Need Feedback on Single Family Home Rental Performance in Bay Area

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

Quote from @Danny N.:

Hi everyone

I have an investment property in the Bay area (South San Francisco specifically) which I'm currently renting out to long-term tenants. It is a 3 bed/1 bath single family home and has a sizable backyard.

Currently it is not cash flowing, and after mortgage/taxes/insurance/maintenance, it is probably losing ~$1,300 per month (eww). Looking at Redfin's data, it is appreciating over time (probably more than $15,600/year), but probably not as fast as other highly desirable neighborhoods in the Bay.

I previously lived in this home before I moved and converted it into a rental property. I have till mid-late 2025 to sell without capital gains tax (< $500,000 couple).

I'm trying to figure out how to improve the performance of this property and have some thoughts about it, but would love to get feedback from other REIs.

Option 1

Add a ~800 sqft ADU in the backyard which I think costs ~$250/sqft (total $200,000) and I think could rent ~$2,000/month. That's ~12% Cash on Cash return which seems pretty good/decent.

My concerns are by doing this, it would reduce my rent price on the main house (most likely since they'd be sharing with other tenants on the property) and also I'm unclear whether adding an ADU would negatively affect the value of the property.

Option 2

Consider converting the property into a short/medium-term rental, specifically to travel nurses. The property is very close to 2 hospitals: Seton & Kaiser. I have always heard there's a shortage of nurses and high demand for them, so thought this could be interesting. However, I have no experience in this and would not know how much rent is projected for this setup.

Option 3

Sell and redeploy capital somewhere better.

Appreciate any feedback on this situation. Thanks in advance.

On you ADU COC you used full rent income. You likely should have used 50% due to 50% rule which would half your COC. Note prop tax will be ~$200/month on the ADU. next I will be surprised if you can add a ground up ADU in Bay Area at $200k unless you do some of the work.

In general ADU additions are one of the worse RE investments. There are many reasons that I will provide but the biggest 2 in your case are that it will cost more than the value it adds and it is likely to make your existing SFH rent controlled.

We have had STRs in San Diego a long time (since 1999) and used to do well. Currently it is my view that their performance is enough to barely justify the additional work involved. If you have a great location for MTR then maybe the increased rent will be greater than the increased effort of an MTR. Note in addition to additional effort involved with running an STR/MTR, you also would have the cost and effort to furnish it. There are cheap options but they take more time and effort and are probably only worth it if something else is extending the timeline.

It appears you purchased in mid 2020. The chart shows ~$200k gain. Selling costs will consume about 50%. Maybe $120k profit . Prop 13 is likely saving you over $150/month and if you loan us from 2020 it is likely less than half of todays rates. I would hate to lose the lower rate loan and not be thrilled to give up the prop 13 savings. What would you do with the proceeds of the sale?

I would not choose the ADU addition. Negative return in the near term due to initial negative position. Rent control on SFH. Plethora of other reasons ADU additions in SFH areas is usually a poor investment.

I think the difference between keeping as LTR, converting to STR/MTR, or selling comes down to what you plan to do with the proceeds and how much time you have to work the STR/MTR.

Good luck

Danny N.

OP

Investor · San Diego · Member since 2021 · 7 posts · 12 votes

> next I will be surprised if you can add a ground up ADU in Bay Area at $200k unless you do some of the work.

Maybe I'm too optimistic here at $250/sqft. Also from doing some reading, it seems spending $200k doesn't add $200k to the home valuation, so that's a big negative.

> It appears you purchased in mid 2020. The chart shows ~$200k gain. Selling costs will consume about 50%. Maybe $120k profit . Prop 13 is likely saving you over $150/month and if you loan us from 2020 it is likely less than half of todays rates. I would hate to lose the lower rate loan and not be thrilled to give up the prop 13 savings. What would you do with the proceeds of the sale?

Bought in 2018 and have over $500k in equity (through principle pay downs and appreciation over time). My loan rate is at 3% which is pretty sweet, but still doesn't help enough with the cashflow situation. If I sell, I'd probably look to reinvest it elsewhere (probably out of CA) for combination of cashflow (or break even at least) and appreciation.

If I do keep it, the only other way I can think of improving performance is to add another bathroom (becomes 3 bed/2 bath) or another bed and bath (becomes 4 bed/2 bath). However, this is pretty much doing a BRRRR now which I've never done, don't have the time and is capital intensive (plus, I'm out of town) which doesn't seem too appealing.

While I could just weather out the cashflow and bank on the appreciation over time, I feel my return on equity is poor, and that equity can be put elsewhere to be more productive.

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Danny N.:

> next I will be surprised if you can add a ground up ADU in Bay Area at $200k unless you do some of the work.

Maybe I'm too optimistic here at $250/sqft. Also from doing some reading, it seems spending $200k doesn't add $200k to the home valuation, so that's a big negative.

> It appears you purchased in mid 2020. The chart shows ~$200k gain. Selling costs will consume about 50%. Maybe $120k profit . Prop 13 is likely saving you over $150/month and if you loan us from 2020 it is likely less than half of todays rates. I would hate to lose the lower rate loan and not be thrilled to give up the prop 13 savings. What would you do with the proceeds of the sale?

