Rent Versus Buy and Returns for the Cheapest Lumina CondoSeptember 1, 2020
Purchased for $800,000 back in September of 2017, the 763-square-foot unit #3D in the Lumina tower at 201 Folsom Street returned to the market priced at $820,000 this past May, positioned as “the lowest-priced condo in the tower,” with an efficient and desirable open-concept layout, an exclusive use patio, and “best-in-class appliances and fixtures.”
Reduced to $795,000 in July, the sale of 201 Folsom Street #3D has just closed escrow with a contract price of $738,000, down 7.8 percent on an apples-to-apples basis from the third quarter of 2017. At the same time, the unit was just listed for lease with an asking rent of $3,000 per month.
For those running the numbers at home, either in terms of returns or a pro forma rent versus buy, the unit’s HOA dues are currently running around $1,112 per month (which does include valet parking for a car in the building’s garage). Keep in mind that asking rents in San Francisco have dropped over 20 percent from peak, with the average asking rent for a one-bedroom in the city having just dropped to around $3,000 a month, which is down from closer to $3,700 at peak, as we first reported last week.
And once again, with offers of complimentary rent and cash concessions on the rise, and listing volumes having spiked, we’re expecting asking rents in the city to drop even more.
Comments from Plugged-In Readers
36k rent – 9k property tax – 13k HOA – 2k home insurance + mis = 12k/740k = 1.6% annual return
If you bake in a 12 month vacancy…
While we realize you’re going for snark, most new landlords grossly underestimate, or even completely neglect, the vacancy rate in their projections.
One way to overcome a vacancy is to use the vacant unit yourself temporarily, and Airbnb your main SF residence. A pain logistically, but I think that is one way to avoid or drop the chance of lower income.
So very true! Banks are really good at helping owners out with that missing variable if they get involved in financing a rental unit 🙂
According to what? “Most new landlords … ” ? As if you have measured such a thing?
1. I’m confused. It was bought in order to rent it out?
2. The math above is grade school, i understand that. But i don’t get the underlying business model. I guess the writer of the article is suggesting whether it is more economical to lease the unit vs purchase. ok. so far so good (just 3 paragraphs or technically 4. i can get thru it.). so… who pays the property tax, the new purchaser, right? so yr saying the costs to the landlord deducted from the rent received are: property tax (why isn’t that passed on to the renter?) and HOA (again, why isn’t that the responsibility of the renter?).
1) Yes? It’s called investment property.
2). They probably expect an ability to raise rent in the next couple of years.
It is not customary for residential renters to be responsible for payment of HOA fees or property taxes. It’s pretty much not done. If you wanted to pass those on to the renter, you’d have to lower the rent significantly in order to find anyone willing to take that deal.
Commercial rentals are usually rented on a “triple net” basis, where the tenant is responsible for taxes, maintenance, and pretty much anything else. But that’s just not the way it works for residential.
Since this unit is basically a large studio apartment, in a part of town not really desirable until office work resumes at some unknown point in the future, I think $3,000 per month is probably about the best they can hope for.
As for the business model, it makes no sense based on today’s economics. The buyer probably had some money they needed to park somewhere, and believes that in a few years, this condo will be worth more and/or will rent for a lot more. Prior to Covid I’ll bet you could have gotten $4K+/month for this unit. Will those days return? This buyer probably thinks they will.
763 sq. ft. and it’s only a studio. 763 sq. ft. should result in a fairly comfortable one bedroom. It lives more like 500 sq. ft., especially with the bed in the living room.
As of this writing there is a one bedroom, one bathroom unit for sale in the same building, on the 16th floor, with an asking price just under $1.1M for 851 ft.² I suspect this sale does not bode well for that unit trading for anywhere near that number.
where’s the mortgage payment (or opportunity cost of cash paid)?
if you throw in a mortgage payment, and 6-9 month vacancy (which is possible given today’s enviroment), that math wont look very pretty.
it’s hard to imagine what the buyer is thinking was here, unless it includes in part some degree of “buying on a temporary dip while there’s panic on the street” and betting on short term capital gains.
