All Forum Posts by: Chris Larsson

Oops, doublepost.

@Saikat,

You can email the listing broker and ask for the 'disclosure package' which will be 50-100 pages of legal documentation. This should include info on past evictions, OMI or otherwise. That could save you running all over the city on your Saturdays. The information is also maintained with the city, though I don't know if it's readily accessible online.

@Chris Mason

>I've encountered more failed condo conversions than successful ones

Scary stuff. In your opinion is this because they didn't use a lawyer, or for different reasons?

Hi Saikat,

To qualify for condo conversion, two people need to live in each unit of a duplex as co-owners for at least one year. So you need to either find an empty duplex with a co-buyer you trust, and who can also make a similarly sized investment to yours, or you need to buy a building yourself and work to find a second buyer (and evict within the rules if necessary). 

An empty duplex is easy enough to find on Zillow / MLS, etc. But the second buyer is a little more difficult. My guess is the best bet is to buy your own place (assuming you can float the down payment for several months), and then sell half as a TIC when you find an appropriate partner. If not, I would start looking for partners first.

A lawyer is obviously a must for that sort of project.

@Diane G. 

Thanks for the info. Definitely not $5-10m deep, but an interesting idea. 

I've run the numbers on buyouts and yes, in some cases even a $100k+ buyout can give good ROI.

I also looked at a building recently with a tenant in a similar situation to yours mentioned. It's very strange to me that landlords would need to be concerned with the life expectancy of their tenants, but here we are. Perhaps your friend should have consulted an actuary ; )

@Dan Redmond,

Thanks for the response. I have a legal contact I've been meaning to call on those issues, but great to have a backup, thanks for the name. 

I wouldn't be surprised if you're right about tenant turnover, I wonder if there's any guideline for this or way to get plausible estimates. Vacant and beat up is a good idea, I'll keep a lookout for those.

Hi Everyone,

I'm looking to buy somewhere within the city of San Francisco as an owner occupier. 

It seems that in many markets, the biggerpockets game plan is to buy a somewhat distressed multiplex, add value through improving/remodeling the property, and increase rents because of that added value. However, in San Francisco, most mulitplex buildings are rent controlled and have a web of regulation surrounding evictions, rent increases and therefore limit how much value you can add by improving the building or running it better.

What are some good value-add strategies to use within the city? Let's keep discussion to the SF municipality only, since laws vary drastically around the bay. Here are some ideas I've seen: 

-Take advantage of the duplex expedited condo conversion program. This allows two owners, working together, to subdivide a duplex into condos after 1 year of owner occupation, which removes the building from rent control and adds substantial resale value. Fix up building in process.

-Buy weak cash flows. A lot of the cheapest buildings (by square footage) have deeply below market rate units and very low CAP rates. In this case, you need to play the waiting game because at some point, those units will clear, you can rehab the unit to bring up the going rental rate and refill the unit at a rent level potentially many times the current rate (and a corresponding increase in equity). This will give you bad cash flows (at least to start) but periodic 'bumps' in value as people cycle out of apartments. Problem is that this is really hard to forecast so your IRR has a very wide confidence band and your cashflows are likely negative for a long time.

-TIC conversion? I don't know much about this but there might be something here. I'd love to hear more.

-Capital Improvement passthroughs? Again, I don't know much here, but there may be positive ROI in this program.

Anyway, I'd love to hear what everyone else thinks and find out what's working for others. Feel free to correct me if I'm wrong anywhere. It's a tricky market we have here, but there's got to be some value somewhere.

Thanks for responses in advance.

One other thing you need to understand is how you can legally move into the top unit. I believe that once the old owner is out, the building will be considered a SFH which means that there is no rent control on the upper unit and you are free to evict assuming the lease is month to month although you would probably need to make sure that the tenants are given access to the entire building (i.e. to ensure that it's a 'single family home' in the eyes of the city). However, you should really make sure of that and should probably consult a lawyer. It's not easy to evict in SF and things can very wrong if you unwittingly break the law. If the unit is considered rent controlled by the city, then you can legally evict by owner move in, but will need to pay ~$17k to the tenants (and likely $10k more to a lawyer).

Here is one bad example: https://ww2.kqed.org/news/2017/01/17/s-f-tenant-hi...

Hi Brian,

I might be able to help with modeling. This is the method I've used for looking at duplexes / triplexes to live in and manage.

You can model your primary residence in the same way as any other income asset with the crucial exception that you insert some math for how things work out when you pay rent to yourself. Even though it's kind of an odd way to look at it, economically this is really the core of what's happening. 

Effectively you calculate your NOI as normal, with you paying the rent to yourself at market rates. Once you account for all expenses & expected appreciation (if any), you have your return on cash invested. Then you need to figure out, 1. Does that meet your hurdle rate (for example, if your money would otherwise be in an S&P, does it beat it?), and 2. Would you want to be paying that much in rent were you not buying and continued renting? 3. Can you, and do you want to, absorb the (negative) cash flow since you'll be on the hook for the full mortgage cost and all expenses, even though the project shows a positive ROI.

There are some tax implications for this as well, you 1. are effectively paying yourself rent with pre-tax money which offers some discount and 2. generate substantial mortgage interest deductions at the price level listed. This may make a big deal depending on your marginal tax rate. For this reason I always take my projects all the way down to expected after tax ROI.