SF condo, sell or rent for a loss?

Question

Purchased a condo in a nice part of SF in 2017. overpaid, but at that point housing was appreciating quite a bit year over year and we were confident we’d be able to rent at cash flow positive rate if we ever moved. We did and We were renting it for a year making enough to cover expenses, but with covid the rental market has fallen by at least 15% and our tenants are moving out.  We can either rent it for a loss in a city where tenants never have to move out...

Or we can sell at a significant loss and invest the remaining in another market that will appreciate more.

Questions for forum:

Direction of SF real estate market? Is it worth holding the property in the hopes that things get better in the next 2-5 years?

We know we overpaid for the unit by quite a bit and we’re concerned we won’t ever make a profit, even if we hold for a while. Is it better to cut our losses and and try to recover some of what we lost in the stock market?

Greg Scott · Answer

I love California. Its a great place to visit and I lived in the state for 5 years. But, I would never invest in California rental real estate, because the entire government seems to think that owners are evil and creates laws accordingly.

I do not like condos as rentals for reasons I have posted multiple times on BP.

Sounds like you still have some equity in the property.   I would pull my money out and move it to find places where I can get better returns.

Katrina Razavi · Answer

Hi Alex, sorry to hear about your situation. I live in the city and it sucks to see folks leaving due to COVID. Before considering selling, I'd def follow the advice of others to see what other options you may avail of to get to a place you could at least breakeven. Perhaps Airbnb or a short-term lease to a trusted friend or colleague?

IMO eventually things will come back "online" in the city and so long as big tech companies continue to have HQ's in the Bay Area (which they will, despite all the panicky media coverage), SF will always be the "cool" place to live. This is why folks were willing to make a 1.5-2hr commute everyday to go to work in the South Bay. No one knows when things in the city will come back online, therefore time is a big variable you should take into account. For example, how long could you "float" this property for? Over the longer term, say 5-10 yrs there's no question that your property will appreciate, like most everything else in CA. It may be at a slower rate than an SFR, but it will likely happen. SF will continue to struggle with the supply/demand problem once things go back to normal, and in that case you won't have a hard time getting tenants or selling at a premium. You just have to be comfortable "waiting it out." Of course it's hard to make a recommendation w/o knowing your full financial picture, just some things to consider. Best of luck.

Joe Scaparra · Answer

Fundamentally a lot of things have changed that should make everyone re-evaluate your real estate goals and strategies moving forward in your locale.  It is easy to get advice from people that won't suffer the consequence if they are wrong.....in other words advice is cheap.   Including mine, so what to do?  Take in all the information and try and put some logic to it........then make a decision and take action.

Stay the course people say hang in there!  Their logic..........real estate always comes back.....don't worry be happy!   Right.   It is just a Covid thing, soon this will be all over......Right.?   Fundamentally Covid HAS SIGNIFICANTLY CHANGED HOW HIGH TECH IS DONE!   Listen, financially people in the High Tech have not been hurt that bad if at all from an income point of view. It is the Service Industry (restaurant, nails, dry cleaners, small retail shops, gyms, elective health care etc) that has been severely impacted.  So why are the high tech'ers leaving in droves San Francisco.....why?  It is not really because they hate SF, it is because they can now work from ANY WHERE!  With their HIGH INCOMES they can substantially  increase their standard of living by moving!!!  It looks like they will be given the option of working at home vs ever coming back to the local office.  If that is the case, what is going to draw them back to SF.  The people leaving now are employed, they haven't lost their jobs!!!!!

Now the other side of the argument!  Get out the sky is falling we are doomed!  It is funny as this argument makes me think about a quote from Mike Tyson (the boxer) who when being told how is opponent plans to defeat him he said:  " They always have a plan UNTIL THEY GET HIT IN THE MOUTH!"  Your real estate goals and strategy, was it born out of sound logic or speculation.  Now that you have been hit in the mouth are you ready to fold.  Did you not anticipate this might happen, if so just execute your plan.  Most likely you are being reactive and did not plan for this situation.  If you don't get a hold of your emotions you will tend to do the exact opposite as what you should do.  Hey the market is at the all time high we have to buy or we will be left behind.  Hey the market is tanking lets get out now, yeah let's buy high and sell low that's are emotions full at work.