ROI will never make sense in SF unless you assume that price/rent will dramatically rise in the future. It’s like stocks trading at the PE of 100. Wait, make that 300.
I pay $395 for home insurance on my rental listed of about same value, so I add $1600 back and get 1.8% return.
If landlord is savvy, if renter doesn’t take parking, owner could also list the parking space to another resident for maybe $200/month… Perhaps he can approach 2% ROI?
$1100 HOA = death.
What about the poor schmo who lost 800k-738 k =62 k over 3 years excluding carry costs + HOA? Oof!
You should include the utility value of living in the unit into that calculation.
Only if the carrying costs (i.e., mortgage and opportunity cost of the down payment) are included as well.
If the $3k/month includes valet parking that’s not too bad of a deal for the renter.
The valet parking isn’t a perk, it’s mandatory because of the building’s mechanical car stackers. In reality these arrangements are a big hassle and you could wait a long time before your car appears.
Also the bed is in the kitchen. $3000/mo seems pretty bad deal.
That urban garden is incredible.
Was this building, at least at one point, considered a high end building in SOMA?
Almost all of the new construction residential buildings in SOMA are “high end”, when you consider that selling prices of units in them are out of reach for the majority of the people already living in S.F.. New construction buildings are almost always luxury condos, luxury high rises and luxury lofts. The only chance that regular (i.e., non “high end”) people have in recent construction SOMA residential buildings is with the BMR lottery.
Since tenants have nothing but snark for landlords when rent prices drop, I see no reason for landlords to ever care about tenants, when rent prices rise…… There are better ways to make money than suffering as a “landlord”. For instance my NVDA stock that I paid $13.00 a share on average, is $554.80 a share today.
Yes, I think everyone here with a modicum of knowledge of finance would agree that if you can reliably and repeatedly pick single company stocks like NVDA before they increase anywhere near 4200% you should make your money in the stock market and avoid suffering as a landlord. Not only that, you should quit whatever “day job” you have and pick stocks full time. That’s not snark, that’s just corollary of the Efficient Market Hypothesis.
Of course, another corollary of the Efficient Market Hypothesis is that it’s overwhelmingly likely that you will not reliably and repeatedly be able to pick single company stocks that outperform a board market index, and in the real world, financial market researchers have found that since the mid-19th century, housing has yielded similar returns to equities in most developed nations while incurring much less risk.
The S&P has significantly outperformed real estate for the last 100 years. no need to pick a specific stock
Given thirty year treasury rates at 1.4% I expect to continue to see ‘investment properties’ trading at low cap rates. This is the norm for luxury properties almost everywhere in the world.
Since this was built post 1978 or whatever the cut off year is, no rent control. If we finally get the inflation the Fed is trying to promote, the income can go up, unlike a treasury bond.
I wouldn’t buy it, but maybe if I was 30 years older it would make sense.
And yet, demanded CAP rates for investment properties are actually rising in San Francisco, not dropping.
I hope you are correct. Cap rates expanded and rents dropped during the last Great Financial Crisis.
Do you have any good examples of cap rate widening?
A $1mm property at a 4% cap rate produces $40K per year (for simplicity let’s assume no expenses).
If rents are down 20% as you have suggested elsewhere, then the same property would produce only $32K.
If we assume cap rates have expanded only 100 basis points, then a new buyer would want to purchase that same property at a 5 cap, and on $32K per year the value implied would be $640K for the same building formerly valued at $1mm. This would be a 36% decrease in value.
Do you have any examples of buildings that have decreased in value by 36%?
I would love to see some as they are probably good purchases.
The 30 year treasury rate is 1.43%. That tells me people smarter than me think the fed is never going to reach their inflation target in our lifetimes.
Don’t know about the “never…in our lifetimes” part, but yeah, at least in the medium term I agree. From Treasury Traders Are Doubtful Powell Can Drive Inflation Higher:
The Fed has completely lost control of inflation, the new piece above quotes a financial economist saying that they’ve undershot their own target for the better part of four years.
