Should I Sell My San Francisco Duplex?

[Thor M.]

I need some RE investing advice as my wife and I are having trouble coming to a decision on whether to sell our SF property given that we are moving.

Background: bought San Francisco duplex in 2014 for $1.45 million (two, 2/1 units, 1150 sq ft each; and 1 unpermitted Jr. 1-bed in-law garage/garden unit - so technically three units). I owe $1.05 million on it with a 30 year fixed at 3.5%; PITI is $7,400. One 2-bed unit is rented at $4,000/month, owner-occupy the other 2-bed (rental value $4,500), and we Airbnb the in-law for about $3,000 a month. My broker just did a valuation and put the current value at $2.05-2.25 million.

Current situation: we just bought a triplex in Oakland for $1.7 million that better suits our needs (large unit for family). We can financially afford to keep the SF property, but aren't sure whether to do so. Under SF law, we won't be able to Airbnb the in-law because we aren't living there, so rent for the in-law would be about $2,000-2,500. If we fully lease the building, it would rent for about $10,500-11,000 and cash flow about $3,000/month assuming no major repairs (tenants pay utilities, all major systems and roof already upgraded, vacancy generally not an issue in SF). But something unforeseen could cut into that cash flow real quickly.

Pros of keeping: (1) SF real estate seems to just go up and up and is tough to purchase - the city discourages and blocks almost all development and so there is a super constrained supply, lots of high paying jobs, and lots of housing demand; we wrote 30 offers to get this place in 2014 and won with a $300,000 overbid. But, at some point the market will level off or slow down (probably when interest rates rise; and there must be a price point when demand falls). (2) The $3,000/month income would be nice, but I suspect we could get the same or more with other investments. (3) If I sold, I'm not sure what I'd do with the pot of money and I'm worried about it just sitting there (probably other RE or maybe index funds). Essentially, the upside is a bet on SF real estate continuing to rise - a good bet over the last 30 years.

Cons of keeping: (1) unreasonable, tenant-skewed rent control laws - master tenants can bring in up to 2 subtenants per bedroom without landlord consent; rent increases of only 1-2% per year max; just-cause eviction law - hard to evict except for very bad behavior, so tenants essentially have a life-estate as long as they pay the rent; if you evict with owner move-in, it "taints" the building for 10 years limiting the option to condo convert, etc.; (2) the building is (10%?) more valuable vacant and I could sell now with two vacant units, but that's unlikely later if I fully lease it; (3) $1 million in equity tied up only making $36,000/yr max (plus appreciation); (4) I could do a Reverse 1031 exchange and take my profit tax free to put into the new property; (5) free up a lot of cash to reinvest somewhere, including the new property.

TL;DR: should I continue to bet on SF real estate rising for my $2mm duplex despite the hassles of being an SF landlord; or should I take my profit and move on?