculous in practice. They ensure we will never rent our house.

After 30 days, a "hotel guest" becomes an official "tenant" in San Francisco, with all the protections thereof, lease or no lease. If you choose an AirBNB type situation, for example, and that guest stays for 31 days, look out, you may have a squatter on your hands. There is a housing shortage, and I know of at least one situation in which a tenant did this on purpose for exactly this reason. It then took the owner a LOT of money and legal battle to get the "tenant" out. If you stay under that limit, you should be fine.

There's a lot of money to be made in temporary rentals with less grief, I believe. You also may be able to get on a list of companies like Google and others who need temporary housing for visiting employees and interns.

It is virtually impossible to quickly evict a tenant in SF, even for very eviction-worthy things like failure to pay rent. We have friends whose tenants did not pay rent for over a year and it took another full year (that's two years of rent-free living for the tenants) to evict them, also after great legal expense and pain. No one cared that our friends (who lived in the same building as the non-payers on another floor) nearly lost their house and could barely pay the mortgage without the rent from the other unit. The law only cared about the tenants. The lease amounted to almost nothing in this case, though it was a CA standard lease that they'd paid a lawyer to review.

All of this nonsense is, of course, and part of why AirBNB and VRBO are so attractive, but also why AirBNB is bearing the brunt of the blame, as we see in measures like Proposal F on the Nov. ballot.

All a long way of saying: If you decide to rent to a long-term, traditional tenant, be prepared for an expensive, drawn out legal process, costs, and all that. Make sure you are *very* secure in the $900/month room rental situation because, should you need to get back into your condo, you may not be able to do it quickly. Theoretically, it's easy for the owner to move back in, but in practice it's often not. I have a horror story about that as well, neighbors who wanted to move upstairs to a renter-occupied unit so that they could move elderly parents in downstairs. That took more than a year and tons of legal drama and fees.

CanuckExpat

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #10 on: October 14, 2015, 05:13:49 PM »
That seems like a lot of work; having to find a new tenant every month essentially. Sure the cash flows would be higher but so is the overhead, and risk of all the people coming and going. Plus isn't there a risk of someone just squatting, or has that all been sorted out? It seems like the owner has more legal recourse with a proper lease, but have the terms gotten decent now with short term rentals?

Even in non-rent controlled units, tenant protections in San Francisco are ridiculous in practice. They ensure we will never rent our house.

After 30 days, a "hotel guest" becomes an official "tenant" in San Francisco, with all the protections thereof, lease or no lease.

If you go the AirBnB or short term rental route, make sure you are limiting your stays to less then 30 days. In fact I would limit them to below five days. The tourist market will pay a much higher rate per night, and you don't really have to find a new tenant, they find you and AirBnB takes cares of the billing. There are horror stories, but with due diligence it can work I think.

We rented our second bedroom on AirBnB for about a year, limited the length of time people could stay, and screened reviews very diligently. We had no problems.

bop

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #11 on: October 14, 2015, 05:22:41 PM »
Does the condo association have any restrictions on the minimum stays for short-term rentals?  For example, I've seen condo associations with minimum stays ranging from 2 months to 6 months. 

Jschange

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #12 on: October 14, 2015, 07:36:44 PM »
At $1800/month, then I'd find a roommate- but slowly and being picky. Good luck whatever you choose!

flyfig

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #13 on: October 14, 2015, 11:00:20 PM »
Good points on the HOA association rules and being picky on your tenant. A friend or someone who can be referenced is invaluable. If your 2/1 can be rented for $4k a mon, I would think that you could make a pretty penny on the sale (minus expenses). The market is HOT HOT for sales right now. If you are FIRE in 2 years and want to keep the property as a rent out, you might as well start renting it out now and going for the room. You've increased some risk and uncertainty (e.g. what if something happens to your friend or the landlord) but it is only 2 years. If you want to sell, now is a very very good time and you can just book the profits. I don't think there is a wrong decision - just where do you want to apply risk to.

aspiringnomad

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #14 on: October 14, 2015, 11:30:07 PM »
Rent it out $300 below market (ideally to a friend of a friend). You'll have your pick of tenants, and if you do your due diligence in pulling credit reports, references, and asking the right questions, you'll have a great tenant who will never want to leave. And maybe think twice about renting to a lawyer in a tenant friendly jurisdiction like SF.

psyclotr0n

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Re: Should I rent out my condo and rent a room in San Francisco?
« Reply #15 on: October 15, 2015, 09:36:37 AM »
At $1800/month, then I'd find a roommate- but slowly and being picky. Good luck whatever you choose!

Actually, it'd likely be more like $1600, but still pretty good. And all things equal it'd be great to not have to move, and of course I'd always have real-time access to the property living in the unit.

On the other hand the tenant has all the same protections whether I live there or not. I guess I figured the cleanest option was just rent out the whole unit since I could live with a friend at the other room available whereas I'd have to go thru craigslist to play roommate roulette (always a significant risk whether you own or not, not that there's any guarantee living with a friend will be bliss).

Markets like this sure make housing a pain, even when you're diligent and make the "right" decisions such as buying at the right time.