Buying, owning and selling income residential property in San Francisco
This week an old client who recently had a baby (and now needs more space) reached out to me with questions about a couple of small residential buildings that have been sitting on the market for some time. On the face of it they looked great, with enough square footage in great locations and nice architectural detail. The devil is in the details, however. When I researched the properties, we learned that they both have long-term tenants with rights that would make it very difficult and expensive for her to ever move in.
Because San Francisco is a rent-controlled city, the value and desirability of small buildings like these are deeply affected by issues such as rents and rental upside potential; tenant profile, “protected” tenants, and eviction history. There are some excellent articles online about rent control and tenant eviction laws. One of my favorites is a Q&A on Tenant Evictions in San Francisco written by g3mh, a law firm specializing in landlord/tenant law. Attorney Andy Sirkin also has some good information about how and when buildings can be converted to condominiums or resold as TIC interests.
Occasionally, I have clients who are willing to take on tenant-occupied properties, especially in our current market where a dearth of inventory is forcing buyers to get more creative. One such buyer purchased a single family home with a studio down in the Sunset District. The tenant in the house was a single mom with a school age child and we went into escrow in early summer. Since my buyer thought he would want to live in the house instead of the studio, we had to hustle and get the property closed in time for him to give a proper eviction notice (you can only evict a tenant with a school-age child during the summer months). However, the studio tenant wound up moving out during escrow so he took that unit instead. The arrangement has worked for him so far, and the tenant in the house has been able to stay.
I have another set of clients who are two couples. One couple lives locally; the other is presently located on the East Coast. Together, they bought a two unit building in Corona Heights with a vacant upstairs unit and a lower unit that is tenant-occupied by someone who has been there since the 1970s. For now, the local couple lives upstairs and keeps a bedroom vacant for the other couple when they are in town. Someday, the tenant downstairs will move on and then the East Coast owners can enjoy a complete second home. In the meantime, they are happy to have an old-time San Franciscan living in the building.
From a buyer perspective, the best thing about tenant-occupied properties is that they have lower price points. They also have more long-term upside; it may take a while for a tenant to move out, but a building instantly becomes worth more when one of its units becomes vacant.
Conversely, on a per-unit basis, the most valuable properties are vacant two-unit buildings. These “partner-perfect” properties are ideal condominium conversion candidates. They can also draw in families who might want to occupy the whole property, which broadens their market appeal.