Off Market San Francisco Duplex Help

[Jaime Rossini]

I found an off market duplex that I want to buy as a house hack. It's more than I can finance and I have a private party that may be willing to do a personal loan to fill my gap in financing. My issue is that I don't know how to run the numbers to figure out how or when/if I will be able to pay the private party back. I tried to use the buy/hold calculator on BP, but it doesn't really take everything into account and I am not a spreadsheet builder. 

The property is in a great area on a corner lot with 4 parking spots and I would love to hold and rent both units when I eventually move out. I just don't know that I would ever be able to pull out the amount needed to pay back the private party in a re-fi . I've been trying to analyze different exit strategies. There is a tenant in one unit (not protected) and a vacant unit. The units are in decent shape, but could certainly use upgrading. We have friends who might be interested in partnering as TIC and condo converting, but (and I know condo prices are low right now) from my research it doesn't seem like that's all that profitable. It's zoned for 3 units and there is space to convert a free standing garage into another unit (but is that more desirable than a duplex with rent control laws?). I know it is a unique property and the location can't be beat...I just can't figure out how to make it work. If anyone experienced in San Francisco has any insight to offer, I'd be grateful.

[David S.]

@Jaime Rossini,  there is a lot of info missing in your post to allow a full assessment but here is how I would look at the situation if I was to buy with a view to house hacking (live in the vacant unit for a couple of years).

Regarding the purchase, this is how I would determine how much gap financing I would need.

Purchase Price + Closing Costs for purchase and new mortgage + Cost to Upgrade vacant unit
- How much can I afford to invest as my own initial equity?
- How much first mortgage debt can I get and at what rate? Talk to some lenders or mortgage brokers.
= how much i need to borrow from my private party and at what rate?


Then I would check to see if the property’s cash flow can service the private party debt and if so, what is left over for me.

Annual rent ( Rent paid by current tenant and rent paid by myself while living in vacant unit)
- Estimated Operating expenses (prop taxes, insurance, utilities not paid by tenants, R&M, etc)
- Annual debt service on 1st mortgage loan
- interest for the private party loan
= what’s left over for investor

That’s the easy part.

The exit value will be much tougher to estimate and will be dependent on where you think property prices will be at the time you plan on moving out.

Its hard to predict where mortgage rates will be in a couple of years. Personally, I think interest rates will be higher than today so it may be difficult to refinance your way out of the private money loan, unless that one tenant is currently paying significantly below market rents and you are certain you will be able to get much higher rents when that tenant eventually moves out and you upgrade to market standard.

Doing a JV on a TIC basis would make the financing easier since your TIC partners would share in the ownership and mortgage expenses. And I am guessing it may allow you to remove the tenant under an owner move-in eviction if both you and your partner move in. Then you can convert to condo later although I do not know how much time and what costs would be involved.

Before Covid, I would have said converting the free standing garage into an additional unit would have been an easy decision but the returns now do not seem as great since rents in San Francisco are down about 20% vs last year and construction prices have increased...Still, I think the free standing unit could have a lot of appeal for many renters and should add value over the long run.

Hope this helps.