Need Feedback on Single Family Home Rental Performance in Bay Area

[Danny N.]

Hi everyone

I have an investment property in the Bay area (South San Francisco specifically) which I'm currently renting out to long-term tenants. It is a 3 bed/1 bath single family home and has a sizable backyard. 

Currently it is not cash flowing, and after mortgage/taxes/insurance/maintenance, it is probably losing ~$1,300 per month (eww). Looking at Redfin's data, it is appreciating over time (probably more than $15,600/year), but probably not as fast as other highly desirable neighborhoods in the Bay.

I previously lived in this home before I moved and converted it into a rental property. I have till mid-late 2025 to sell without capital gains tax (< $500,000 couple).

I'm trying to figure out how to improve the performance of this property and have some thoughts about it, but would love to get feedback from other REIs.

Option 1

Add a ~800 sqft ADU in the backyard which I think costs ~$250/sqft (total $200,000) and I think could rent ~$2,000/month. That's ~12% Cash on Cash return which seems pretty good/decent.

My concerns are by doing this, it would reduce my rent price on the main house (most likely since they'd be sharing with other tenants on the property) and also I'm unclear whether adding an ADU would negatively affect the value of the property.

Option 2

Consider converting the property into a short/medium-term rental, specifically to travel nurses. The property is very close to 2 hospitals: Seton & Kaiser. I have always heard there's a shortage of nurses and high demand for them, so thought this could be interesting. However, I have no experience in this and would not know how much rent is projected for this setup.

Option 3

Sell and redeploy capital somewhere better.

Appreciate any feedback on this situation. Thanks in advance.

[Becca F.]

I would have chosen Option 2. I tend not to favor selling off Bay Area property and you have a 3% rate. As far as Option 3 selling the house and looking elsewhere, the places I'd consider are Sacramento, Nevada or Arizona (where I would buy if I sell off all my Indianapolis properties). NV and AZ have low property tax rates compared to my 2.72% and 2.78% Indy property tax rates, which also saw a 17% increase the last assessment. I would rather have a few high quality appreciating properties in the western states vs. lots of less expensive ones in the Midwest. I think cash flow is going to be tough right now on LTR anywhere so I'm looking at appreciation. 

I'm a little surprised that doing an ADU wasn't recommended in the comments. This is what I was considering with my S.F. property, adding a kitchenette and a separate entrance for ADU -it wouldn't affect garage space. I haven't gotten estimates on how much this would cost. I'm also negative cash flow on the SFH because of renting to family members. I don't plan on selling this house - my kids will inherit it and they can keep renting it out or move in themselves.

Could you raise the rent on your existing tenants?