Physical and Financial parameters for apartment investing in San Francisco
If you have been an investor in an apartment in San Francisco you probably have done very well and you may or not know how you did it. Below is listed parameters for selection of apartment buildings in San Francisco which will give you a check list you may follow in evaluating several properties which may be for sale.
UNLESS YOU CHOOSE A PATH, YOU WILL END UP WHERE YOU’RE HEADED. UNLESS YOU CHOOSE A PATH, YOU WILL END UP WHERE YOUR’E HEADED
The idea of any investment is to get to the point where the money you invest will eventually make you the money to live on and you do not have to be a wage slave. That being said:
1. Do not fall in love with the investment property: it is an investment tool to make you money.
2. Any property has an investment quality at a given price: the purchase price and what you can imagine you can do with a property will hopefully produce a profitable result.
3. When possible put as little down payment as you can and keep a reserve for capital improvements, vacancy and maintenance. Leverage is a wonderful tool to great return on your investment. A 20% down payment with a 10% increase in annual rents produces a 50% gross return on your investment.
4. Refinance or trade the property when your equity is 50% of the market value of the property. If you put 50% down and had a 10% increase in the annual rents you would have a 20% gross return on your investment.
5. The physical exterior of the building is important; every buyer will someday be a seller and if the property is not attractive to you now, it will not be attractive to another buyer. It is okay to buy the ugly duckling so long as the price is right and there is a possibility that you can make a white swan out of the building.
6. The building must have copper plumbing, circuit breakers, a new roof and adequate heating, or credit must be given to the above. Upgrading systems like these will not increase the rental value and likewise the value of the building; income and value are two sides of the same coin.
7. There must be an average of 15 to 20% potential increase in the rental values. If a tenants rent is 40 to 50% below the market, they will never leave; it is too good of a deal, and if they are the master tenant in a large flat they are probably making money from the subtenants, (which is in violation of the rent ordinance). A 10% potential increase in rent is interesting but does not have the potential of a windfall profit. Is a market rent can be raised by $400.00, this equates to a $50,000.00 increase in the value of the building.
8. Buy a building near the colleges and hospitals; students don’t stay to long in the units; they graduate, get a job elsewhere and then marry.
9. The best apartments to buy, when they are available, are the Romeo 4 or 6 unit flats. Next would be Victorian or Edwardian 6 unit flats, where the entry door comes to a porch that step down to the sidewalk. These buildings are attractive, (tenants prefer the high ceilings with heavy wood trim and will pay more for the bad floor plans than a 50-60’s modern building). Romeo flats have no lobbies, no steam heat, individual water heaters; this equates to low expenses. Every investor loves the Marina style 6-12 unit buildings which have large lobbies with lots of carpet, steam heat and central hot water. The rents are good but expenses are high and people tend to stay in these buildings longer. Buy any type of apartment that has rent upside, but not too much, but consider the expenses of the Marina style verses the Romeo when you determine what you will pay for the building.
10. Don’t but a brick building; a brick foundation, not to high is okay. You can retrofit the foundation at a reasonable cost, (which you have to get credit in escrow for), but a brick building is still a brick building no matter how much you retrofit it.
11. Don’t buy a building with all the garages down the side of the building; these will have to be seismic upgraded in the near future. Students today are riding bicycles; install a bicycle rack in a store room of the building.
12. When buy a building know yourself what the deal has to be; remember everything has a positive cash flow if you put down a 100% down payment. The “deal” falls somewhere between a positive cash flow with 20-25% down with realistic expenses and also has the potential for a windfall profit due to rent control. Rent control is the best profit potential that an investor in San Francisco can have; the key is the decontrol of the rent upon vacancy to market rent.
13. If a tenant, whose rent is considerably below the market comes to you and wants financial help in their moving expenses to vacate their unit, pay them. Consider giving them 6 months free rent.
14. Keep good relationships with your tenants; remember they are paying your loan and operating expenses and a little more. They are working for you.
15. Don’t but office or commercial property unless you have strong financial holding power. When they become vacant, they can sit there for a long time.
16. Street appeal of the property, location of the property, condition, (upgrades) of the property, tenant profile, operating expenses, current rents vs. market rents, (we want an 80% ratio), cost per square foot. These are all points to consider.
This all being said we have brought concrete apartment buildings with elevators and boilers, (and yes, the expenses are high); We have bought mixed use (Retail on the ground floors and apartments above), we have bought Marina style; we have bought metal warehouses for the land they sit on to build condo’s o n. Every property has an investment quality at a given price and a game plan which is realistic. Sometime the timing is right; Loma Pieta earthquake was an education in patience; when banks stopped lending money. Leverage is hard to achieve, but the high demand by tenants for residential property in San Francisco has always been good and the future continues to look good. If prices seem too high to get started, form and investment group or join a tenant in Common investment association