Author Topic: Investment Property in San Francisco  (Read 7225 times)

yahui168

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Investment Property in San Francisco
« on: January 06, 2014, 05:31:52 PM »
I have a friend that is in escrow for a $2.2 mil multi-unit in SF with $600k down. Expected long term rental income will be $14k per month. Likely though, the units will be used for short term rental through vrbo/airbnb with potential income at $18k per month. I'm not a real estate investor. This appears to fail the 1% rule so I'm assuming this will have to be an asset play? make money when you sell type of situation? SF is a rent control city but rental demand is very high. The property will delivered empty. My friend assures me this is the best deal he's seen in SF.

I'm curious as to what's the best strategy for this type of investment? Wait for property prices to go up and sell? Wait for rental income to reach the 1% rule? Tear down and rebuild?

Thanks.

SnackDog

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Re: Investment Property in San Francisco
« Reply #1 on: January 06, 2014, 05:52:52 PM »
Your friend is looking at monthly costs of maybe $12k mortgage, $2k taxes, and at least $.5k insurance. That is $14.5/month without maintenance. If he wants to airbnb he will have to furnish. Tough deal!

daverobev

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Re: Investment Property in San Francisco
« Reply #2 on: January 06, 2014, 05:58:49 PM »
I have a friend that is in escrow for a $2.2 mil multi-unit in SF with $600k down. Expected long term rental income will be $14k per month. Likely though, the units will be used for short term rental through vrbo/airbnb with potential income at $18k per month. I'm not a real estate investor. This appears to fail the 1% rule so I'm assuming this will have to be an asset play? make money when you sell type of situation? SF is a rent control city but rental demand is very high. The property will delivered empty. My friend assures me this is the best deal he's seen in SF.

I'm curious as to what's the best strategy for this type of investment? Wait for property prices to go up and sell? Wait for rental income to reach the 1% rule? Tear down and rebuild?

Thanks.

Best strategy would be not to buy in the first place ;)

Rental income against value probably doesn't change THAT much (not by a factor of two, which is pretty much how far the $14k is from the 1%. Well, 50% anyway!).

The 2%/50% 'rules' are for cashflow properties. Buying for appreciation is a different strategy. The target for multiple (triplex, etc) is the 2% per month; less for SFRs. They are rules of thumb for cashflow investors.

I'd love to hear what the running costs of this thing would be - property tax, maintenance, vacancy, etc. Doing the $18k short term rentals will - I would very much assume - lead to higher management costs.

Borrowing 1.6 mil, the mortgage will be 10k a month alone (30 years, 5%)

Your friend must be buying to sell again in a few years. Seems like they won't be making money in the interim!

dragoncar

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Re: Investment Property in San Francisco
« Reply #3 on: January 06, 2014, 11:04:14 PM »
A $2.2 million multi-unit in SF is likely almost 100 years old.  Maint will be super high.

Edit:  $100 is not a unit of time

yahui168

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Re: Investment Property in San Francisco
« Reply #4 on: January 07, 2014, 12:02:37 PM »

I'd love to hear what the running costs of this thing would be - property tax, maintenance, vacancy, etc. Doing the $18k short term rentals will - I would very much assume - lead to higher management costs.


Escrow closes end of this month. I'll ask him what actual running costs are after three months.

dragoncar

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Re: Investment Property in San Francisco
« Reply #5 on: January 07, 2014, 12:06:02 PM »
How many units?  How did it get empty?  I'm sure your friend is doing his due diligence but I'd be worried about illegal eviction/ellis act which could limit future ability to rent out.

arebelspy

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Re: Investment Property in San Francisco
« Reply #6 on: January 07, 2014, 12:10:00 PM »

I'd love to hear what the running costs of this thing would be - property tax, maintenance, vacancy, etc. Doing the $18k short term rentals will - I would very much assume - lead to higher management costs.


Escrow closes end of this month. I'll ask him what actual running costs are after three months a decade or two.

Fixed that for you.  Sample size and all that.  ;)
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scarab007

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Re: Investment Property in San Francisco
« Reply #7 on: January 07, 2014, 12:24:18 PM »
Living the bay area myself, your friend would do much better coming down the peninsula a bit and purchase properties at a much lower cost.  I would love to see his match on this with that mortgage and expense.  600k invested could probably do much better than he will see with this unit.

yahui168

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Re: Investment Property in San Francisco
« Reply #8 on: January 07, 2014, 03:41:04 PM »
Three units, one unit is 3bd/2ba and two are 3bd/1ba. Tenants were paid by the seller to terminate the lease. I'm not sure what his expenses will be. I do know the loan's interest rate is around 4.8%. There's property tax which is around 1.15% in SF. I'm not sure if insurance costs are comparable to homeowner's insurance if you have a multi-unit investment dwelling. I think there's garbage which is $300 per month. It will be self managed so no management costs. He's doing some reno by replacing some windows and redoing the kitchen and bath in the 3/2.

honobob

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Re: Investment Property in San Francisco
« Reply #9 on: January 08, 2014, 02:29:52 PM »

I'm curious as to what's the best strategy for this type of investment? Wait for property prices to go up and sell? Wait for rental income to reach the 1% rule? Tear down and rebuild?

