All Forum Posts by: Greg San Martin

So many responses in such a short amount of time. The video hit a nerve.  

Best to get out if you are going:

(1) before the locals adopt rules requiring landlords to sell their properties at below-market prices.

(2) before interest rates increase.

(3) before you lose your upside potential in a new property. 

I guess I've been in California too long.  The bizarre stuff doesn't bother me that much.  It's easier to ignore the warts when your single and small multi props appreciate $40,000 a month. 

Unfortunately, the warts are turning into leprosy. So, instead of building for tenants who may not pay, maybe it is time to cash out and git.

If the triplex is vacant, consider converting it back to a single or perhaps [back to] a golden duplex before selling to take advantage of high demand for spacious singles and to avoid the stigma of small multi-family in Berkeley (i.e., neo-socialists in local government are actively seeking to bankrupt small multi-family landlords). In some cases, conversions are allowed.  Then a new buyer could add multiple ADUs with a limited exemption under state law

That #1 strategy - buy a fixer - is a great idea that not everybody understands.  Buying low (i.e., fixers) significantly reduces operating costs (i.e., property taxes).

Here is one more line item for your list: look at neighborhoods that have historically retained their values during recessions. I have noticed that many areas that are least volatile during recessions also have the largest long term gains. Even within zip codes, different neighborhoods have significantly different value rentention characteristics. You may pay more for this sleep aid.

As is now clear from Prop 19 and the massive forecast budget deficits at state and local levels, Prop 13 remains a huge target for state and local electeds. 

1031 exchanges seem to be impaired by Prop 19.  With two children (my heirs) and multiple units, I am harmed by Prop 19.  I am upset that the state deceived voters again to increase tax revenues and real estate broker commissions.  As a "side hustle", and in response to Prop 19, I want 100,000 Millenials to become real estate brokers and chase ambulances.  

What clearly has changed since 2002 is that we have become a one party state and rolled out the welcome mat for half of the nation's homeless and even larger shares of other states' drug addicts, mentally ill and child molesters.  And within California, we have concentrated those folks in Oakland, Berkeley, etc.  

One of the long term consequences of widespread aggressive rent control has been to concentrate large populations of low income renters into high cost areas.  This in turn builds momentum to pass more rules and fees on landlords and homeowners.  If and when interest rates go up and property values (and tax revenues) spiral down, I think Bay Area real estate investments (and governance) will become very unattractive for at least a few years. This is because many cities, like Oakland, will use franchise fees to maintain the same or increased budget levels.  In other words, they will effectively and legally add pass through fees on utility services (just the privately owned services) to replenish their general funds.  Oakland has already begun applying franchise fees to waste collection.

But I am not selling yet  I may even try to buy distressed properties from distressed small multifamily owners (owner occupants) before the TOPA zombies take over that market.  

As long as the US Senate is controlled by Republicans, fewer and fewer subsidies for affordable housing will get approved because most of the rest of the US does not want to continue throwing money at new units in California that cost nearly $1 million per unit to build. That means more upward pressure on rents at existing rentals.  

The rodeo is not over yet. My bell may get rung while I wait for my bell to ring. But in the meantime, the hazard pay is pretty good.

Only in California would someone ask this question: what does it cost to be placed on life support?  Or in a cryogenic pod?  If I never actually die, then there is no reassessment. Just kidding. 

This proposition fooled a lot of people.  Maybe its time to change professions and become a professional ambulance chaser (I.e., a realtor).  Kidding again.

Welcome aboard!

consider buying single-family with large Lots and / or conversion potential and then building one or more accessory dwelling units (ADUs).

Keep in mind the size of the existing primary and rentability when you buy. If you build an Adu that you can move into, then you can rent out the much larger primary home and generate more rental income.

There is an LA appraisal study from last month that looks at the property value add of ADUs.  ADUs add value and that value increases over time, but initially, ADUs do not increase property value by as much as they cost to build.  Flippers would have to look at both appreciation and rental income to estimate break-even periods.

