All Forum Posts by: Lawrence Leung

@Diane G. Good for you on getting someone in now albeit $200 less than what you hoped for. We currently have 8 vacancies on the market with another 6 more in the pipeline. We have not been as aggressive with our pricing and that has helped in getting a decent amount of inquiries. Unfortunately, the issue we are seeing is that almost all interested parties want to move in June or July. My guess is that they are trying to time the lifting of SIP and easing of restrictions. We are keeping our fingers crossed on trying to find folks that want to move in earlier, but may need to just approve and execute leases.

@Tob Siripak  It is hard to help answer your question without first knowing what your end goal or strategy is.  @Kam T. is right in that San Francisco is very complex when it comes to all three options you listed, but each options has it place given the right situation and strategy. Definitely read as much as you can to save you money with lawyers.

P.S. Buyout costs can be expensive, but I think many folks are blowing it way out of proportion. Buyouts are required to be tracked by the Rent Board for quite some time now because it is used to present to the Board of Supervisors for review on a regular basis making it a publicly available resource.  You can really drill into the data and use it in your investment analyses.
 

@Scott Allison If only Shelter in Place didn't prevent me from getting my magic 8 ball at the office :)

All kidding aside, I think you already have the answer to your question. It sounds like you've done well for yourself in terms of appreciation and for that you should be proud. If your work gives you the flexibility to work remotely go for it and take advantage of your IRC 121 capital gains exemption and reinvest anywhere. Vegas could be a smart move based on historical trends during downturns, but just make sure you have a Plan B/C in the event the downturn doesn't happen as quickly as you expect or you have to come back to the Bay Area for family or some other emergency. Best of luck and keep us posted on your decision!

@Matthew Wright, I confess I was a bit confused when you mentioned "I do not want to turn into a x3 unit building due to creation of HOA etc." TIC is just a way to hold fractional ownership in a property while HOAs are created to formalize and organize fractional ownership. If instead the building is owned entirely by a single person/entity adding, an additional unit is not relevant to TICs or HOAs. But to answer your question, Yes. If the city believes the unit was rented in the past, they will force you to legalize it as they no longer offer demolition permits and San Francisco's ultimate goal is to increase housing stock.

On a side note, you can read more about TICs as an investment strategy by searching the BP forums.

@Matthew Wright, Hoping you and your family are staying safe and healthy during these uncertain times. Your situation is very familiar with situations I've come across in our Investments business. At a technical level you have two paths, either 1) combining the bottom and ground floor units into a larger unit as you suggested above or 2) create a third legal unit. Unfortunately, the path you take is not always by choice. In San Francisco, this choice is taken out of your hands and is instead a determination made from and by the Planning department.

From an Investment POV, you are absolutely correct that combining the lower and the ground floor units is the best option to preserve your ability to perform a fast track condo conversion and generate the most equity in the shortest amount of time. This does require owner occupancy of both units for at least a year for condo application submission, but also assumes a number of other things including that nothing was performed with respect to prior historical tenancies that would disqualify you from a condo conversion.

While the aforementioned would be ideal, it would be all for naught if Planning determines that if at any one time the ground floor was rented in the past. Planning performs a thorough review to make this determination including searching publicly and also checking to see if anything was reported to the SF Rent Board or a DBI complaint. If Planning does determine the existence of your ground floor unit, it will require you to legalize the unit through the existing Planning code process assuming zoning supports the third unit OR using the new ADU program making your fast track condo conversion a passing dream.

With regards, to some of your latter comments and questions:
1) Any un-permitted work (including corrections) is not a good idea as a quick compliant from a neighbor can bring an inspector knocking on your door with a NOV especially in the current environment where everyone is SIP.
2) Legalizing existing constructed spaces can be hit and miss based on the inspector you get. Some inspectors may eyeball the work performed and feel it is sufficient to sign off and yet others will ask you to open up the walls to ensure everything was done to code. Just realize that at the end of the day it is the Inspector's name on the line if something were to happen, so it is not a surprise when Inspectors want everything opened up to see what is behind the drywall.
3) IMHO, the ideal option would be for you to get permits for an expansion and bring everything up to code using those permits.
4) Lastly, if your ground floor unit is vacant, I would recommend keeping it that way. If instead it is currently rented, I would manage it very carefully and pray to God the current residents move out voluntarily and hope they never look back. In San Francisco, renting illegal units is a double whammy as you technically cannot receive any compensation for an illegal space while at the same time you are unable to evict anyone due to the eviction control in San Francisco. This introduces the possibility that a resident can live in an illegal space indefinitely for free. 

