San Francisco Rent Control Question - Owner Move In

[Geoffrey B.]

This is my first post on this site and I look forward to connecting with many of you! 

I'm currently living in the San Diego area but am considering making a move up to San Francisco. Was curious if anyone on here had experience with purchasing rent controlled apartment buildings and doing an "owner move in?" I've noticed that there are 100% occupied buildings for sale. They are being marketed at sub 4% CAP rates due to the upside in rents if a tenant moves out. I was curious how lenders/appraisers would treat an owner buying for example a 6 unit apartment building, then moving in to one of the units and signing a lease with the holding entity (i.e an LLC) at market rate? Based on my math, just bringing the owner's unit up to market rate would considerably improve the NOI and thus the building's overall value. Furthermore, I could theoretically purchase a building with a hard money loan with say 25% down and then refinance with a more conventional term loan once the owner move in has seasoned, as the LTV and debt coverage would be more in line with conventional underwriting.

Please let me know if my thinking is off base or if lenders don't allow for this structure. Looking forward to the discussion!

[Robert C.]

@Geoffrey B., First, this is stuff you should talk to a lawyer about for SF, and I'm not one. The rules are constantly changing as of late. 

Based on my experience, banks will lend to you in SF based on actual rents, so vacating the unit won't be to your benefit when getting the loan. Signing any lease within 3 years of doing an OMI is not legal in SF, and reporting requirements have become even stricter recently, so you'd be opening yourself up to a lot more liability if you try skirting no-cause eviction regulations. Even buyouts need to be reported to the rent board prior to simply having the conversation with your tenants. 

Now, if you can buy the building, move-in and wait the 3 years before renting and refinancing, then that would be feasible. Most of the time, the numbers don't work out too well. And if you decide to live in a 5+ units building here, you'll probably be sharing space with some grumpy neighbors who will make you miserable, considering they've probably been living for many years in a deferred-maintenance-ridden building, while regarding you suspiciously as the new owner who's thinking about kicking them out... From that standpoint, you'd be better off moving into a smaller building.