Before you start thinking seriously about buying a house, you need to define your goals. In San Francisco there is no room for uncertainty.
If you’re a first time buyer, you should approach your investment as what it most likely will be — the most substantial financial decision you’ve made thus far.
What are your priorities? Is this about quality of life or an investment strategy. How long are you intending to hold the property? What is your exit strategy? What matters more — investment potential for a place with better amenities or a more popular or convenient neighborhood?
In short, what is your business plan?
When you make the decision to buy a house, there is no room for disagreement between your left brain and your right brain. You’ve got to feel it in your gut, and see it on your spreadsheet.
It starts with knowing your options.
Q. What are the advantages of owning a condo?
- Convenience 2. Quality of Life 3. Affordability 4. No Rent Control
Condos are clustered around the city center, near transportation. SoMa alone accounts for 25% of all condo listings, the Mission another 10%. All together, 8/29 SF neighborhoods account for roughly 72% of all condo listings.
This should not be surprising. Condos, particularly newer ones, are in tall buildings. And tall buildings, in what city planners call “high density” population zones, cluster around transit.
Quality of Life
24-hour security. Concierge service. Housekeeping. Fitness center. Conference room. Pool. Hot tub. Sauna. Rooftop barbecue. Valet parking. Panoramic city views from your bedroom window.
Newer condo buildings essentially offer luxury hotel living. The Homeowner’s Association (HOA) takes care of building maintenance, staff, some utilities and insurance. You feel like you’re living in a luxury apartment, but you reap the financial benefits of homeownership at the same time.
This year 1bd/1ba condos in the SoMa Grand, a luxury condo building with all the amenities above, have sold for $775,000 — $865,000. In San Francisco, that’s affordable. A mortgage on an $800,000 condo at current rates (with a 20% down payment) is approximately $3,200/month. That’s less than many 1bd/1ba apartments in the same area.
Of course, not all condos are in the SoMa Grand. Tiny studios in Civic Center and Nob Hill have sold this year for $425,000 — $450,000. In Hunter’s Point, you can find condos as large as 1,000 square feet that sell for approximately $500,000.
For first time homebuyers looking for a “starter home” — a place to live for 5–6 years while they build equity and save for a family-size unit — condos can be an affordable option.
No Rent Control
Condos are not subject to rent control. If you want to move out for a couple of years to get a degree, take a job in another city, or travel the world on sabbatical, you’re free to do that without worrying about expensive tenant battles when you get home.
Q. Why not buy a condo? What are the disadvantages?
- HOA Fees 2. Appreciation and Supply 3. Privacy and Control
All those amenities are not free. All condos come with a Homeowner’s Association Fee (“HOA Fee”) that is paid monthly. HOA fees range from $150/month for the most bare-bones amenities, insurance, and maintenance, to over $1,000/month at the most upscale locations. Essentially, unless you have the most bare-bones HOA that only covers basic upkeep and maintenance, you have not entirely escaped rent.
Appreciation and Supply
Condos are the fastest growing sector of the SF housing market. It’s easy to see why. Nearly all the land in San Francisco is occupied. So the only way to build is up. Thousands of new condos are coming on the market in the next 5–6 years. Not enough to blunt appreciation entirely. But enough to make condo price appreciation significantly slower than single family.
The layout of a condo building is essentially the same as an apartment building. You share walls, floors, ceilings and amenities with neighbors you don’t choose. And every HOA has some restrictions. Pet ownership may be limited. There may be limitations on how often you can rent and what you can modify in the interior.
If your reason for buying is the classic American Dream — your own little patch of heaven with a garden and front stoop — condo ownership is probably not for you.
Single Family Home
Q. What are the advantages of owning a Single Family Home?
- Appreciation 2. Value-add 3. Having your own space 4. No Rent Control
Mark Twain’s famous quote about land ownership, “Buy land, they’re not making it anymore,” could just as easily be said for single family homes in San Francisco. As the city builds ever higher, with thousands of condos but virtually no new single families, prices will continue to rise dependably.
Anything from a new kitchen, to a backyard expansion, to legalizing storage space can add value to a single family home. “Home-flippers” make money buying single family homes that need work, installing improvements, and selling quickly at a profit. Any of the improvement options that are open to flippers are also open to you as a homeowner. In condo buildings, most improvements must be approved by the HOA. In a single family, it is by the owner’s discretion.
Having your own space
With no neighbors down the hall, and no gyms or saunas on the second floor, single family homes with picket-fenced back yards still exist, even in San Francisco. Not only that… you can do essentially whatever you want with it, compared to a condo.
No Rent Control
Like condos, single family homes are not subject to rent control. If you want to move out for a couple of years to take get a degree, take a job in another city, or travel the world on sabbatical, you’re free to do that without worrying about expensive tenant battles when you get home.
Q. Why not buy a single family home in San Francisco?
- Affordability 2. Distance from Downtown 3. Maintenance
The average price of a single family home in San Francisco is approximately $1,300,000. With a 4.5% mortgage and 20% down, those payments will be $5,371 a month. Add another $1,277 a month for property taxes, and you’re already at $6,648 a month, not including insurance and maintenance. If you want one of San Francisco’s prize single family homes, be prepared to pay for it.