Check out this mailing I found while visiting one of the multi-units we manage in San Francisco. Even tenant lawyers are soliciting to bring litigation against landlords and property owners. @Amit M. what do you think of this beauty?

@Michael Cavalli, My apologies as I never extended my condolences to you and your family.  Your father's passing and the size of your mother's estate bring to light more considerations. I want to share some of these considerations for you so they can be "starter" conversations for your family, your real estate agent and your mother's tax accountant.

As the cliche goes, the only things certain in life are taxes and death. Given the property is a significant portion of your mother's estate, it is important to mitigate as much as possible the tax liability and impact so as to not to reduce your mother's estate nor negatively impact her current and ongoing lifestyle. I think the considerations can be be explained by breaking them down into the potential Capital Gains valuation buckets...

1) Little to no Capital Gains: In this situation, the cost basis of the property (purchase price + any capital improvements + stepped up basis upon your father's passing) is near equal to the FMV of the property. The sale or non sale of the property will not cause a significant tax liability and so this ideally would give your mom the most flexibility and options. You can rent, you can sell or you can do both.

2) Capital Gains is Significant, but does not vastly exceed $250k: The magic number behind $250k comes from IRC 121 and the capital gains exemption your mother receives by selling her primary residence as long as she lived there 2 out of last 5 years. This rules gives your mom a 3 year window where you can rent the property while you wait for the "right" buyer allowing your mom to get some welcome cash flow and some flexibility albeit not as much as the former situation.

3) Capital Gains is Significant, vastly exceeding $250k: If you are still within the 2 years after your father's passing, you may be able to take advantage of the $500k vs the $250k exemption using IRC 121's special rule around surviving spouses. This does, however, increase your urgency to sell the property within the 2 year window after your father's passing.

If instead, your mother is past the IRC 121 window for any exemption and the capital gains are significant you can choose not to sell the property. Capital gains only exist if you sell. Instead, turn the property into a rental and let your mother receive some cash flow. She can always refinance as I suggested earlier unlocking the money you had tied up and also giving her access to some equity.

@Michael Cavalli, Your parents' home sounds wonderful and is the ideal setup for generational living. While I do agree with @Greg Scott that California is not the easiest state to be a landlord, the investment results make it worthwhile even in places like San Francisco where a savvy investor can identify the value play opportunities.

The fires from the past few years have made the rental market in Sonoma and Napa counties very favorable for landlords with higher rents as demand significantly outstripped supply. With that being said, the current Covid-19 environment is very challenging for landlords trying to rent a vacant property while trying also to keep you and your family safe and healthy.

Rent-o-meter as @Marshall M. suggested is a great tool for normal property types, but given the uniqueness of your property I would also recommend tapping into a locally established Property Management company in Napa that can give you more insight into 1) current demand given Covid-19, 2) historical demand for a generational living setup as you currently have and 3) expected rental income for the setup you have and the given amenities.

As an owner and investor, there's no reason why you cannot continue to keep the property listed to catch the right buyer for your property, while at the same time placing it on the market to see if you can get a Tenant in at a price point you are comfortable with. Once you have a Tenant in place you can free up the "locked real estate money" by pulling out equity through a cash out refinance OR create a LOC to tap into the equity for other investment opportunities.

I wish this post was under better circumstances, but I hope everyone, and your family and friends are staying safe and healthy.

Phil Ting a California Assemblyman just introduced a new legislative bill in light of Covid-19 that would force every property owner to reduce their rent by 25% and subsidize the rent of their tenants.

AB 828 by Assemblyman Phil Ting ignores the robust rent and eviction controls already in place across California. It provides no assurances that landlords can collect rent, remove problem tenants, or get a fair hearing in the court system. You can read more about California Apartment Assocaition's letter opposing AB 828 here.

If you own a rental property in California we NEED your help to defeat this bill. Visit CAA's Action Center to send a letter to your legislator urging them oppose AB 828.

This bill denies equal justice to property owners by:

1) Forcing landlords to reduce rents by 25% even if a tenant cannot demonstrate a hardship or need.

