Upside and downside of investing in multi-units in San Francisco
A reader asks:I am thinking about buying multi-units in San Francisco as an investment and renting them out for income as well as building equity. Do you think this is a good idea?
Our answer:
Buying multi-unit buildings in San Francisco for rental income is a challenging because of several factors. First of all, San Francisco properties are governed by rent control which restricts yearly rent increases to 60% of the CPI (consumer price index) and allows some tenants to be "protected".... in other words they cannot be evicted even if you, as the owner, wants to live in their unit. (There is what's known as the Ellis Act which is explained briefly in an article on the San Francisco Tenants' Union which also has a link to a PDF of the actual law.) However, the Board of Supervisors is pro-tenant and tries to discourage individual ownership of units by passing laws that prohibit owners from converting their units to condos if there is more than one eviction. Go to the City of San Franciso webpage and do a search on condo conversions; you will see all the laws that are being proposed or that have been passed to limit the amount of condo conversions being done. Needless to say, there is too much to cover in the space we have here!
You might ask, why would a city government be anti-condo conversion if the producing of more real estate properties adds to the property tax base and increases the city's revenue? Good question. At this time many building owners do not live in San Francisco so there are more renters who vote. Given this dynamic, I think you understand who the politicians tend to cater to. The San Francisco Tenants Union is one of the most powerful lobbying forces we have. Fortunately, the San Francisco Association of Realtors (which tends to be more pro-property rights) is another strong lobbyist.
Another reason your idea is challenging (you thought we forgot the question, didn't you?) Many of the units sell for a large gross multiplier which means you will not get positive cash flow unless you put more than 50% down. And in that case you lose the advantage of the normal leveraged investment that real estate normally provides. Horizon Financial Associates has an article from 2004 which explains leveraged investments rather nicely.
So what do investors do? Therefore, investors in San Francisco Real Estate depend upon appreciation to recapture their investment. That appreciation has been due in part during the past few years to reselling multi-unit buildings as TIC's (Tenancy - in - Common) and/or doing conversions to condominiums. However, with the passage of the new law mentioned above, it undermines the ability of owners to vacate their buildings so they can sell the units individually. (Owners have been using the Ellis Act to be able to deliver vacant buildings to potential buyers or sell to individual parties as TIC's.)
So before buying any units as investments, analyize the current income, understand that any increases will be limited by rent control, and have a good attorney to talk to when and if you have tenant issues. I would never suggest you negiotiate with any tenant without using an attorney who specializes in tenant/landlord issues. Tenants have successfully sued well meaning landlords for simple misunderstandings. Also be sure to have good insurance with protection for tenant issues. As we like to tell our clients: "It's not how much money you make, it's how much money you keep".
Note: Since we wrote this article, we found details on the condo conversion process from legal consulting firm G3MH which we have downloaded to our website in PDF format. We hope you find this useful.
- Mick Orton and Janis Stone
posted by SFResidence.com @ 10:21 AM
2 Comments:
I own a rental property in San Francisco. The rent board just adjusted the annual allowable rent increases for March 2006- February 2007 to 1.7% which is 60% of the increase in the consumer price index, they say! (How generous of them!)
And now the security deposits from tenants are subject to an interest rate of 3.7%. I don't even get that rate on the savings account where the money is being held! My advice about getting into renting property in San Francscio or anywhere else that has rent control... DON'T!!!
Unless you're a renter.
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