That said, if you look at the outer neighborhoods — Excelsior, Bayview, Visitation Valley, you might be able to find a single family home in the $650,000-$800,000 range.
Beware of “fixers”. The price tag is lower, but be prepared to shell out for costly improvements, and to compete with contractors and “flippers”, who often come with all-cash offers.
Distance from Downtown
There is a higher concentration of single family homes in the outer neighborhoods. Any single family in the inner districts is probably prohibitively expensive for first time buyers.
In a condo, most maintenance is taken care of by the HOA. In a single family, it’s up to you manage repairs, upkeep and upgrades.
The most overlooked opportunity for First Time Homebuyers is multi-unit properties. That’s where the real money is.
Q. Why buy a multi-unit property?
- Affordability 2. Income 3. TIC Agreements and Condo Conversion 4. Tax Savings
In one sense, real estate is not very different from any other purchase — buying in bulk saves you money. Just take a look at these eye-popping stats! (San Francisco Q1 2017, Source: SFAR MLS)
Median price = $1,135,000
Average size = 1,208sqft
Price per square foot = $939/sqft
Single Family Homes
Median price = $1,300,000
Median size = 1,523sqft
Price per square foot = $853/sqft
2–4 Unit Buildings
Median price = $1,780,000
Median size = 2,500sqft
Price per square foot = $712/sqft
Price/unit = $684,615
At those prices, is it affordable NOT to buy a multi-unit building? 2–4 unit buyers are paying almost 2x less per unit!
But what if you don’t have the money up front to pay the downpayment or the income to pay the mortgage? Aren’t these great deals only accessible to wealthier buyers?
Short answer… no. You can access these buildings by joining forces with other first-time or experienced buyers. That’s the goal of the TIC Matchmaker Group — bringing together first-time buyers who could never afford a 2+ unit building themselves but can do it together.
It’s a fantastic opportunity that is severely overlooked by first-time buyers because they don’t know about the affordability, or the ability to do a partnership.
When a group of investors buys a multi-unit property, each investor has the opportunity to owner-occupy or rent for income. At market rate, rents on multi-unit properties in San Francisco are typically more than your mortgage, property taxes, and expenses. So as soon as you buy, your investment is not costing you a dime. In fact, it’s producing monthly income for you.
When more than one investor buys a 2+ unit building and wants to owner-occupy, typically they will do a Tenancy-in-Common (TIC) Agreement. A TIC agreement is an internal contract between the investors stipulating who can use each unit.
Each buyer gets separate financing. So if one partner defaults, it does not affect the other partners’ loans. Each share of ownership is divided, meaning one partner can sell their share of the building without permission from the other partners. It’s hybrid between individual and group ownership.
A TIC agreement typically adds 5–6% to the value of each unit, since they are now being sold separately.
Once a TIC agreement is in place, you have the option to Condo Convert. Condo conversion is a valuable opportunity. When you convert a TIC unit to a condo unit, you immediately add an average of 15–20% to the value of the unit.
The reason condos sell for more is that they 1) Now belong exclusively to one owner, as opposed to being owned by a partnership and governed by a TIC agreement and 2) They are no longer subject to Rent Control.
It takes about 2-years to convert a 2-unit building — more for a larger building. Many people who come to TIC Matchmaker events find 2-unit TIC partnerships and condo conversions to be an extremely attractive and affordable option.
If you decide to rent out your multi-unit property rather than live there, a different set of tax deductions kick-in.
For starters, you can deduct your expenses from any rental income you earn, thereby lowering your tax liability. Most rental property expenses — including mortgage insurance, property taxes, repair and maintenance expenses, home office expenses, insurance, professional services and travel expenses related to management — are deductible.
If you rent your property, you can also deduct the “depreciation” of the property over time. After you determine the cost of the building (the land under the building does not depreciate), you can deduct a set percentage each year.
For example, if your building costs $1,000,000 and it’s a residential rental property, you can deduct depreciation of 3.636% ($36,360) per year for 27.5 years.
Practically unknown to first time homebuyers, 1031 exchange is the secret sauce for real estate investors.
If you sell a stock and buy a new one, you have to pay capital gains the year of the sale. But if you sell a property and buy a new one using 1031 exchange, you defer the capital gains on the appreciation of the property. It’s considered a trade, so capital gains taxes are avoided.
Q. Why not buy a multi-unit property?
- Cost of maintenance 2. Rent Control
Cost of Maintenance
Make sure you do your due diligence before purchasing a multi-unit property. Because they’re larger buildings, there is more room for issues to arise. And if you have to fix the whole building, costs will rise proportionally.
Unlike Condos and Single Family Homes, multi-unit properties are subject to all the tenant protections of rent control. If you buy a property in which some of the units are occupied, you will have to be patient and wait for the tenants to move out, or face a costly and often nasty eviction battle. For ethical and economic reasons, eviction is not a strategy that the SF First-Time Homebuyer recommends.
Before you start looking for homes, do some research and think hard about what you are looking for. Condos, Single Family Homes, and Multi-Unit Properties each offer unique opportunities for the savvy buyer.