464-470 Funston Avenue & 472-478 Funston Avenue

This was one of the most beautiful properties I’ve seen in awhile and felt it would be a great investment as well as opportunity to move into the building with friends when older in a shared-housing situation. The two 4-unit buildings were marketed separately but the successful purchaser bought both properties. The units were either one or two bedrooms with a living room and a formal dining room and all very spacious with classic Edwardian features.

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FINANCING FOR A RENTAL PROPERTY DEPENDS ON THE NUMBER OF UNITS IN THE BUILDING

Financing a rental property of 1-to-4 units is very different from financing a property with 5 or more units.  Conventional loans on rentals of 1-4 units have standard guidelines set by Fannie Mae and/or Freddie Mac, while loans on properties of 5 or more units typically are portfolio loans and every lender has their own guidelines.

With conventional financing for rentals of 1-4 units, qualifying for the loan takes into account a borrower’s income, assets, credit, and the potential rent (market rent, not current rent)on the building. Down payments can be as low as 25% for 2-4 unit properties.The maximum loan amount for a conventional loan on a rental property depends on the number of rental units: 1 unit max = $625,500; 2 unit max = $800,775; 3 unit max = $967,950; 4 unit max = $1,202,925.

Loans on properties of 5 or more units (“multi-family properties”) are substantially different from conventional loans because lenders want the net income (rents less ALL building expenses) for the building to cover the cost of the mortgage.  A borrower’s other income, assets, and credit are looked at by multi-family property lenders, but they are not the key factors in qualifying for financing.

To calculate net income from a building, the lender generally uses current rents (not market rents, although market rents will be used for empty units), less recurring building expenses (utilities, building management, insurance, etc.) and the property taxes after they have been reassessed based on the new purchase price.  Sellers of multi-family properties need to provide detailed rent rolls and net operating statements to potential buyers so that lenders can determine the financing possible on the building.

Since the lender wants the net income on the multi-family property to cover the new mortgage payment, there is no fixed minimum down payment required: the larger the net income, the smaller the down payment required.  Accordingly, financing available on multi-family properties has to be evaluated case-by-case for each property.  In general, in the Bay Area, given current prices and rents, borrowers have to put down at least 35% (and often 40%+) in order to qualify for multi-family property loans.

Each multi-family property lender also has their own set of products with different rates and terms.  A 30 year fixed rate loan for a property of 5 or more units is rare. Instead, lenders prefer shorter terms (anywhere from 5 to 25 years).  Many multi-family property loans have payments based on a 30 year amortization, but they are due in full much sooner with a balloon payment.  Interest only payments also are available on some multi-family property loans.

Do you want to explore your financing options for a rental property? Feel free to get in touch with me at 415-730-4665 or doug@emortgageservices.net.

619 Clayton Street

My listing at 619 Clayton sold this week for $100,000 over the asking price to an investor in a relatively short amount of time. There were two other offers on this property around the same price and these other interested parties were investors as well. During the marketing period, there was a lot of interest and a majority of the buyers were investors. The other types of buyers were owner-occupiers (living in one of the units and renting out the others) but I didn’t receive offers from this type of buyer.

My client did a partial 1031 Exchange (“partial” because she lived in one of the units) and the buyer also did an exchange. In my next entry, I will describe in greater detail what this means.

View Listings Here

Well Maintained 3-Unit Victorian.

This building in Lower Pacific Heights has been on the market awhile so there could be an opportunity to purchase at a very good price. The seller has done some structural work, repainted the exterior and there’s a new sewer line. The rents are good and could be banked since the owner has not increased rents in awhile. I will add an explanation of “banked” rents in the next post. In a nutshell, there’s some upside here!

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Two Big Advantages of a 4-Unit Building as an Investment Property or as Your New Home

In preparation for my 4-unit building in the Haight going on the market, I asked Doug Goelz to describe two financial scenarios based on the numbers for 619 Clayton. This property will be in the MLS on Thursday, October 15.

Two Big Advantages of a 4-Unit Building as an Investment Property or as Your New Home

Whether you buy a 4-unit building as a place to live or as an investment property, you will benefit in two important ways:

  1. First, the potential rents on the property will help you qualify for financing. Even if the units are empty or rented at below market rents, the lender counts 75% of the market rent determined by the appraiser as qualifying income. If you are going to occupy the property as your home, you can choose which of the units to use for rental income. With the potential rental income from the building, your other income (for example, your salary) does not have to be as high in order to get the financing you need. For example, $9810 in potential rent on a 4-unit property will help will you qualify for almost $500,000 in financing. If you are going to live in the building, the lender won’t count rent from one of the units, but even $6010 in potential rent on a building will help you qualify for over $300,000 in financing.
  2. The second obvious big advantage of a 4-unit building as an investment property or as your new home is the cash flow each month. Depending on your down payment (at least 20% if you are going to live in the building; at least 35% if you buy it as an investment property) and loan rate, PITI (your cost of mortgage Principal and Interest, property Taxes, and Insurance) plus utilities for the building will be roughly $9,000 to $10,000 per month. So, a 4-unit building generating $6010 per month in actual rent could end up costing an owner-occupier less per month out-of-pocket than the cost of a market rate apartment in San Francisco. For the investor buyer, actual rents could offset the entire monthly expenses.