2) Allowing judges and the court system to set rents and change the rental agreements already in place.

3) Assuming every tenant is facing a hardship related to COVID-19 and must be compensated for this hardship.

4) Protecting nuisance tenants as it does not require tenants to answer an unlawful detainer complaint.

5) Mandating that rental property owners demonstrate an economic hardship to collect the contracted rent.

AB 828 is an unfair attempt to allow the government and the courts to give reduced rent and extended tenancies to all renters even if they do not face economic hardships, and it provides no safeguards or protections for landlords.

For Immediate Release 4/16/2020

Contact: Gail Phillips, CAE, NARPM CEO

NATIONAL RENT SURVEY SHOWS MOST RENTERS CURRENT WITH APRIL PAYMENTS

[Chesapeake, VA] – In a nationwide survey released today by the National Association of Residential Property Managers (NARPM®), it was found that most renters were current with their April rent payments, in spite of the economic downturn due to COVID-19. The survey was conducted among NARPM's 6,500 members with 1,094 responses.

Over 40 percent of property managers reported that 91 to 100 percent of their tenants had paid April’s rent in full and on-time. Another 20 percent said that 81-90 percent of their tenants were current with payments.

“It’s early yet, in terms of the wave of unemployment hitting the nation and its impact on rent and other financial obligations,” commented NARPM® President Kellie Tollifson, MPM® RMP®, of Bothell, WA. “Establishing this information from this point moving forward will give us a baseline from which to judge how the downturn will impact property management companies and the clients they serve in the coming months. We’ll be conducting similar studies monthly while the rental moratorium and the COVID-19 crisis remains.”

Property managers were also asked whether, if offered, renters had accepted a payment plan for April rent. Less than 5 percent indicated renters had accepted such a plan, while many commented that they had not yet felt the need to offer a payment plan. As of April 6, the vast majority – 68 percent – of property managers said that less than 10 percent of their renters had not yet paid April’s rent.

Looking at whether company policy had changed toward how maintenance requests were handled, most – 70 percent – said they had, with some indicating that ‘non-essential’ repairs would be held until local stay-at-home orders were lifted. Over 78 percent of property managers indicated that they had instituted new policies for handling showings of rental units. Responses varied from self-showings only of vacant units using lockbox access to virtual (online) showings only, while some indicated stricter pre-showing screenings were now in place.

“There are many options today for prospective tenants to view a property,” added Tollifson. “Usingtechnology, renters can do a virtual tour of a home to help them narrow their selections. Lockboxes are often used these days for self-showings, and most property managers offer a variety of technologies that will help keep renters safer whether during a crisis or otherwise.”

The next survey of residential property managers will take place in May. There are currently over 6,500 members of NARPM®, the nation’s only professional organization for managers of residential properties, from single-family units to small multiplexes. Members represent over $24 billion in residential rental properties nationwide. For more information, visit www.NARPM.org.

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We were one of the 1,094 that participated in this survey and we did report the following:
1) We received 95% of all our rent
2) We offered payment plans for those that indicated impact from Covid-19
3) Only one Resident has agreed to payment plan, but has not yet paid.
4) All other impacted Residents have remained silent with no payments
5) Policies for showings has changed to using virutal tours and narrated video walkthroughs.

We will share the May findings next month.

@Kyle N. You have way too many unknowns for anyone to really help you as the most important missing piece of information is the exact location like @Mitch Messer pointed out. If the property is in San Francisco, you cannot unilaterally change the terms of the lease agreement. But if the property is located elsewhere with a less restrictive or non existent rental ordinance, you can give a 30 day notice and increase the rent to make your numbers work. But like @Arlen Chou pointed out, you absolutely need to understand how the rent amount was disclosed.  Was this just the seller stating a number or was it an Estoppel signed by the Tenant?  If the later, the Estoppel would substitute absent a lease. In San Francisco, it is very common to invest in properties where a lease was lost, never existed to begin with OR the tenants are not willing to share with you their copy. 

You also didn't mention performing any inspections, but you want to negotiate. With out knowing the condition of the property and what deferred maintenance or serious issue exist, it is hard to negotiate. Get yourself a home, pest and roof inspection. If you don't want to spend the money, make sure you have a GC go with you and visually inspect the property. Do you have any contingencies in place?