CRE is About a percentage point above residential. It’s also much more negotiable than residential rates.
just a word of advice - 7 cap sounds great. but i have never bought a property that cashflowed like it claimed on paper. Lipstick on a pig and all that. Be prepared for it to be worse. But as you point out, as long as you can make it cashflow from day 1, rent control is a moot point (unless vacancies get much worse)
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Best rates for commercial I’ve seen are about 4.3%.
Be careful about caps. NOI only less vacancy and management. Best I’ve seen are about 6. Mostly 5 caps. The other buyer beware warning. How much deferred Maintenance is there, and will the city left you add rent to pay for it.
At the moment I won’t touch SF RE at less than 7 cap rate tbh. The exodus is real and I see small to med opportunistic tech companies heavily advertising big city pay n small city cost and life. They will hire away a large fractions of top talent (I assume at least half of the workforce would love this) from big tech if they don’t follow soon. No one knows how this will end so a 7 cap rate today in SF is still a lot of risk.
How to detect how much lipstick? Past lease agreements, bank statements?
i) deferred maintenance that is not disclosed, or even if disclosed, stuff you need to take care of
ii) bad tenants (they will cost you an arm and a leg)
iii) undisclosed new city/county regulations (e.g. i got caught by surprise once by some stuff a city in the peninsula had passed just a couple of months before i bought and the owner was not compliant with)
iv) neighborhood issues (one reason to buy in a good neighborhood or rapidly gentrifying neighborhood)
v) unreported / incorrect operating costs (e.g. they don’t account for utilities correctly or water bill is much higher, etc)
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Going through the inspection etc. Don’t know for sure. But seller claims it’s well maintained and has provided documentation.
Having said that almost all SF RE is old so some constant maintenance is expected.
Don’t trust an inspection. Have a trusted contractor whom you plan to work on the place look at it. I have always found more issues post purchase then was reported on an inspection report. Highly recommend that you don’t buy commercial RE if it’s your first attempt at landlording. The stuff looks great on a P&L when you build it, but never works out that way. I made that mistake. my luck was buying as the housing market was recovering from the bust, so rising rents covered up my stupidity.
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SF has a city Multi family inspection program. Get those records and talk to other owners about how tough the inspections are. They cost me my building in Sacramento. Inspections are brutal now.
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What do you think of mixed properties, commercial on the bottom n residential on the top. Cash flow from each is say roughly half n half. Commercial like restaurant n hair salon etc (not retail or office) and highly rated n old n established.
Hi, while buying SFH do you still recommend having inspection or is there a better way to find problems in the home? Thanks!
Thanks. Will talk to the city about this tomorrow. Will report back on what I find.
No experience with them. but with my philosophy, it would be a bad idea, as you will now need to be an expert in 2 areas - retail and residential RE. Depends on what your investment goals are. My goals with residential RE is to buy it, rehab it, find good tenants, and try to get it to be as “autopilot” as possible. I don’t try to optimize for income, i optimize for minimal headaches (since my job is my primary income source)
Usually inspection report comes from and is paid for by the seller, so doesn’t hurt. When we bought our current primary, we got our usual contractor (who worked on most of our rentals) to walk the place twice with us to give us feedback. it was pretty smooth (we didn’t find anything, but the peace of mind was great), but that was probably because it was remodeled a few years before our purchase and done pretty well.
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I am wondering how prop15 will handle mixed use. Spilt tax roll?. Plus banks hate mixed use buildings. I think we may be loosing our Petaluma mixed use building. Covid19 killed us. Prop 15 will be the coup de grace
I plan to use professional help, RE management company at least for first few years. Is it still a bad idea?
If prop 21 and prop 15 pass reduce your bid
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RE management companies will typically screw you. be prepared to have enough margin to support them. They make money by minimizing the time they spend on your property, so their incentives will not be aligned with yours. They don’t optimize costs (they will call their rolodex of contractors who won’t necessarily offer best prices). They won’t push back on tenant repair requests (they want the call to be over as fast as possible). They will try to do everything in as straight and narrow a way as possible to avoid all potential liabilities and drive up costs. They won’t work as hard as possible to fill your units. Property managers also have a high turnover so you will lack continuity of people that know your place. Some of the managers will be incompetent (i had one that got me in trouble with Sac county by not doing repairs asked for in an inspection eventho I chased the person to do it for 3 months and then I had to escalate it to the GM of the RE firm who called in a favor with the county to get the penalty waived)
If you have enough margin to support them, it makes sense (i manage my one remaining property in sacramento through a property management firm as it’s too far), all the local stuff we manage ourselves. But that’s also why we stopped buying properties. can’t manage them anymore. too much stuff to do with family and work.
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Irrespective don’t you think prop 15 would affect landlords who purchased long ago. New folks entering now would actually benefit relatively n competitively speaking.
What are the chances of prop 15 passing?
latest field poll says 15 likely won’t pass. but you won’t know till the votes are all counted. will take weeks in CA.