Here are some payment scenarios for potential buyers of a 4 unit building in The Haight.

If you live in the building:

Purchase price = $1,849,000
Down Payment = $369,800 (20%)
Loan Amount = $1,479,200

If you buy the building as an investment property:

Purchase price = $1,849,000
Down Payment = $647,150 (35%)
Loan Amount = $1,201,850

Monthly Expenses

Mortgage Principal and Interest = $7716
Insurance = $209
Property Taxes = $1856
Utilities = $405

Total = $10,186

Rents

Unit #1 = $1380
Unit #3= $1750
Unit #4 = $2880

Total = $6,010

Monthly Expenses

Mortgage Principal and Interest = $6452
Insurance = $209
Property Taxes = $1856
Utilities = $405

Total = $8,922

Rents

Unit #1 = $1380
Unit #2 = $3800
Unit #3= $1750
Unit #4 = $2880

Total = $9,810

Net Monthly Out-of-pocket Cost = $4176

Monthly Positive Cash Flow = $888

My New Listing in the Haight

I will be listing a 4-unit building soon and as I get more information, I will post here, on this site. For starters, there are 2-2br/1ba and 2-1br/1ba units. One of the units will be vacant at close of escrow. The vacant unit requires some work but the rest of the building is in good shape, according to the inspection report. There is a garage for two cars, a huge basement and outdoor space. Gross rents are $117,000. The asking price is $1,849,000. Call me (415.310.1339) for more information or if you would like to schedule an appointment.

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Co-Investing With Family Members

Written by Guest Contributor: Doug Goelz, Mortgage Services

I see the personal finances of many people, and in my experience, real estate is the most consistent means of wealth-building for my clients.  In many cases, the real estate holdings were originally co-investments with parents, or were inherited from the parents.  Modest investments years ago have become the basis of wealth for many of my clients.  Here are a few examples of some of my real clients:

Sue: Years ago, rents were relatively high and Tom and Sue were looking for a new apartment in San Francisco.  Sue’s mom was getting a little older and thought it made sense to move closer to her daughter.  Sue’s mom had the down payment needed for a two-unit property while Sue and Tom had the income necessary to qualify for the loan.  So, Sue’s mom bought a two unit property with Tom and Sue and moved into one of the units, while Tom and Sue moved into the other unit, and they lived in the building together for years.  Year later, after the units were converted to condos, Sue’s mother passed away, and Sue bought out (her now-ex-husband) Tom.  The property is worth about 6 times what Sue paid for it originally, and is still Sue’s primary residence.

The Smiths: Joe and Marie Smith bought a small apartment house years ago when their 4 kids were young.  Later, they bought a couple of small rental houses in the Sierra foothills.  Joe and Marie have passed away, and Tammy, along with her 3 siblings, all now adults, are the joint owners of the rental properties.  The siblings each have different financial objectives now so they are selling the properties and making their own real estate investments.  Tammy, one of the daughters, is a teacher and rents in San Francisco.  Her share of the money will let her buy a place for the first time.  The small real estate investments by Joe and Marie decades ago will provide the money for Tammy to a buy home; for the other siblings, their share of the proceeds from the sale will let them buy investment properties that will provide income for the rest of their lives.

Michael:  Michael’s father was selling a rental property and was not going to do a 1031 exchange because he was tired of being a landlord.  He was going to pay the taxes on the gain and invest the money another way.  Michael had just moved back to San Francisco and was looking for an apartment in this crazy rental market.  Michael suggested that his father buy a place suitable for Michael and a roommate.  The result of the property Michael’s father ended up buying? Michael has a place to live; Michael manages the property; and dad deferred taxes with a 1031 exchange and collects monthly rent from Michael and the roommate without the stress of dealing with tenants.  The real estate will be part of Michael’s future inheritance.

Is everyone in a position to buy a property with future generations in mind? No.  Does everyone want to? Definitely not.  Nevertheless, a multi-generational view towards buying a property can be beneficial to everyone involved by providing housing now to members of the family, rental income now, and/or a significant leg up on wealth building for the younger generation involved.

Do you want to explore your financing options for a property with your family? Feel free to get in touch with me at 415-730-4665 or doug@emortgageservices.net.