Investment property in San Francisco

[Sailesh Kumar]

There is a property that I am interested in in SF Cole Valley area. Here is a link to the property: https://www.zillow.com/homedet...

This has 6 unit large apartments and 3 commercial properties on the ground floor.  The total rent from everything is roughly $45K per month at the moment (4K per apartment, 10K from a restaurant and 5K each from a nail spa and a hair saloon) and I believe there is a small upside in rent after pandemic.  The asking price is 8.5M after 500K reduction.  It does sound like an expensive property but it has good location and cap rate is relatively good for SF even based on current income.  Any thoughts you have on whether its a good investment and what's the right price for this in your mind.  I will really appreciate any insights.

[Brian Garlington]

You're saying that's a good cap rate for San Francisco? My very very rough calculations are that is about a 3.17 cap rate. What makes you so set on tat particular neighborhood?

[Sailesh Kumar]

@Brian Garlington This is perhaps the best we can find.  It depends on how you calculate the cap rate and hw much down payment you make.  If you down 40% and also assume full potential income which the property owners have done, the cap rate comes over 5%.  Based on current income the cap rate is of course lower due to vacancy and temp rent reductions.

+ Gross Potential Income $750,000 (this is pre-pandemic rent)

- Vacancy 2% (again pre-pandemic data)

- Expense $140,000

- Debt service cost $240,000

+ Principal reduction $85,000

NOI = $440,000

Cap rate = 5+%

I understand that assuming gross potential income at pre pandemic levels and vacancy rate of 2% when current vacancy is 33% (2 out of 6) is unreasonable and even insanity but everyone is SF does their math this way.

[Amit M.]

You need a high down payment, deep pockets to weather the rent collection risk over the next 1-2 years, and a long term perspective (7+ years) for this to make sense. Usually well capitalized* established portfolio SF investors buy properties like this, as they can add it to their mix, and wait for the longer term upside. 

*meaning they already have made a lot of money in the SF market; newbies bettering the farm on a non value play expensive property, not so much.

[Michael C Williams]

Hey @Sailesh Kumar  Mixed use buildings are notoriously difficult to value. A lot of agents will use anchor pricing (high end of expectations) and drop from there until a deal is made. Given this building has "been family owned for 40 years+" they likely have low carrying costs and can be more patient than owners with high debt service. Are you working with an agent?

[Kathy Utiss]

Man this is so confusing to me. 

In the first post you list all the rents and it comes out from what I could figure to be $44,000 a month. Maybe I'm off a thousand. However, that is a big difference $62,500 vs $44,000 a month or $18,500 a month. Curious with it just being nine units what the real potential is to make that extra income monthly. Not sure how you debt service this for $240,000 a year when just on the interest at a min of 3% is $170,000 a year. ($170,000/12=$14,166 per month. Then the principal on $5,100,000/360=$14,166 a month= combined $28,332 a month. Not $20,000 a month.  

If the true income is $528,000 vs. $750,000 I would definitely be saying no. Even at $750,000 a year in income the above is just to debt service even with 40% down on $8.5 m. Besides debt service you still have taxes which hopefully is figured in to that $140,000 a year. Not to mention your 2% loss on rents. Depending on what the actual NOI is rather $528,000 or $750,000 an associate of mine says offer should be 10x the NOI. So in this case if NOI is truly $528,000 offer should be $5,280,000. Then re evaluate your numbers and see if it makes better sense to make an offer or not.

I'd be saying NO. One of my 1st offers in a long time I'm working on now the numbers are like this.

Appraised Value $1,600,000

Asking price $1,100,000

NOI $525,000

Sweet mixed use property :) Numbers like this can make sense up to like $5 million. Always principal+ interest. Then taxes usually on commercial are figured into the monthly numbers. Residential offers if wholesaling usually most investors want down to 60% of appraised value.

Good Luck :)

[Sailesh Kumar]

Originally posted by @Michael C Williams:

Hey @Sailesh Kumar  Mixed use buildings are notoriously difficult to value. A lot of agents will use anchor pricing (high end of expectations) and drop from there until a deal is made. Given this building has "been family owned for 40 years+" they likely have low carrying costs and can be more patient than owners with high debt service. Are you working with an agent?

 @Michael C Williams: Thanks for the reply. Yes they seem very patient and have priced it very high. SF is a very difficult place to find good value even in this economy. 10x NOI is impossible to get.

[Sailesh Kumar]

@Kathy Utiss thanks for the detailed reply. Sorry for the the mixup in numbers. But your analysis is spot on.  Unfortunately if one wants to play in SF there are no values or bargains. Most properties are not even cash flow positive for years. Even in this economy.

NOI of 10x is impossible. GRM is often 15x. You are lucky to be cash flow neutral. Sellers are not reducing prices in spite of record vacancies. Not sure what to do but one has to bite the bullet if wants to play in SF city. I'll be happy to be proven wrong and buy a better property. Desperately looking to buy in SF BA.

[Amit M.]

think

value

add

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3words

[Johnson H.]

@Kathy Utiss The reason that building you found has a better GRM is because it's in a bad part of town. Owning that building is not for the faint of heart. A lot of experienced owners in the city won't invest in that area. It is a lot of trouble and the area is not getting any better.

The OP's building is a trophy property in an amazing part of the city. You don't buy in SF for day 1 or year 1 cash flow, you buy for the appreciation and to build wealth. This is why apartment building's in the city routinely trade for above 17 GRM before covid and around 15 GRM now on average with mixed use even lower due to the shutdown of the city.

[Kathy Utiss]

The way it sits I don't think it's very valuable for any investor. I was being conservative. My friend would have said to make an offer of like $5,410,000 a hair cut of $4,585,000. He does his pricing based just on the NOI. Would love for someone to tell me what they consider a good DTI on commercial properties :) With what you told me about the area my friends pricing sounds more spot on. I really don't think the numbers are that great on the property. But it is about the only thing I saw that may have potential when I looked from over here in St. Louis. Good to share view points so we all gain more knowledge :)

[Sailesh Kumar]

Originally posted by @Amit M.:

think

value

add

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3words

 @Amit M. no such investment opportunities in SF in spite of pandemic and record vacancies and record rent drop.  If deals don’t come by in this time then it’ll never come by.  SF will eventually come back and RE will recover far earlier.

It shows the resiliency of SF RE. I think going forward good deals will be ever rarer. It is very confusing. This property has the best GRM I can find and as you can see from others responses it still doesn't cut it. It really makes me wonder if it takes heart of steel to invest in SF.

[Sailesh Kumar]

Originally posted by @Kathy Utiss:

The way it sits I don't think it's very valuable for any investor. I was being conservative. My friend would have said to make an offer of like $5,410,000 a hair cut of $4,585,000. He does his pricing based just on the NOI. Would love for someone to tell me what they consider a good DTI on commercial properties :) With what you told me about the area my friends pricing sounds more spot on. I really don't think the numbers are that great on the property. But it is about the only thing I saw that may have potential when I looked from over here in St. Louis. Good to share view points so we all gain more knowledge :)

@Kathy Utiss I checked all sales of such properties over last 3 years in SF. I didn’t find even a single deal that met your criteria in a good area of SF. Not one. 10x NOI is unheard of in SF. One is lucky to get 12 or 15 GRM.

Will appreciate if anyone can spot a better deal in SF.