Right now Austin's real estate market is about 10yrs behind SF's market.  We are in a frenzy to buy now!!!!!   If the nation's economy holds up then Austin will be in a nice protracted long term real estate bull.  We old Texas real estate investors use a buy an hold strategy based on POSITIVE CASH FLOW.  That strategy has built in mitigated risk factors that give us comfort in most up and down markets.  However, you still have to apply logic to your strategies to make sure you don't crash and burn.  The more you buy at the high end margin the more reserves you need to have stashed away!  Your strategy better not be moving with the herd as the herd now in SF is beginning to move to the scared phase.  My buy and hold cash flow in Austin is on hold......keeping what I have but if I want more properties then maybe start looking else where besides the Austin MSA.    Don't change your principles and strategy just because the local market won't work, change your market to fit your principles and goals!

Enough preaching for today, just re-evaluate and always consider the downside too.........Cheers!

Brian Garlington · Answer

Condo's in The City are not selling for list price at the moment. As for people "not wanting to rent" in San Francisco I would suggest you do some very quick research to see what Section 8 would pay you in a nice part of The City. After advertising on CL and Zillow I got a number of inquiries, but it wasn't until I advertised on GoSection8 (for free) that I got overwhelemed with lots of folks wanting to rent my condo....and the Housing Authority actually paid about 18% more than what the "cash" tenants were willing to pay. ...and the money is guaranteed. ....Oh,....and since the tenant's income is subsidized by the government...that means that I am not restriced as much with rent control.

Heather Wilkerson · Answer

@Alex S. - The 2020 year end data for SF shows that condominium prices are down only 2% year over year. Of course there are some areas that have been hit harder than others, but overall the decline in rents has been much more steep than the decline in property values. All of my team’s post-covid listings have sold within two weeks and the number of new buyers entering the market is the strongest I have seen in years. As employers start to bring people back to the offices, we are projecting that condominium values will stabilize further. Happy to provide you a valuation if you are seriously considering selling. Once you have the firm numbers, it will be easier to run scenarios and determine the best course of action. Best of luck!

Steven C. · Answer

What is your investment time horizon?  What % is this investment in your overall portfolio?  Without this info, it's hard to say what the best course of action would be.  You should calculate your overall return at your expected time horizon based on assumed appreciation/deprecation, rental income projection, etc.

Darius Ogloza · Answer

SF real estate has been a short seller's worst nightmare since 1849.  It will come back.  The only issue is: how long will it take?  If I were in your position I would consider buying another SF condo with the proceeds of sale from your current residence while prices are down before I would drop a few hundred grand into the S&P 500 at 3800+.

Brian Garlington · Answer

@Alex S.  What did you end up doing?

Michael C Williams · Answer

@Alex S.  My thoughts on the condo market assuming the vaccine roll out is complete by the end of 2021.

Stabilized pricing for the rest of 2021. 2-3% appreciation for 2022-2024 and 4% appreciation beyond. This is assuming interest rates will stay artificially low (Jerome Powell said this will likely be the case). Offices reopening to at least 1/2 pre-pandemic levels.

You can also try an off-market sale if you are worried about days on market/price drops. Good luck and happy to give further input if you have any questions.

Matthew Forrest · Answer

@Alex S. The stock market was my first investing interest and I have dabbled in a variety of investment vehicles so I'm relatively asset class agnostic. In your case the first thing I would look at is viability of the long term hold, if you cannot afford or are not comfortable with committing capital to this property every month,  sell it and move on. Regarding the selling the property, in my opinion it doesn't matter where you bought it. Would you feel this way if you bought the condo for $100k. We're not psychologically wired this way, but financially it only matters where the market is going and not where its been.

Every decision we make without 100% certainty is a bet. Are you willing to bet that return on the capital you have in this property will outperform other investments (RE in CA, RE out of state, stocks, bonds, bitcoin, sports cards)? If so, stick it out. If not, again, sell and move on.

For context, I like Southern California real estate long term, but I don't like the SF Bay Area and I wouldn't buy a condo in most places.

SF condo, sell or rent for a loss?

Most Popular Reply