So this person drops $148K on a down payment (assume 25% down as an investment property) to only still be paying $2569 on monthly mortgage (assume 3.25% on investment property) plus insurance plus $1100/HOA. If getting $3K/m in rent, they are still losing approx. $1450/m. I’m no economist, but that seems like a lousy way to invest $148K in cash and burn thru your savings.
To a comment above, a blue chip tech heavy fund is up about 50% this year. Russian mob money laundering? Mistress cut him loose?
FWIW, I have a few investment properties in Kansas City where cash flow is very strong. This is what $700K would get you there. Rent would be at least $5K on this place/location and no HOA.
Maybe the buyer is out-of-town, blindsided by a RE agent, thinking he is getting an instant $200K equity by comps…
Your own link says the rent Zestimate on that KC property is $1350. 4 bedroom homes within 2 miles of that Zip code go for under $2K on Craigslist. $5K seems like a stretch.
The San Francisco condo that is the subject of this post has a rent zestimate of $3600, so they don’t run low.
Tipster – that KC house is in a very small, highly desirable ‘hood called West Side and perched above “rough” neighborhoods in the perimeter so you can’t look at comps unless w/n 3 blocks of this one. If you’re questioning, look at sales comps in those 3 blocks vs others.
Another reference, I bought this one less than 3 yrs ago for $400K (featured on HGTV) and getting $3400/m rent – the math is the same on smaller purchase scale. It’s not my best cash flow either, but thought readers would enjoy seeing what you can buy elsewhere for half the price of a studio.
Not selling investments in another city, just saying a wise investor isn’t purchasing in SF w/ hopes of cash flow or appreciation any longer.
That KC place is adjacent to a massive freeway interchange. The neighborhood is hemmed in by 2 freeways and a railway switching yard.
Even in the Bay Area you can find discounts in geographically unfortunate locations. Check out the prices in Concord where 4 and 242 intersect. The homes are not as large and classy as this KC house, but you can find some deals. A friend snagged a condo there for under $100K in 2010. That neighborhood is still relatively cheap.
But it’s the “Historic West Side”! That overcomes the noise and the PM2.5 and the carbon monoxide and the bad neighborhoods surrounding it!
Brian & Milkshake – Sounds a lot like Potrero Hill (and SOMA, China Basin) where they are building $5M+ homes (sandwiched between 2 freeways and a rail yard)?
Yes, people still like views and proximity to their city (at least they did when they had an office to go into). Same there. Besides the fact it’s a nice neighborhood, you missed my point.
I’m talking about investing to make money. Whoever bought this SF condo… or ANY condo in SF in the past 4-5 years is in the negative cash flow and they aren’t staring at any equity growth in the near future (not to mention $1100 HOA dues). This buyer could have dropped that $148K on two nice 3/2’s in KC in great neighborhoods and earn $1k/month each in cash flow. That’s a $3500/m monthly delta. And half of my renters are young couples and families moving from out of state, two from CA.
You could be right on cash flow in Concord, I don’t know that area well.
I’m talking about investing to make money. Whoever bought this SF condo… or ANY condo in SF in the past 4-5 years is in the negative cash flow and they aren’t staring at any equity growth in the near future (not to mention $1100 HOA dues). “This buyer could have dropped that $148K on two nice 3/2’s in KC in great neighborhoods and earn $1k/month each in cash flow. That’s a $3500/m monthly delta. And half of my renters are young couples and families moving from out of state, two from CA.”
I think from a purely financial point of view, this makes total sense. You’re not buying to LIVE in KC (nothing against KC); you’re buying an investment for a return…and it cash-flows positive on its own two feet, which is not a set of particular financial factors I think is going to apply to most San Francisco individually purchased properties…Developments I think go into another bin altogether. Am I understanding your logic and presentation correctly?
In related news: A Luxe Two-Bedroom with Views Trades for $232K Less, down 11 percent from 2017 on an apples-to-apples basis.
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