All Forum Posts by: Amit M.

You need a high down payment, deep pockets to weather the rent collection risk over the next 1-2 years, and a long term perspective (7+ years) for this to make sense. Usually well capitalized* established portfolio SF investors buy properties like this, as they can add it to their mix, and wait for the longer term upside. 

*meaning they already have made a lot of money in the SF market; newbies bettering the farm on a non value play expensive property, not so much.

way

too

pessimistic 

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3words/1chart

@Joe Black congrats on getting your first property. Tell us more- did you keep existing tenants, do any renovations, etc? Usually you need to work some type of creative magic to get a successful house hack in Oakland/Bay Area :)

@Jc M. You made a good basic investment IMO so first, don’t panic! I know SF is in a tough position now, but don’t buy into the BS media hype. SF is not going down, tech is not dead by any stretch of the imagination, and the BS social policies will reverse themselves. If you’ve lived here as a native I’m sure you’ve seen this dynamic unfold before...like during the early 2000’s. To put it succinctly, in dynamic RE markets like SF, when it rains it pours, on both the ups and the downs (although prices drop are maybe 10-20%, but the ups reach 100% :) There are a lot of sensational click bait articles on forever dead office buildings and SF’s demise, and they are dead wrong! Young people will start returning to the city later in 2021, and even more in 2022. Both new grads wanting an urban environment and those that left by pandemic-panic...after they realize that cavorting around in a cookie cutter and soulless suburb (often with crappy weather...too hot or  cold) ain’t what they thought it would be. And remember, due to rent control and so many units (effectively hoarded) off the market, the relative available rental market here is small. Doesn’t take a lot of people coming back to reset rents to positive territory. That, plus new developments will be dead in the next 2-3 years, so not much new inventory coming after 2021. 

As to your specific case: yeah the rental market is horrible NOW (like from October; in the summer it was better). But I think it will stabilize and slowly improve starting in the spring. So a summer renewal may not be too bad. An inlaw in the excelsior should be nowhere near a 30% hit in rent. That mostly happened in soma and DT high rise/expensive condos. Try to keep current tenant, maybe offer. a modest reduction if needed. Otherwise re rent it, and look for younger people that will not squat there forever.

One investment you may want to consider (if you haven’t already done this), is legalizing the inlaw unit. Or legalizing the rooms down as part of the main house, but still make that space rentable as a second unit. You’d need a good architect to get this through SF’s arcane planning and bldg depts, but it can be done. Either way you legalize 550 sq ft, which will add several hundred thousand $$ in value. I’d focus on that rather than risking $$ in unknown out of state markets. Good luck!

...guess this isn’t one of those “feel good” posts about RE investing 🤪

@Carlos Ptriawan no issues with insurance. But yes with financing, there is a little song and dance that you and the realtors must do: basically you can have everything in the unit EXCEPT a stove! Yeah it sounds weird, but the appraiser will just look at everything as non legal bonus rooms, including a kitchenette. They just don’t want to see a stove, which for them defines a full kitchen. So as long as there isn’t a “full kitchen” it’s not considered a “unit”. Having extra unpermitted rooms, bathroom and a “kitchenette” are ok, they just add minimal value to the appraisal. In our case a handyman pulled the stove out, put it in the garage and covers it with a tarp ;) after appraiser came he put it back in ;);) It’s a bit silly but it worked.

You can buy the place then legalize the unit as an ADU.

@Carlos Ptriawan in my specific cases all the properties are in San Francisco, which has a San Francisco only program to legalize existing inlaw units. They are not referred to as ADUs. I wouldn’t extrapolate that to other counties in CA, which are mostly relying on the state law allowing ADUs. 

@Dan H. and @Justin R. since I have not sold or refinanced, I cannot say with certainty. But I suspect my properties will be treated in a similar manner Justin described. I also think it is very dependent on the zoning in the area, and also if similar properties already exist. Plus I'm sure it county dependent, and San Francisco is in a world of its own: I'm my cases I didn't technically add an ADU. We have a program that allows owners to legalize pre existing inlaw units, which is what I did, as they waive most city fees, and are generally more lenient with planning and bldg requirements than adding ADU's. Also the way the city records work, when you pull a 3R report, it updates any work you have done on the property, and the unit count changes when adding a unit. Most appraisers go off the 3R, so if you get that to reflect 3 (instead of 2) units, I think you're looking good. All of this is still new territory!

I agree the ADU phenomena is not always what's it's cracked up to be- especially for most people who are trying this with SFH's. The main issue is the appraised value of the ADU not being close to covering construction costs, especially in CA. And I don't know if this will easily change in the future, because once a precedent has set it's hard to transition the ADU value from current $20-50k to $200-400k, which is where it needs to be.

I've been fortunate as I've done these projects on duplexes. And when I eventually sell the city records will reflect a triplex. So I believe I will reap full unit value. But this is for San Francisco, where SFH's and 2-4 unit buildings frequently sit next to each other cheek by jowl. But when you have a suburb of SFH's, all of a sudden a SFH+ADU is lookin' like a white elephant. And white elephants are never good at getting top appraisals (unless you can radically alter the project into something easily understood from a bank and appraisers perspective.)

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my2c

@Justin Thorpe and @Joe Bertolino I agree with both of you. Of course there is a balance to everything, but there is no doubt in my mind that the news and media is disproportionate hyping up one side of the equation.

Joe- interesting anecdote about the Sacramento apartment sellers seeking SF properties. Right now it's largely detente between apartment building buyers and sellers in SF; most owners won't sell at fire sale prices, so buildings are lingering on market or being removed from listings. I'm sure a few will sell at the right compromise for both parties, but not a lot of transactions. So only if the vaccines are a big bust, and we are in the same position 1-2 years from now may prices drop significantly. But if we expect the vaccines to take hold in 2021 then we will start correcting fast enough whereby SF sellers can hold out for better selling prices. I know that SFH's are holding their prices well (sub $2mil, larger homes are selling for a discount.) This also happened in 2009-10, so if you're looking for a higher end home or condo (and I know people who are) 2021 is a time they plan to strike.

As I’ve mentioned before, SF is a very small market, and never has a lot of listings at any given moment. So it doesn’t take much inertia to change the market dynamics. Same thing with rentals. With so many units locked in at below market rents due to rent control, it doesn’t take much to swing the dynamics back to the landlords favor.