Sample SFH vs Multi Unit Case Study

Ok, so this sold 4-plex in SF just crossed my phone and I thought it would be a perfect live case to look at. Sold for a rounded 1.5M (happened because of the auspicious 1.288M listing pricing strategy of course). Total monthly rent (3 rented and 1 vacant) is about $9,524. No protected tenants and it would appear that rents could be higher, esp on the 3/1 unit. I believe the projected rent amount on the vacant one is not unrealistic. No idea on condition. We will just say the disclosed info is accurate.

Now, a SFH at 1.5M is fairly representative for SF or neighboring areas. How much could one expect to rent that out for? Surely nowhere close to the 9.5k correct? One may try to try to do an inlaw to boost the rent, but still, total would still be lower. I would also agree that not too many folks are buying in this price point to solely rent out as opposed to live in the main home but we are just discussing here for the sake of discussion.

Yes, the multi unit loan would be higher since investment but I think this example is reasonably sound as to show the pronounced cash flow one can have with a multi unit prop vs trying to go with a SFH. Absolutely, more risk, more potential headaches and more work in general. I suppose an argument is that the SFH will probably go up in appreciation faster but who really knows in this supposedly trend to renting society of ours.

Ok, I will take my shots from you crack financial experts like a man…

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In an extremely low inventory situation like the last few years, appreciation of MFs is on par with SFH.

Normal scenario is MF has better yield but lower appreciation.

This is a legal duplex used as 4-plex. Is there any legal issue? Can the city issue a notice asking conversion back to 2 duplex?

And any liability due to illegal kitchens in 2 illegal units?

Good question (as I was thinking the same) so I tried to see what I can find regarding the NC2 zoning classification. I believe that just means small scale neighborhood communuity district, so possibly a mix of commercial and residential type buildings. Makes sense, this is Balboa Street after all.

I have to assume that these are legal units (unless told otherwise). Obviously, if illegal, then this is not a good example. I might contact the agent for more info…

Even if the rental yield is a double of SFR today, you’ll have a very low rent in 20 years. After 15-20 years, you’ll start regretting for your rent controlled purchase.

But it could a good buy if you buy a rundown multi family and let the city to announce the building is unhabitabe and all the tenants are vacated by the city due to building end of life. You’ll be able to tear down and rebuild.

The question to ask is this: if a similar SFH has that many rooms and square footage, would it be selling for a mere 1.5M?

The answer is “No way in hell”. So that means multi fam appreciates at a lower rate than SFH and yes, even condos and TH. 1.5M can buy you 2 condos or townhomes and each can be rented for 4.5K to 5K so total is about the same. Yes you need to pay HOA but you can look for ones with lower HOA’s like $200 or $300. It’s manageable. In exchange you don’t have rent control and more appreciation.

Ok, heard back from the listing agent Janice Lee. All she said was that it is a legal 2 unit building. So, that would explain the relatively cheap pricing. There is always something. Yet, it sold over asking.

Now, can the new owner try to get it all prim and proper and get the additional 2 units fully permitted as legal dwellings? Remains to be seen. I would think that is the plan unless the 2 units are configured in such a way that it literally is impossible to (say the height there is so low or something).

When the tenants wise up to the legal issue they can sue and live rent free for years. It’s a time bomb ticking away.

We need to make it an automatic eviction if the illegal unit is reported.

Well, in the real world though, don’t people start from what max amount they can spend and then find what is the best property that meets that price point? In this example, someone goes I can buy something at 1.5M, what should I buy? Perhaps the buyer is astute enough to know that the 2 illegal units can be made legal. Then in theory this risky buy turned out to be a good deal, no? Just speculation here. In terms of the differing appreciation level, aren’t we forgetting the fact that the owner of this building is right of the bat positive cash flow wise whereas you may not necessarily be on the separate condo/town house purchases? That extra money received has to be factored in, no, at least in terms of overall ROI???

Again, I am just wondering if savvy buyers are approaching purchases this way now. No different really from buying a lower priced place because it is tenant occupied. People will just get in and figure out a way to vacate the building.

Why not focus on appreciation in Bay Area, and buy cash flow else where like Midwest and Texas? You also get the benefit of geographical diversification.

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But what’s the plan even if you can vacate the 4 unit building? If you rent to new tenants at market rent, your new tenant will eventually turn into low rent tenants.

The only good option is to tear down and build new condos or new apartments that will be exempt. But in that case, why not just buy a piece of land and build from scratch?

I see very little incentive to buy rent controlled multi family buildings. I’m open to multi families outside of SF and Oakland, but the price is very expensive and there is no multi family discount in cities with no rent control.

Yeah, but again, you violate the rule about buying only within your manageable, immediate geographical area. I personally am cheap and do not see the real value of using a property management company. And again, aren’t we turning up the risk factor by investing in places like that???

I don’t have that rule. :slight_smile: It’s like only buy stocks of companies HQ’ed in SF.

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Ultimately it’s whether you are comfortable with the risks. I see people thriving in that sector. Some people have the personal and negotiation skill to ease out the rent controlled tenants and still stay on the good side of the law. Some like me are less gifted. If you are good at it, MFH can be very lucrative. I am just too chicken to go in.

Not a strong case, but I again suspect that the buyer may be knowledgeable enough to know that he/she can make that property fully legal. If so, decent deal for 4 units, no?

I am not sure if vacating the entire building would be the strategy since only one unit (3/1) is fairly low. Who knows. I am just speculating and scheming on a Monday…

Come on, if you are getting true market rent, I don’t believe you are going to complain and it will be a long time before that tenant turns into a low rent tenant. Rents do not go up that much that fast. Even here. If anything, one would expect some peaks and valleys not just straight up increases like we have been seeing…

With 1.5M maybe you can buy 3 small houses like these:

Cashflow positive too.

I will give you that, cheap, but I still have never been fond of the airplanes overhead in South City. That will keep appreciation down real quick…

SFR has a limit since there is a 10 property maximum. If you want to hold many units, you will have to buy multi family. But BA is so expensive so it’s rare for someone to hold a 100 units or 50 units.

Some condos are selling with low premium to per unit price for multi family, condos would be a better deal than multi family in those cities.

Huh, what is that? No limit if you are Grand Poobah Manch…

Condo? HOA (Is bad for your health)