Thoughts on this expensive now reduced property

[Sailesh Kumar]

There is a property that I am interested in in SF Cole Valley area. Here is a link to the property: https://www.zillow.com/homedet...

This has 6 unit large apartments and 3 commercial properties on the ground floor. The total rent from everything is roughly $45K per month at the moment (4K per apartment, 10K from a restaurant and 5K each from a nail spa and a hair saloon) and I believe there is a small upside in rent after pandemic. The asking price is 8.5M after 500K reduction. It does sound like an expensive property but it has good location and cap rate is relatively good for SF even based on current income. Any thoughts you have on whether its a good investment and what's the right price for this in your mind. I will really appreciate any insights.

[Johnson H.]

Sailesh, this is an amazing location in the city. I just reviewed the offering memo and here are a few thoughts. There are two vacancies, so you'll want to verify what the current rents are for that unit's condition, bedroom mix, and bedroom size. Second, the numbers are based off the reduced commercial rent numbers which is good. You'll want to see if they had to kept the reduction for 2021. Third, you'll want to review the commercial leases, see what kind of options they have and if they are NNN or some type of modified gross, and study the market for similar spaces as they could ask for a permanent rent reduction. Fourth, there is a ATT tower and you'll want to review the lease for that. Fifth, the expenses are missing rent board fees and management fees off the top of my head. Sixth, you'll want to ask whether or it any tenants have had covid hardship and if they are all current on rent. The current rent could be listed but not paying. Finally, mixed use buildings like this have a little bit more difficult time getting financing in the city, you'll have to probably put at least 50% down and your rate will be higher than a typical MFH.

This is a pride of ownership building, something you can park money into and wait for the upside when the city is alive and well again.It is not a value add opportunity where you can create upside from making the building better and turning over units to force appreciation which is my goal as I have been looking to buy SF apartment buildings for years and even one of these agents has made an offer for me. Please also keep in mind the city’s rent control and current eviction moratorium in your consideration of this building if you haven’t already but it doesn’t bother me as that is the game you must play buying in the city. 

It seems like it’s a turnkey property so not much else can be done to increase the value of the building which I usually don’t advocate for. However, buildings like this rarely turnover on the market, so many times I see a building on a market first time in 30-50 years. So an investment like this depends on your goals, financial situation, and outlook for the city and rents.