All Forum Posts by: 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. 

@Justin Thorpe Good points. I do believe you can make money in real estate anywhere, but you need to understand how the game is played locally and for that asset type. For the majority of us mom and pop investors, we either have to buy at a discount to market value, buy a value add building/project, or do something in the middle in order to continue to scale. 

I don't know where this $8k rent number came from, no one is paying that in those units. A new development there won't be getting the 1% rule. They are probably paying 3-4% cap rate and getting low interest rates in the 2-3.5% range with an interest only period of 3-10 years since its a huge loan. The money isn't made on day one, its on the future rent increases on the property. When those rent increases fall to the bottom line, divided by the low cap rate, that is where you get your appreciation. Cash out and repeat. That's how the game is played in the bay area. 

I wrote this for a few friends but I think its applicable here.

Long term, I think the Bay Area will be fine. There will always be companies that come and go. For example, I remember 10 years ago Salesforce only occupied one building in downtown SF. Over the years they kept leasing building after building to have several in SF and then leased the newly built and tallest building in SF, Salesforce Tower recently. Schwab changed HQ due to an acquisition, Mckesson moved out as well, but leasing up those spaces wasn’t a huge issue. 10 years ago, I never heard of much going on in Mission Bay except for the Giants baseball team. Now UCSF has a huge campus occupying several blocks and the new Chase center is there as well.

The skyline is vastly different in SF compared to 10 years ago as well with a lot more office space. Short term leasing will be slow but I am sure it will get taken up and you’ll see office buildings start being built in a couple of years from now.
Moving a HQ doesn’t necessarily mean all those jobs at HQ get cut and moved to Texas right away, it will take some time and depend on the executive in charge. If the CFO stays in the Bay Area, his team will probably not be getting cut anytime soon. Any big company moving HQ probably still has to keep a large office presence here as talent is scarce. There is a reason why talented software developers get paid huge comps, it is tough to find great talent and some have just became millionaires in a year working at Doordash.

In my opinion, there are a couple of different avenues of migration to the Bay Area. One are college kids coming to the many great schools here in the Bay Area, Sanford, Cal, USF, UCSF, etc, they enjoy the city and their friends and stick around for awhile starting their careers. Yes, many will leave even during good times but we don’t need many to stay to keep the economy growing and thriving. Second are college grads looking to have fun and when the city opens up again, they will come back and rent small studios and coliving spaces because they will be having fun outside most of the time. Third are those coming here for work and I believe when everyone has the vaccine, the office will be open again and people will be back in the office as usual. Fourth is the foreign immigration of folks and that won’t ever stop.

In summary, there will always be new companies that grow and take the place of old companies. Once the city opens up and becomes fun again, people will come back and rentals will bounce back. In the mean time, hold on tight and keep looking for those deals.

All of the new multifamily development in SF was luxury as that was the only type of MFH development that could pencil out. These developers pushed rents higher and higher because the demand is there. Now that the demand has fallen, its these units that are taking the largest haircuts. The older housing stock for MFH has seem some rent declines but not as bad as these luxury units. Also, it depends on the unit type and area, studios and single room occupancy in downtown are getting hit harder than large 1/1 and 2/1's on the west and south sides of the city.

MFH buildings are still selling in SF and the bay area. Yes, there has been price declines but many of those buildings were overpriced to begin with. Billionaire Jay Paul just spent $73 million on a luxury apartment building in Redwood city on 12/1 that came out to $816,666 a unit. Why would the rich invest here instead of OOS? Something to chew on. I do believe money can be made anywhere but I am local and believe real wealth is created owning real estate here.

Yes, can be a great strategy but not easy especially during these times with low demand for condos and TICs. First you need to get units vacant, either with buy outs or Ellis act. I have seen buy outs over $300k which could be worth it in some cases and some dont want to move at all so you have to go Ellis act route. Then you could face reputational risk with some media shaming if some groups get involved. Also, you need the right lawyer if you go the Ellis act route, one friend went through the process, tenant lawyers saw the APN number was incorrect, spent a year already into the process and they had to start the process over. Then you need the money to rehab the building to be TIC worthy. You'll need a TIC agreement which most investors get from Sirkin law. Then, finally you can start to sell the units which will be priced a bit lower than a condo and you'll need to find fractional financing from a bank. Finally, I won't trust any agent that says they can take care of it all, I know of some horror stories from that as well.

In summary, it is doable, it is not for the faint of heart, you'll need a good amount of capital for buy outs, holding costs and rehab, and a lot of patience. If you can find a vacant building at good pricing, then most of the headache is off the table. However, you'll want to look at TIC comps right now, usually they sell for about 10% lower than condos but I have not followed TIC values and supply recently.

Sid, where are you seeing a 30% correction in values for MFH in SF? For the five MFH that are 5+ units that sold in November, none of them were fire sales with 30% off. 

@Michael Loza - Welcome to BP. I have a meetup but have been quiet since Covid happened. My meetup is in my signature link.

@Account Closed has a great zoom meetup right now. Take a look at his website and join is meetup! https://everythingrei.com/ 

Sid, you are definitely correct that the standard way to value commercial multifamily property is through the income approach/cap rate and that works well with buildings at market rate rents. However, when I look at properties for sale, I look at the potential of the property and the cap rate is one of the last things I look at. This is because I am looking for value add projects, those that need rehabilitation from mismanagement or the ability to add value in other ways. In SF, it is common to see super low cap rates of 0.5% to 2% selling, because there is great potential of the building. I would be happy to buy a 0% cap rate building if I can turn it into a 10% cap building in a reasonable time and the icing of the cake would be the value of the building at a 4% cap for a cash out refi.

In my opinion, a 25% reduction in rents will reduce NOI by even more than 25%. Why? Because there are a lot of expenses that can't be reduced as quickly as your decline in percentage of rents. I did some quick math and with a 25% decline in rents, holding expenses the same, it is a 38% reduction in NOI and value.

I have seen a few sales with pretty low purchase prices but it appears that sellers entertained low ball offers. There are price reductions but most started off high. We will see what happens when these CA propositions pass/fail, there are a few that don't bode well for landlords. Also, real estate is seasonal and inventory is low even for MFH, so we may see the usual a bit of softness this winter and spring will be telling of the rest of the year. Sid, you could be very right that prices fall 25%, but I am not seeing it yet. 

@Sid Naik, congrats on getting your condo rented but tough to hear you had to take 20% less. When the market rebounds again, you will be able to make it up I'm sure.

I was wondering who was Jonathan on this thread but I guess you mean me haha. I am not saying MFH won't drop, I am saying it won't drop 25% that quickly and we might not get to a 25% drop either because there is a lot of money waiting on the sidelines just like you waiting to buy.

I am seeing some mixed use properties in SF having some price reductions as it is probably a difficult time to lease out ground floor commercial in many areas of the city. Pure MFH is getting a little slow but sellers aren't motivated yet. I still think those headline numbers of 31% down in SF are for the new luxury apartment buildings especially studios and doesn't include move in incentives but those are not the buildings us mom and pop buyers are in the market to buy.

Are you seeing any properties on the market with price reductions due to NOI declining? I haven't...yet!