Garage conversions can be cheaper than new ground up construction.

What RE investors often overlook is that junior ADUs can be far less expensive to develop than ADUs from conversions, additions, new constructs, etc.

At singles, if two ADUs are built, one must be a JADU. We have done a good job at identifying the costs of a "jewel in the crown" ADU. $350K on Benvenue. We have failed miserably to identify the pricing of least cost JADUs. That will change.

The reason JADUs are so inexpensive is because they are conversions of existing living space.  You do not have to rebuild foundations, walls, floors, pipes and wires.  JADUs require efficiency kitchens, which are also lower cost than full kitchens.  For these reasons, JADUs can ve built and rented much faster than ADUs.  

Sub $50K JADUs have been built in Marin, Napa and Santa Cruz counties. More are on the horizon. If your Benvenue prospect has ADU conversion potential, then your garage conversion is likely the more expensive ADU.

The cities do not much like JADUs because tax proceeds and fees are much lower. One of the reasons the state mandates approval of JADUs is because the cities would rather have revenue than to solve the housing crisis. The big ADU developers are unlikely to mention JADUs because those projects do not generate a lot of profit.

One caveat: the Oakland and Berkeley rent boards will do everything in their power to prevent any ADU from being built that is exempt from rent board rule. They actively seek to thwart Costa-Hawkins both legally and otherwise. In Oakland, you need to worry about rules that the rent board will adopt in the future and not just existing rules.

And one other caveat: Fannie has that funky ADU language in its lending guidelines. If you plan to buy and hold, understand whether a second ADU affects your ability to refi. Make sure that adding a second ADU does not inadvertently give your lender a reason to call your loan after rates rise. Read the small print.

Also good to keep in mind that new state law effective Jan 2020 maneates that local agencies allow two ADUs at single and 3 or more at multis.  The problem with ADUs is that they take so long to pay off and do not add as much to property values as they cost.  

Hopfully, this SJ Mercury link works:

https://www.mercurynews.com/20...

Somewhat on topic is a new report on trends in Bay Area rents.

https://www.mercurynews.com/re... 

"Bay Area rent have plummeted during the coronavirus pandemic, including . . . 17.8 percent in San Francisco, the steepest decline in the nation, 9.5 percent in San Jose, 7.9 percent in Oakland, and 6.3 percent in Fremont."

"The four Bay Area cities were among the top 10 cities in the country with declining rents. They also remain atop the list of most expensive cities in the U.S., according to Apartment List."

But rents are not everything.  Appreciation of leveraged investments is what has made millions of millionaires (on paper) in California.  

Values for singles and small unit rental properties in most areas have been rising fast.  The past month, my properties in the Elmwood district of 94705 (Berkeley) have increased over 4% and are projected to grow more than 8% over the next 12 months (according to Zillow).  Those estimates can change wildly from month to month.  Your Benvenue prospect likely appreciated an average of $5K to $10K per month every month over the past 20 years.  It may be appreciating even faster now.

Still, Oakland has the nastiest new controls on small landlords of any city (in my opinion) and the Oakland city council is more willing to support ongoing property and wealth transfer proposals from their rent board (RAP).  I have not seen data but I have heard that owner occupied duplex and triplex owners are so harmed by the new normal for landlords in Oakland that sales prices for owner occupied duplexes and triplexes are declining. This is because the city tricked them and locked in their below market rents when they repealed the full exemption for such properties.

My main point is that the big trend in the Bay Area is declining rents.  If that is a lasting trend, it is a factor in any thoughtful decision to invest.  The closer to tech, the worst the trend.  But the remarkable growth in value in singles and small multis is also an important trend, if lasting. 

If a unit was added without permits, local rent boards, including Berkeley's rent board, hold that the tenant no longer must pay rent.  

So, Brian's advice (buyer's agent) seems like great advice.  Make sure it is a realtor that understands the rent board rules (most realtors do not).