Thanks.
San Francisco investors generally look to rent growth and appreciation.  Since this is NOT a rent control property he is looking at market rents growing 6%+ annually.  He is also in a position to possibly TIC the property and sell individual units.  Rules seem to be changing to allow a bypass of the condo lottery and convert to condo with a payment to the City. Even higher market value!  However, rentals are HOT, HOT, HOT right now.  There are thousands of new units going up just along the Market street corridor. 
As far as a 1% rule, that only is appropriate in 1% rule markets.  Even then it doesnít predict any profitability.  If you want to use this you need to determine what the rule is in your market.  Here the GRM is 13.1.  SF normally sees GRMís in the high teens/low twenties and spike in the thirties in hot markets until rents catch up.   If you can afford to get in the market San Francisco is one of the best places to invest.

Kumiswati

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Re: Investment Property in San Francisco
« Reply #10 on: January 30, 2014, 04:41:57 PM »

[/Since this is NOT a rent control property he is looking at market rents growing 6%+ annually.]

This is actually incorrect. A 3 unit building is a rent control property unless you buy it as a 3 condo building as the units have been condo converted.


Living the bay area myself, your friend would do much better coming down the peninsula a bit and purchase properties at a much lower cost.  I would love to see his match on this with that mortgage and expense.  600k invested could probably do much better than he will see with this unit.
Hm.. SF and the Peninsula are quite different tho. Different view, different crowd, different energy. Just different.

honobob

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Re: Investment Property in San Francisco
« Reply #11 on: January 30, 2014, 05:32:02 PM »

[/Since this is NOT a rent control property he is looking at market rents growing 6%+ annually.]

This is actually incorrect. A 3 unit building is a rent control property unless you buy it as a 3 condo building as the units have been condo converted.


Living the bay area myself, your friend would do much better coming down the peninsula a bit and purchase properties at a much lower cost.  I would love to see his match on this with that mortgage and expense.  600k invested could probably do much better than he will see with this unit.
Hm.. SF and the Peninsula are quite different tho. Different view, different crowd, different energy. Just different.
I do believe I am correct.  What support do you have for your claim?

Kumiswati

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Re: Investment Property in San Francisco
« Reply #12 on: January 30, 2014, 05:49:16 PM »

[/quote]I do believe I am correct.  What support do you have for your claim?
[/quote]

I'm 100% sure. I own a newly condo converted unit (bought as a TIC) so learned lots in the last 7 years. Also own a 3-unit building and I know for sure all 3 units are rent controlled.

dragoncar

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Re: Investment Property in San Francisco
« Reply #13 on: January 30, 2014, 09:16:43 PM »

Quote
I do believe I am correct.  What support do you have for your claim?

I'm 100% sure. I own a newly condo converted unit (bought as a TIC) so learned lots in the last 7 years. Also own a 3-unit building and I know for sure all 3 units are rent controlled.

I agree it's probably rent controlled.  Unless it's a condo, stock cooperative, or built after 1978.  Plus, OP basically implied it was rent controlled.

honobob

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Re: Investment Property in San Francisco
« Reply #14 on: January 31, 2014, 12:06:51 AM »

Quote
I do believe I am correct.  What support do you have for your claim?

I'm 100% sure. I own a newly condo converted unit (bought as a TIC) so learned lots in the last 7 years. Also own a 3-unit building and I know for sure all 3 units are rent controlled.

I agree it's probably rent controlled.  Unless it's a condo, stock cooperative, or built after 1978.  Plus, OP basically implied it was rent controlled.
A lot of people have opinions that have no clue.  The OP said it was gonna be a short term rental,  VRBO etc.  Don't sound like rent control to me.  What are you guys thinking?

dragoncar

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Re: Investment Property in San Francisco
« Reply #15 on: January 31, 2014, 12:47:31 AM »
A lot of people have opinions that have no clue.

For sure.

Quote
  The OP said it was gonna be a short term rental,  VRBO etc.  Don't sound like rent control to me.  What are you guys thinking?

I'm thinking that it's illegal to rent in SF for less than 30 days without a hotel permit.  If a property is subject to rent control, you can't avoid that just by breaking a different law.  Good luck with that one tenant who decides he likes the rent and decides to stay forever.
« Last Edit: January 31, 2014, 12:49:48 AM by dragoncar »

honobob

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Re: Investment Property in San Francisco
« Reply #16 on: January 31, 2014, 02:14:50 AM »
   Plus, OP basically implied it was rent controlled.
This is what the OP said,  " SF is a rent control city".  True enough but that doesn't mean this property is under rent control or that all property or even most rentals in SF are under rent control.  Remember the OP is busting his buddies balls about the 1% "rule" in SF. Clueless?

