Investing in San Francisco - wise?

Question

Hello, I'm new to this site. Over the past 10yrs - I've bought and rented out a handful of rentals in Sa Francisco. (All are under Rent Control but I have regular turnover due to the tenants I select). In the past I've purchased w/ 10 or 20% down, and for a 20% ROI - with rents and property values increasing and costs lower- I have a good cash flow.

I would like to continue investing but it seems the City is now so expensive that the returns don't make the risk worthwhile(?). Where should I look to invest next, and what returns can I expect. (I'd like to keep it under 600k, otherwise I need to partner up).

Because I'm an architect, I'm interesting in either 1) fixing up a place to rent/later del, or to 2) just buy and rent. Thank your in advance!

Account Closed · Answer

Hi Anna, Welcome to BP. I know @J Martin loves to talk about this topic so I tagged him here. Hope he can give you some great insights about investing in the East Bay.

Andrew Fingado · Answer

@Evan R. You make some very needed points. Each city has its own version of rent control and/or eviction control and it is imperative to understand before you make an investment. Interestingly, some cities have eviction control (like San Diego), but no rent control and vice versa. Normally they go hand in hand, but there are a couple of cases where one is without the other. I also wanted to clarify one more thing to the original poster, its not just San Francisco that disallows rent control on single family homes. It is statewide, as the Costa-Hawkins Rental Housing Act exempted SFH and condos from local rent control laws. So if you are interested in buying property in a rent controlled city, always remember SFH/Condos are not subject to their local rent control laws.....but they MAY be subject to eviction control. Oh, and Evan if you ever want to meet a guru about Rent Control laws (especially Berkeley rent control, which is the most complicated in the state), check out a Berkeley Property Owners Association meeting when Dr. Michael St. John gives a speech. The guy wrote his Cal thesis on rent controls effects on housing prices in Berkeley, and runs a consulting business concerning landlord/tenant issues in regards to rent control. Talk about a specialized profession! He has helped me immensely in understanding Berkeley's ridiculously complex rent ordinance.

Will Barnard · Answer

I don't know the Nor Cal market like I know So Cal, but one of my biggest reasons for not wanting to hold in CA aside from the pricing is the very unfriendly landlord laws we have, this state is tenant friendly and dangerous for landlords. Therefore, my choice is to go out of state for buy and holds. As to your cap rate question, I want 10 or better and that is difficult to find in CA, only in the not so good desert areas can you accomplish this from my experience. A bad PM can certainly kill your investment, but in a large multi family syndication deal, and with a solid operator, PM can be on site and controlled in house, reducing these risks. The higher cash flow also makes up for the out of state fears people come up with.

Chris Martin · Answer

Regarding "Properties outside the state make me nervous..." As an outsider looking in, I think it is fair to say the rest of the nation feels like 'Properties inside your state make us nervous.' As they say, all real estate is local.

Account Closed · Answer

Thanks for the chuckle Chris. To echo what you said, apartments in my area are selling for 150% of 2005 & 2006 prices. Sigh.........

Kevin Young · Answer

hi anna! you're brave to rent in SF... i love living in the city, but fear the rental ordances ;-) i have some MF in the ebay and invested in some retail near sac. would love to connect up. there are deals, just slim pickings...

Jason Flynn · Answer

@Andrew Fingado I honestly haven't looked THAT hard. Today I was browsing a couple auction sites and saw some in Marysville that had potential, but who knows what they would end up going for...

Evan R. · Answer

The rules around rent control (limits on raising rents while tenant occupies property) and eviction control(limits on why you can have a tenant leave) vary city by city, and year by year, when the building was built, and when the tenant started occupancy. For San Francisco, all SFR are exempt from rent control. This includes buildings with commercial on the first floor, with a single apartment on top. In Oakland, for a rent controlled unit, you cannot raise rent more than 3% or by CPI. However, you can pass 100% of the cost of capital improvements onto your tenants. The last Oakland city council meeting heard arguments about capping capital improvement related rent increases to 10% per year. Because rent and eviction controls are on a city level, you need to be aware of each cities idiosyncrasies. State lawmakers are talking about placing limits on the Elis act, which enables property owners to evict tenants and convert the building into condos. One of the bills would require a landlord to wait five years before preforming Elis Act evictions. Click here to read more about the proposed bills. Many real estate agents may not understand the nuance of rent and eviction control laws for the property they are marketing. By being knowledgeable about the controls, you may be able to find a good deal.

Andrew Fingado · Answer

@Jason Flynn You would be certainly correct about that. I think Anna's few chances to find cashflow would have to be in that area though, cash flow just doesn't seem possible at all anymore in the bay. Have you found anything recently that looked good even in the outlying areas of Sacramento? Last time I was on loopnet I saw a few places that looked alright, but I think they were up by Yuba City.

Jason Flynn · Answer

Sacramento has been skyrocketing too. It's possible, but it's not easy.