A dynamic city with an abundance of renters, San Francisco is a great city in which to own a multi-unit rental property. But when you’re looking to invest in this type of property for the first time, how can you be sure that you’ve found the right building? Nick Scarabosio of Jackson Group Property Management says that rental property in San Francisco, assuming you can afford it, is always a good investment. And, according to Scarabosio, only one thing makes one rental property better than another: income versus expense. Here Scarabosio talks about some things to consider before buying a multi-unit rental property in San Francisco and what they might mean for your bottom line.
Buying a rental property is a bit like buying a business. In general, you’re looking for a good product that’s in demand, and on which you can expect to make a reasonable profit. But buying a multi-unit rental property in San Francisco is a whole new ball game. Because San Francisco is a business hub and a major metropolitan area, renters in all price ranges are abundant. The city’s rent control ordinances, however, make rental property ownership and management just a bit more complicated. When considering the current and future profitability of a rental property, there are some key things you’ll need to consider.
Rent Roll
When you’re looking at purchasing a rental property that already has tenants in it, the current rent roll is the first thing you’ll want to see. The rent roll will show you who’s in the building, how long they’ve been there and how much they pay. In a rent-controlled city like San Francisco, the rent roll is likely to show some significant differences between tenants. Because the city dictates a maximum allowable rent increase each year, tenants who’ve been living in a particular property for a long time are likely to be paying quite a bit less in rent than tenants who’ve only been living there for a short time.
Normally, a formula called the Gross Rent Multiplier (GRM) is used to estimate the values of income-producing properties. The GRM assigns value to a property based on its potential rental income. In a rent-controlled city like San Francisco, however, a building’s potential rental income may have little to do with it’s actual rental income. If, for example, a building contains several tenants who’ve been living there for over 10 years, you can assume that a) those units are currently priced far below market value, and that b) there is a real likelihood that those long-term tenants are not planning to move out any time soon. While a real estate agent may base his GRM on what might happen if one of those tenants move out (such as, a $1,000 unit may become a $2,000 unit), you need to think seriously about what might happen if they don’t. Can you afford to wait? If not, you’ll need to find another investment property.
Unit and Building Condition
When you’re buying in San Francisco, where many available rental properties are old, it’s important to consider the short- and long-term maintenance costs you are likely to incur as the owner. To get a sense of these costs, take a look at the condition of the rental units. If most of the units are in good condition, have recently been remodeled and won’t need expensive improvements when it’s time for a new tenant, the property may indeed be a good investment. If, however, none of the units have been remodeled and you can expect to spend several thousand dollars on upgrades each time there’s a vacancy, consider whether you can afford several vacancies each year. In order to have an accurate picture of a building’s income-to-expense ratio, do your best to project what’s going to need to be fixed within the next 10 years.
In addition to the condition of the rental units, pay close attention to the condition of the building itself. How old is the heating system? Is the roof in good shape? What can you expect to spend on repairs and maintenance in the next 10 years. If the units need to be upgraded, but the building is in great shape, maybe the numbers will work for you. If, however, it’s clear that not only will the units require some major sprucing-up, but the building itself is going to need several repairs or upgrades in the foreseeable future, you’ll probably want to move on.