And now us pissants are calling the OP's buddy a crook because he's on VRBO.  Plenty of legal 30 day plus rentals advertised there.  Damn stupid, lawless millionaires.  :-p  So I'm standing on my conclusion based on the FACTS presented that this property is one of the thousands in SF that is NOT under rent control.  Let the market rule!

dragoncar

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Re: Investment Property in San Francisco
« Reply #17 on: January 31, 2014, 02:56:06 AM »
   Plus, OP basically implied it was rent controlled.
This is what the OP said,  " SF is a rent control city".  True enough but that doesn't mean this property is under rent control or that all property or even most rentals in SF are under rent control.  Remember the OP is busting his buddies balls about the 1% "rule" in SF. Clueless?

And now us pissants are calling the OP's buddy a crook because he's on VRBO.  Plenty of legal 30 day plus rentals advertised there.  Damn stupid, lawless millionaires.  :-p  So I'm standing on my conclusion based on the FACTS presented that this property is one of the thousands in SF that is NOT under rent control.  Let the market rule!

Facts? We are both guessing here.  The difference is that I  likely to be right.  Go ahead and find me a non-rent controlled 3-unit in SF for a mere $2 million.  Not gonna happen.

Kumiswati

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Re: Investment Property in San Francisco
« Reply #18 on: January 31, 2014, 07:49:01 AM »
OK, I happen to know lots about SF Real estate, again because I own a formerly TIC converted condo and also a 3 unit building that I short term because they are rent control.
A 3 unit building in SF was mostly likely built before 1978, thus makes it a rent control building, UNLESS all 3 units were condo converted.

Now, about short term rent, the law that lots of people misunderstand is that it is illegal in SF, but no, it is not. It is only illegal when you do that in 4 or more units building. 3 units are still ok, and that's what I do as well.

The OP's friends can definitely still do FURNISHED rent for 30 days on VRBO and can therefore charge double the rent than unfurnished. No one in their sane mind would opt to stay with with that kind of crazy rent. Managing short term rents, although lucrative, takes lots of work. I happen to enjoy the work itself, as long as I don't get bad renters, which could happen once in a blue moon when I don't screen very well.



Kumiswati

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Re: Investment Property in San Francisco
« Reply #19 on: January 31, 2014, 08:30:51 AM »


Facts? We are both guessing here.  The difference is that I  likely to be right.  Go ahead and find me a non-rent controlled 3-unit in SF for a mere $2 million.  Not gonna happen.
[/quote]

I am with you there. There is no way you could find a 3 unit condo (thus not rent control) building in SF for $2M.
My 2/1 flat will likely go for $850K, even more.

cats

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Re: Investment Property in San Francisco
« Reply #20 on: January 31, 2014, 08:49:39 AM »
If you get updates from your friend over the next few years, I'd be curious to hear how it works out!  We've pretty much concluded that this kind of "serious" landlording is not really the best return on investment in the SF area--seems more like you are counting on property appreciation and selling later, or leaving a cashflow property to your heirs (i.e., after the mortgage is paid off).  Also, I may be overly paranoid, but buying property in SF proper especially wigs me out because I feel it's only a matter of time before we get another massive earthquake and I'd be worried about my building getting demolished in that (thought I guess the underlying land values would remain high).  I realize there are natural disasters everywhere and that every place has it's risks but given the relatively high cost of getting into the SF market in the first place...

tryan

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Re: Investment Property in San Francisco
« Reply #21 on: January 31, 2014, 12:44:15 PM »
Quote

$2.2 mil multi-unit in SF with $600k down. Expected long term rental income will be $14k per month.


This one looks like a ball n'chain.  He'll bleed EVERY month.  But who knows, the "bigger fool" might just be out there for him in a few years.

foobar

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Re: Investment Property in San Francisco
« Reply #22 on: February 06, 2014, 06:33:58 AM »
Think of the bay area as a high inflationary area. With property values and rents going up 5-10% for the past decade or so (places like SF have pretty much recovered from the housing bubble price wise), you can make a good argument for buying stuff today because it will be a lot more expensive in the future. One day someone will be the biggest fool, but people have been saying that for 20 years.

The kicker is the various rent control laws and the work if you decide you want to unbundle the properties.

Quote

$2.2 mil multi-unit in SF with $600k down. Expected long term rental income will be $14k per month.


This one looks like a ball n'chain.  He'll bleed EVERY month.  But who knows, the "bigger fool" might just be out there for him in a few years.

dragoncar

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Re: Investment Property in San Francisco
« Reply #23 on: April 17, 2014, 04:44:10 PM »
So  how's this going?