The six-unit Bernal Heights building at 300 Coleridge is on the market for $1,850,000.
With all six two-bedrooms occupied by rent controlled tenants, most of which are protected and paying low rents, the gross income for the building is estimated at $89,575 which includes $8,400 in income for the four car garage and an average apartment rent of $1,127 per month. The building’s current expenses are estimated at $34,734 a year for a CAP rate of just under 3 percent at current rents.
While the current owner “will not deliver vacant, Ellis act or evict any tenants,” the building is being marketed by the listing agent as “suitable for buyers willing to Ellis act and develop as TIC units or a long term future rental units.”
Keep in mind that TIC conversions in buildings with five or more units must go through the state subdivision process and evicted tenants by way of the Ellis Act can file for the first right to return to their units for a period of ten years, during the first five of which they are entitled to sign a new lease at their original rents.
Unless those protected tenants are all terminally ill, this is a stretch. If they are, it’s a deal!
I saw this listing and noted the invitation to evict. While brazen, it does reflect the reality of the situation. The rents are so low that they are inviting this opportunity by a developer. Why the selling agent even felt the need to note this is strange – anyone looking for a property like this would understand the circumstances, and the tenants surely understand their position too.
$308k for a 2bdr? That’s practically BMR pricing.
All or most of those tenants will probably vacate for, say, 100K (average) in cash and then you’ve just bought a 6 x 2BR building for under 2.5M. Even if one or two tenants opt to stay you can start renovating and selling TIC shares. A smart buyer will find a way to do this without the Ellis Act.
I’ve often wondered about these rent-controlled multi-unit buildlings as long-term investments.
If you are young and have a few million sitting around you could do worse than buying a building like this and just waiting the tenants out.
Provided that the price really is highly impaired by the presence of these tenants, its a textbook ‘buy low’ strategy. There is so much hysteria about rent-controlled buildings that folks forget that for the right price, anything can be a good investment.
I don’t know if it’s as simple as buying them all out for $100k. If you then have to renovate, market the units for sale, and leave some room for profit you are in the $500k-$600k range pretty quickly. I don’t follow the TIC market, but that seems like a lot for a 4-room TIC in this neighborhood.
I think it’s fair to include the additional mls comment so readers get the whole picture: “Owner and Agent making no warrants as to future use”
Thanks
If the tenants take the listing wording as a threat of eviction it could get real messy and expensive for the current owner and the agent. I wonder if they did their due legal diligence regrading unlawful evictions?
Regardless as to whether a tenant takes the wording as a threat, both the SF Rent Board and the courts would not. The agent’s statements are accurate and as such protected.
The current owner pays $5724/year in property tax. The new owner will pay about $23,000/year in property tax. That increases the building’s estimated expenses by 50%.
Alternatively, the new buyer can make the rounds and offer tenant buy outs; get 2-3 to agree, renovate and rent those at market rate. That’s what I’d do in this case. Tic’s are still hard to sell and finance these days.
@49yo hipster:
The problem with that approach is that Rent Control would apply to the new tenants as well. Granted, some think that rents are as high as they can go right now, but people have said that before. At least with TICs you’re on a better path to condo conversion.
I am not sure how a buy-out/re-rent would pan out financially. Say you buy out a tenant and then do a cosmetic redo. You could be spending 120-150K overall per unit (rough guesstimate).
You could collect 1500/month extra thanks to your investment (after taxes), but it will take you 6 to 8 years minimum to get it back.
And what will be the rental market in 6 to 8 years? If it is higher, then you’re almost back to square one with sticky tenants paying less than market rent.
And this is why the rental pool shrinks little by little…
The usual play is to buy out all tenants, then do a cosmetic redo and sell the units as TICs. For this building, if you budget 150K for each unit (buy out + cosmetic redo) you still have some wiggle room for a TIC resale at 550-600K per unit. After all they’re all 1000sf+ each and 4/6 would have parking.
Very hypothetical resale as TICs:
The lower floor units could be priced at 540K with no parking, middle floors at 610 with parking and the higher floors with parking could be at 650K, for an average at 600K.
On the buyer side, for a 600K buy with 25% down and fractional TIC rates around 4.8%, this means a $2360/month mortgage payment + probably $900 in Property taxes and HOA. Not too so far off from the current rental value.
My numbers are probably way off, and there’s most probably more costs to expect for the redo (new kitchen/bath? Higher buy-out?), but I see how someone could jump in and take the chance.
Since I do 3 to 5 of these a year in the City…
A full kitchen & bathroom remodel; cabinets, counter tops, tile work, flooring, new plumbing, upgraded electrical, new technology wiring and 2-4 new windows should be no more than $40,000 to $45,000.
And just for fun, if you do get $1,500 more per month in increased rent, the math is:
$1,500 X 12 months = $18,000 more per year in annual income.
GRM = 10 (conservative in SF but why not)
10 X $18,000 = $180,000 increase in building value.
Quite a bit for $1,500 more per month.
Just checked the buildings math, and if the annual income is in fact just under $90,000, then the GRM for the building is 20.
Now 20 times earnings is a bit high in my opinion, but to each their own.
Helmut,
My #s include the inevitable buy-out which could run in the 50Ks or more for these protected tenants. Then you need a paint job, maybe refinishing the floors, etc…
This is the source of my 120K-150K including lawyer’s expenses. We’re not too far off.
My point is: yes you do get your money back, but it will be in another decade, and when market conditions could be different.
Let’s say you purchased a similar building in 2003. You bought out the tenants, redid the units and put the units up for rent at market price. Market price in 2003 was roughly 1700. With rent control increases, rent would be 2000 today, when the market value is more in the range of 3200 or more. You’re already missing out by more than 1000/month…
The math is different because the eras are different, but there’s more certainty into a 2-year play than 10 years.
Listing agent: I think it’s fair to include the additional mls comment so readers get the whole picture: “Owner and Agent making no warrants as to future use”
Love it. Secret comments that mere mortals cannot see.
Isn’t the real long term play condo conversion (with the caveat above)? You’re not going to Ellis a building like this to keep it condo eligible. Do landlords just not have the stomach to let it play out with long term co-owners in three of the units? Or is the obstacle financing and perhaps too many liabilities? Just think of the Prop 13 tax basis of individual units to pass on to your heirs.
20-25k to paint, through on a new roof for 15 or so, divide 40k by 6 units and its $7,000 on top of the 45 I quoted, which is 52,000 per unit. Refinish the floors and do some other things and its 60. Buy out the tenants if you can at 10 – makes 70. Throw in 5 for lawyers expenses if you like (but it should be 2 or 3)
Sorry but your numbers are high.
I hate repeating myself. Please reread the first sentence @ April 2, 2013 4:45 PM.
Geez. 3rd time already
Helmut, good luck at buying out protected tenants for 10K when these tenants underpay by 1500+/month.
Buying a six unit building with protected tenants is problematic– the higher property taxes on transfer make renting less profitable than for the prior owner, and emptying out the building and reselling is problematic for all kinds of reasons.
But Bernal is very hot right now– the last two SFRs sold in north Bernal went for $400+k over asking (Bonview) and $300+k over asking (Mullen), and there is very little supply.
Look up the owner’s name on this property. Does John Wai ring a bell?
The list price for 300 Coleridge Street has just been reduced $92,500 (5 percent), now asking $1,757,500.
In related news: Potentially Problematic Condo Conversion Legislation Approved.
The sale of the six unit building at 300 Coleridge Street has closed escrow with a reported contract price of $1,767,500.