New Construction Condos in San Francisco - Sell or Hold?
Hello BP nation - I've got a development project in SF that I'd like to share some details on.
I'd like to just get this project out of my own head for a bit and try to solicit some different opinions on exit strategy.
Would greatly appreciate any and all feedback.Thanks all in advance!!
acquisition:
$1.2M, 1,600 SF single family house
development costs:
$1.3M (inclusive of all construction, consultants, permitting, bank fees / interest, prop tax, insurance, utilties etc).
sales costs :
~$250k (incurred upon sale only - broker fees, transfer tax, staging, closing costs)
time / carry:
acquired Jan 2015
expected completion May 2017.
finished product:
2 new construction luxury condo units, 2 floors each:
Lower unit - 2,250sf - 3 bed, 2.5 bath - one car garage spot (side by side) - deeded entire backyard (approx 1,000sf)
Upper unit - 2,250sf - 4 bed, 3.5 bath - one car garage spot (side by side) - two large decks (master bed and living room) plus deeded ~500sf roof deck with nice views spanning bernal hill to sutro.
Shared garage between the two; approx 600sf. All in all, gross SF for the bldg is ~5000sf.
Targetted sales price:
Going off a relatively conservative sales per SF price of $850/sf, total sale should be $3.8M
Back out all of the above and the potential profit is $1,050,000.
This project is in the inner Mission district of SF.The potential for that 1M profit obviously is very attractive. I also rented out the house for 15 months prior to construction, so if sale is triggered, it will be cap gains.
For the past 4 yrs, I have been primarily in active developer mode - buying, fixing, selling.
However, the goal has always been to spend a lot of time and energy in these 'earlier' years setting up a bunch of nest eggs for the future. Given the location and the price that I would eventually pay to hold onto the units (assuming I could get perm loan to pay off construction loan), I'm looking at ~$2.5M for 4500 sf of brand new San Francisco real estate - which comes out at ~$555/sf - a steal by any measure in SF.
From the investor POV however, even at $20k (I know this is high, maybe achievable through homesuite furnished...maybe not) of rental income per month, with the following assumptions:
- 20% vacancy
- 1.15% prop tax
- 3k insurance
- 5k annual maint / upkeep
- 10% prop mgmt fees
- 4k utilities
- financing 70% ltv at 4.5%
the numbers come out to approx:
- 3.5% cash on cash
- 5.3% cap
- roughly 26k annual cash flow after all expenses etc etc etc
The obvious choice would seem to be sell this off, move onto something else - another development or maybe MF rental via 1031. But given the nature/desirability of property in prime SF, it would seem like there would be an opportunity cost in selling this off for an immediate gain. The issue is of course that the potential returns from holding as rentals pale in comparison to selling it off, or so thats how I've been viewing it thus far. I feel there are different options to consider, but I've just been stuck on the fact that rentals just can't work in SF, even when you are holding at developer prices....I would greatly appreciate some different viewpoints on how to analyze this exit!