Multifamily in San Francisco?

Question

Some friends and long-time roommates of mine have decided that we want to buy property in SF, and eventually decided on multifamily as it looks like we'll get the most sqft/$ that way, as well as individual units.

Our plan is to buy a 3-unit and split it 3 ways. Of course this has risks involved which will require a good contract in case someone decides to pull out early, etc. But specifically I wanted to know the risks and what to be aware of when buying multi in SF.

I know that SF is a very different beast, and I want to make sure that we are making a smart investment, both as a place to live and as a place that we can sell or rent later on down the road.

I'm thinking that the end of this year will be an ideal timeframe as many landlords will be struggling due to mortgage forbearance ending and looking for a way to unload.

What advice can you give on buying multifamily in SF?

Teresa Ong · Answer

First, you should steer clear of buying anything with a tenant in it because it will be near impossible to remove them.  Those buildings are typically priced lower than others, but that's because there is no guarantee that you can ask the tenant to leave.  SF tenant protections are very very very stringent.  As well, I would tell you to reconsider becoming a landlord in SF for those very same reasons. If you find an empty building to purchase, then be sure to ask a lawyer to draw up your TIC agreement- one that you all agree on and one that will protect everyone 5-10 years down the road for anything.  You probably want to have the right of refusal if anyone of your buddies should decide to sell; i.e: you get the first shot at buying your partners out before they go to market.  As well, you would also want to draw up an agreement that prevents any form of long term rentals because that completely devalues your property.  Bottom line: good idea to buy, don't be a landlord in SF.

Johnny Hoang · Answer

Good points made in these responses. San Francisco is very tenant sided as with most places here in CA so I would definitely take that into consideration. It's rare to find a multi family unit that is completely vacant and/or not getting under market rents in SF. We've helped many clients purchase single family homes in the SF market and do a garage conversion, house split, detached ADU or a combination of these to make it operate as a MFH.  We found that to be an easier acquisition than purchasing.

The SF market does get pretty competitive, so most of our clients that can't get into SF shift their lenses to West Oakland/Alameda area which is relatively close to San Francisco driving via the bridge and a few Bart stops away via public transportation. West Oakland has a lot of MFH units as well.

Also, I'd look into getting an FHA loan for a MFH unit as you can typically do as low as 3.5%-5% down payment ( keep in mind PMI will be higher but if you pencil that in your numbers you shouldn't be too concerned) and makes your purchasing power higher as the lenders can use the income on the other units to off set some of the debts. The loan limits down below for your reference so you can have an idea of what purchase prices you can potentially go to. For a triplex, you can essentially go up to a 1,250,000 purchase price 5% down, which leaves you with a down of $62,500 or around 20.8K each if divided by 3. Plus closing costs etc, realistically you're cash outlay would probably end up being around 35K each after all said and done. Which is still a pretty low amount with all things considered and rent being so high in the bay area. --  But keep in mind,  submitting offers with an FHA loan are typically not as competitive in our market since most buyers are doing 20%+ conventional loans or cash. However, even though there is a lack of supply here and a lot of demand, more than half the people we work with are doing FHA or low down payment conventional loans, so there is definitely hope if you wanted to get into something with low down.  Just have to find the right deal and the right seller that is motivated, and when that aligns, it can work out really well.

FHA LOAN LIMITS

$765,600 - Single Family

$980,325 - Duplex

$1,184,925 - Tri-plex

$1,472,550 - Quad-plex

Christopher L Jones · Answer

I would recommend looking at markets outside of SF. There are literally hundreds of micro markets around SF that will provide a much easier acquisition process and will, more than likely, look better on your ROI. As mentioned by other posters, tenants rights are the most progressive in SF, which could become quite an issue with your "friends."

Since you don't plan on renting out any unit that you purchase, why not buy on the low end of the market and add value while you're in possession. If you get all of your friends to apply some elbow grease with you, there is huge potential to manually push that equity.

That being said, you might also want to look into SFH or Duplexes that have ADU potential. That way, you buy into the market a lot lower and you'll also have the opportunity to add units in the longterm. It all depends on the specific neighborhoods you're looking at and how you plan on maximizing your ROI. Here in the Bay, you gotta get creative.

Best of luck!

Ryan Landis · Answer

@Tyler D'Alessandro so without providing legal advice on a forum, there are legal ways to get buildings vacant. That being said, I am not sure how it would work for 3 owner occupants if you went with an Ellis or something like that. If all 3 of you are committed to living there for the foreseeable future and would be able to ride out the wait period, etc. it could be something worth talking to an attorney about.

That being said, each person has their own moral compass and you would ultimately be kicking 0-3 people out of their living situation so I will let you deal with that part.

If you can just get vacant upfront it will make things easier, but you are going to pay for it. In terms of setting up a TIC, that is a pretty common approach in SF. Most TICs trade for less than condos because they are not as straightforward to finance, but if 3 owners are going in on it I would have to think you could easily set it up to protect yourself (i.e. first right of refusal, if someone fails to pay, etc.)

Your lawyer bills on this won't be cheap, but it could very well save you some money compared to going and purchasing 3 condos...

Tyler D. · Answer

We would owner occupy it. I have no desire to manage rental property in San Francisco.

Brian Garlington · Answer

Three people in an equal partnership on a triplex in tenant friendly San Francisco?

What could go wrong?

Sorry, I just had to say that.

Are you folks planning to owner occupy it? If so that is a totally different animal. My gut tells me you folks live in or near The City and want to self manage it.

Bad idea if you've never managed properties before.

If you are NOT going to self manage then why would you buy a triplex in San Francisco? Why not buy in the midwest or the Southeast. I guarantee you will have less headaches and you can actually get cashflow.

Joseph O'Brien · Answer

@Teresa Ong

In a sense, I agree with what Teresa has commented! SF is a difficult place to come in as a new investor, and make a profit. Another thing I would be wary of is the new propositions on the ballots this year. You could possibly see rent controls created by individual counties including the Bay Area. So there could be a potential Cap on your rental income in the coming future.

Multifamily in San Francisco?

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