How to Evaluate a Property

Question

Hey BP!

So I'm creating this post to get my feet wet and try and see how other investors in the SF Bay Area approach their valuations on properties in the area. I'm currently living in San Mateo but am interested in purchasing a duplex or multifamily home in the city. My plan is to live in one unit, and rent out the other while making improvements to both units. Below is the example property.

http://www.realtor.com/realestateandhomes-detail/1...

I would live in one of the units and rent out the second bedroom in my unit, as well as rent out the second unit.

Here are a few of my questions.

1. What would you offer for this property? How do you formulate your valuation of this property?

2. What rent would you have to charge to achieve a positive cash flow?

3. How do you calculate the expenses of the property?

4. The property looks nice outside of the kitchen and bathroom. Over time I would make plans to rehab both. Are you worried that because the house was built in 1947 there may be complications in the rehab? (Old wiring, outdated sewage lines, etc)

5. How would you formulate an estimation as to how much a rehab would cost?

6. Because I'm planning on living in the property, would tax benefits am I subject to?

Any information you have would be greatly appreciated. I am interested in house hacking and would love to hear more about strategies, experiences, general tips, etc. Thanks for your time!

Best,

Zach

Unai La Salle · Answer

You don't seem like the right kind of buyer for this property because you're looking to rent and positive cash flow.  I don't know if you're aware but this building is under rent control and the 2nd unit's $1,900 rent cannot be raised much and there are tight restrictions on removing the tenant.

The type of buyers this property is perfect for are two separate parties (think friends or siblings) buying it as a TIC with each party occupying one unit.  The existing tenant will be kicked out using OMI (Owner Move In), assuming the tenant is not protected.  Then they do a quick conversion to condos in two years and raises the property value.

Such buyers are most likely buying on emotions because they are purely looking for a nice home to live (not cash flow), possibly buying in that location because of proximity to family or about to start a family, etc; so they will pay top dollar.  I've seen it happen too often - investors using brains are no match for home buyers using hearts.

At any rate, there is no reason for you to rehab the tenant-occupied unit beyond basic liveable condition since the rent will be low.

I don't see how it makes sense for a lone investor.  For a single party, the only way it'd make sense is if you fall in love with the house and must have it.

With that said, I can see it going for north of $1,400,000.