Ask Us: Should I Buy A Single Family Or 2-3 Unit?

Where readers ask and we (the community) try to answer:

Hello,

I have been following your blog with great interest. I have a comment/question and wasn’t sure of the best place to put it.

I was curious to know what you thought of something. Due to family circumstances, I would love to buy something in San Francisco, but something more along the lines of a 2 or 3 unit building. So, I am not just an investor coming looking to do a condo conversion in a year and then sell off again at a higher price. I plan on staying in there for a while, at least a few years and then depending on where I am at that point, renting it out to hopefully have it pay for itself.

It seems that sellers have the philosophy right now that they might not want to sell unless they get the price that they want (and the price they want is the price they would have gotten 6 months ago if they could). So, instead maybe some people are opting to hold on to their houses and rent it out until the market gets better and they could get a better price than right now? Do you see that happening?

If so, then it would seem to apply more to single family homes, no? Because rent-control laws don’t apply to them? But how about 2-4 unit buildings? It doesn’t seem right to apply this same logic to them, because both rent and eviction control laws apply to them, so either they sell at a lower price now (vacant but negotiated price), or a lower price later (because they might have tenants or even protected tenants).

I would be interested to know your thoughts! Anyways it will be interesting to see how it all plays out!

Cheers,
L

So many questions, such little space to answer. Check the comments below for answers from our insanely intelligent readers. Check your inbox for my reply directly to you, and check back here, because you touched on so many issues, we’re certain to keep coming back with more replies.

As always, thanks for reading and hanging out on theFrontSteps, and thanks for your question.

13 thoughts on “Ask Us: Should I Buy A Single Family Or 2-3 Unit?”

  1. You can only do what you want easily (relatively) with a 2 unit building in SF due to severe limitations on condo conversions. For a 2 unit building you can have to unrelated parties living in the building as TICs for a year and then apply to start the conversion process. Not ideal but better than the lottery which applies to larger buildings. You could go 10 years waiting for that. Check out the process information at the City of SF Dept. of Public Works website:

    http://www.sfgov.org/site/sfdpw_page.asp?id=32430

    You might be better off finding a 1 unit building with room to build a 2nd or 3rd unit.

  2. I think your best bet in this market is to find a 3-4 unit building that is fully rented, and to do an OMI. You mentioned that condo conversion is not paramount, and that you would want to stay for a while. Such a building would seem to be tailor made for that scenario. In my opinion fully rented multi units are where some value buys can be had in this market. (Notice I did not say cheap, but value, as in relative value to peak.)

  3. Flug, I misread his original statement about condo conversion. Not enough coffee. I would say that I would be careful with OMI as it severely limits the future use of the property but if the buyer is okay with those limitations, then okay. Me, I find them burdensome, but then that is how I feel about a lot of restrictions on SF property.

  4. i think that’s a good strategy for eventually getting into income property. the writer’s sentiments about owners holding off on selling were right 6 mo’s ago, but now i’ve seen some decent deals on 3 unit bldgs.

    fyi- most of the bldg’s that are completely vacant are either: a) fixed up, hoping to sell for a premium as tic’s b) in poor shape, but devoid of tenants, thus prime for a developer.

    you may want to focus on the bldg that has 1 vaqcancy. often an owner will get a vacancy and decide to sell, knowing an owner/occupier can move right in, or an investor can renovate that unit to top shape and get a premium on rent.

    personally i was impressed by this bldg for $1.2 in the mission: http://sfarmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=Sanfrancisco&PRGNAME=MLSPropertyDetail&ARGUMENTS=-N303146709,-N229246,-N,-A,-N16081419

    or this one on 16th st: http://sfarmls.rapmls.com/scripts/mgrqispi.dll?APPNAME=Sanfrancisco&PRGNAME=MLSPropertyDetail&ARGUMENTS=-N451653898,-N217871,-N,-A,-N16042320

    good luck!

  5. I think it’s better to go for 2 unit rather than a 3. If you can find a duplex with one empty and no protected tenant (and good rental income), you have a lot more flexibility. Duplexes with existing tenants in them are priced at a discount so you get a break there. Once that’s done, you can keep the other unit as a rental, or you can sell the other unit as a TIC (with that rental unit designated as OMI), or you can get the tenant out by buying them out. After you sell one, the proceeds can significantly reduce your outstanding loan.

  6. Anon8mizer,

    you said, ” If you can find a duplex with one empty and no protected tenant (and good rental income), you have a lot more flexibility”

    And I agree. The problem is that these are rare, and if you find one you will be paying a stiff premium even now.

  7. Personally, I think the Ellis Act is way under utilized as an SF RE investment strategy. Buy, Ellis Ruthlessly and TIC. There is a property on Pacific that is still overpriced and has a protected tenant, but I’m sure you could finagle a deal to get the price down. Ellis out the tenant with some remodeling and you might have a profit if you’re careful. Forget Condo conversion — it’s over-rated.

    This market is still too crazy and 2009/2010 forecasts / predictions are looking bleak so it would be wise to tread with caution.

    Fluj has the right idea, get a place that is fully rented and get the seller to take a hit on the rent stream and hope that (a) you can cover costs with minimal loss, (b) keep rents at decent rates if you have turn-over, (c) pray market value of the home doesn’t plummet.

    To the original question… this is hard and you can lose your shirt (and more) if not careful.

  8. There is some money to be made on that one. I didn’t see any pictures of bathroom and kitchen so I assume they need to be updated. So if you spend $100k to totally redo the kitchen and bathroom, can you sell one flat for $650K tic in that area?

  9. I’m thankful this winter I’m not a 41 year old renter, and still single writing a blog in an environment where advertising revenue is going down, and there’s no way to ever get a real job making real money.

    Happy Thanksgiving!

  10. As a long time TIC owner my suggestion is purchase a 2 unit building with no tenants so you can condo convert the building relatively quickly and easily. There are a lot of things to consider if you go the TIC route, not the least of which is that the terms you will be able to get on your TIC mortgage will likely be much less favorable than a comparable single home or condo loan. Read these websites for more information about everything to do with TICs:

    http://sf-tic.blogspot.com/

    http://www.andysirkin.com

  11. The short answer to your question is that SF is such a tight market that pretty much every angle has been covered, from “fixer-uppers” to the condo conversion route. That’s to say, people making money on “flips” are usually contractors who can save 30% on construction costs. That’s where they’re making the money.

    If you’re not in it for the flip, I think 1-4 unit buildings can get you more bang for your buck assuming you’re good for the downpayment. BUT BUT BUT, be sure you know ALL the ins an outs of rent control, owner move-ins, condo conversion laws etc. It’s worth going to see a knowledgeable attorney like Andy Sirkin and there are others as well. Cheaper and safer than researching yourself.

    I’d add to other points:

    1. Make sure you’re cut out to be a landlord. Not everybody has the stomach for it (though if you pick good tenants and take your responsibilities seriously, it’s not unpleasant.)
    2. Before you go down this road, make sure you know that you can qualify for a loan and have a good idea of how much they’ll lend you.

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