The Rise of The Furnished Rental: San Francisco’s Best Real Estate Investments

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San Francisco has notoriously strict rent and eviction control rules, so why would anybody want a multi-unit property here as an investment?    I once saw a 4-unit building for sale in the Mission Dolores area.  One unit pretty obviously housed a hoarder who was causing a health issue as well as a severe fire hazard in the building (endangering their neighbors).  Another place smelled like cat urine, and the person who was the master tenant was making a profit renting out the rooms on a nightly basis.  She was adamant that nobody touch the solidified grease in her cast iron pans, and left them in the kitchen where flies buzzed in the air around the pans.

With in full swing, it is common to hear of master tenants making not only more than their rent from taking on roommates, but also making a profit.  Meanwhile, the landlord has a below average investment, and lets the maintenance of the 100+ year old (antique) go by the wayside.  That of course results in a below average place to live for the tenants.

If a building is old and classified as a multi-family dwelling, in San Francisco it is most likely subject to both rent and eviction control.  What that means is that you could be forced to provide subsidized housing to your tenants while rents (and costs of living) increase.  Why San Francisco does not just go full-tilt and provide subsidized housing for all, I don’t know.  They could finance buying out all the individual citizens with funds from parking tickets given out during baseball games.  But I digress…The bottom line is that as a landlord, you have no way of regaining possession of your property unless you (under limited circumstances) do a move-in eviction and live there 3 years, or do an Ellis Act eviction, taking it off the market and placing rental restrictions on it for possibly years to come.

Why not buy a really nice TIC or condo for the same price as that run-down building with mediocre rents and high expenses?  You can do a very expensive, short-term rental with fewer costs and upgrades required.

For example, let’s look at 30 Prescott, a 1700+ sqft TIC in a 2-unit, listed by Vanguard Properties:
Its price, as of 7/16/13, is $1,895,000.  It is located in Telegraph Hill.

And let’s compare it to 197-199  Collingwood St,  San Francisco, CA  94114, listed and sold by Coldwell Banker for $1,950,000 on 6/11/13.
Now these numbers are going to be very rough, but my point is that it may make a lot of sense to buy a trophy TIC or condo…

So as furnished rental, I would estimate Prescott might bring in $11,000-13,000, based on the 2/2.5 in Nob Hill listed for rent for $10,000 per month by Pacific Union, or the 4/2.5 in Nob Hill listed for rent at $13,500 per month by Pacific Union. (***Disclaimer: I am not a rental agent, and if you want to rent your place, or if you want to get a reasonably accurate estimate of what your place might rent for, you should contact such an agent.)

Collingwood lists rents at $8834.00 per month.  (I know this is not the way investor people state, but I’m trying to make it easy to understand).

The expenses for Prescott, other than the mortgage (if you have one) would be the dues, listed at $250 per month, and the property taxes, which are based on purchase price.  At $1.9m, a very rough estimate of monthly property taxes would be $1,900 per month.  Although property taxes are collected twice yearly, they should be collected monthly for a TIC, since the assessors office only issues a tax bill for the entire 2-unit property.  If you furnish it, I would count on an extra cost of $200/month for PG&E, cable, wireless internet and phone.  It is possible you will more than make up for that cost if you go the furnished route.  If the building needs work or if you move to condo-convert, you may pay out of pocket, much like a special assessment in a condo building.
With the multi-unit, you are responsible for repairs for the whole building, whereas with a condo or tic, you will share common expenses with the other owners. When you buy the whole building, you pay for all of the insurance, utilities for the common areas, water and garbage.  With a TIC or condo, the building insurance is shared.  Other cost breakdowns may vary building by building.

If you buy a condo to rent out, be sure to check to see what the minimum rental period is.  Normally it is at least 30 days.  In a TIC situation, you need to check the TIC agreement regarding the rental rules.