Bought in 2018 and have over $500k in equity (through principle pay downs and appreciation over time). My loan rate is at 3% which is pretty sweet, but still doesn't help enough with the cashflow situation. If I sell, I'd probably look to reinvest it elsewhere (probably out of CA) for combination of cashflow (or break even at least) and appreciation.

If I do keep it, the only other way I can think of improving performance is to add another bathroom (becomes 3 bed/2 bath) or another bed and bath (becomes 4 bed/2 bath). However, this is pretty much doing a BRRRR now which I've never done, don't have the time and is capital intensive (plus, I'm out of town) which doesn't seem too appealing.

While I could just weather out the cashflow and bank on the appreciation over time, I feel my return on equity is poor, and that equity can be put elsewhere to be more productive.

If appreciation is less than 6 percent , just sell , except if you have kid that later on want to live there.

Jake BakerBusiness Member

Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes

@Danny N.

I feel if you were to build, you can cash flow, but you will have a lot of equity in the property. Hence a low ROE like you said. You could refinance, but you would be left with unfavorable terms given the higher rates and it sounds like it will be an investment loan, not a primary loan.

I think it is time to sell and take advantage of the tax savings. Invest in a few properties that give you more peace of mind.

[email protected]

BookkeepingRE - Bookkeeping for Real Estate & Service-Based Businesses52 Reviews

Website View Page

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

If you have negative cash flow for $1300 a month or 15k a year ; you have to offset this with 30k equity appreciation a year.

Looking at SSF however, highest ZHI avg SF was $1,382K ; now median is $1,250k. I am probably would think to sell before that capital gain tax or when price is hit $1,3 again. The appreciation models only 3%-4% for SSF which is normal for 1 mil avg houses.

Do not do ADU stuffs.

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

I'll reinforce previous poster's recommendation against aging an ADU, especially to a SFH. ADU was the biggest hype last decade and a huge disappointment for many, especially in CA.
1- big pain in the a$$ to get approved and then built.
2- super expensive in CA.
3- often it reduces the value of the main home on resale, because most people want a normal private home and not some white elephant with a weird back cottage or no garage due to ADU.

TLDR:

CA
legislative
fail
————-
3words

Becca F.

Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes

I would have chosen Option 2. I tend not to favor selling off Bay Area property and you have a 3% rate. As far as Option 3 selling the house and looking elsewhere, the places I'd consider are Sacramento, Nevada or Arizona (where I would buy if I sell off all my Indianapolis properties). NV and AZ have low property tax rates compared to my 2.72% and 2.78% Indy property tax rates, which also saw a 17% increase the last assessment. I would rather have a few high quality appreciating properties in the western states vs. lots of less expensive ones in the Midwest. I think cash flow is going to be tough right now on LTR anywhere so I'm looking at appreciation.

I'm a little surprised that doing an ADU wasn't recommended in the comments. This is what I was considering with my S.F. property, adding a kitchenette and a separate entrance for ADU -it wouldn't affect garage space. I haven't gotten estimates on how much this would cost. I'm also negative cash flow on the SFH because of renting to family members. I don't plan on selling this house - my kids will inherit it and they can keep renting it out or move in themselves.

Could you raise the rent on your existing tenants?

2 Reply

Corby GoadeBusiness Member

Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes

Quote from @Danny N.:

Hi everyone

I have an investment property in the Bay area (South San Francisco specifically) which I'm currently renting out to long-term tenants. It is a 3 bed/1 bath single family home and has a sizable backyard.

Currently it is not cash flowing, and after mortgage/taxes/insurance/maintenance, it is probably losing ~$1,300 per month (eww). Looking at Redfin's data, it is appreciating over time (probably more than $15,600/year), but probably not as fast as other highly desirable neighborhoods in the Bay.

I previously lived in this home before I moved and converted it into a rental property. I have till mid-late 2025 to sell without capital gains tax (< $500,000 couple).

I'm trying to figure out how to improve the performance of this property and have some thoughts about it, but would love to get feedback from other REIs.

Option 1

Add a ~800 sqft ADU in the backyard which I think costs ~$250/sqft (total $200,000) and I think could rent ~$2,000/month. That's ~12% Cash on Cash return which seems pretty good/decent.

My concerns are by doing this, it would reduce my rent price on the main house (most likely since they'd be sharing with other tenants on the property) and also I'm unclear whether adding an ADU would negatively affect the value of the property.

Option 2

Consider converting the property into a short/medium-term rental, specifically to travel nurses. The property is very close to 2 hospitals: Seton & Kaiser. I have always heard there's a shortage of nurses and high demand for them, so thought this could be interesting. However, I have no experience in this and would not know how much rent is projected for this setup.

Option 3

Sell and redeploy capital somewhere better.

Appreciate any feedback on this situation. Thanks in advance.

Honestly, SFO is not going to get more landlord friendly, it'll get worse and worse. I'd sell. Building an ADU will be crazy expensive, take forever and your ROI will still be pretty crummy.

I have tons of friends in SFO who have started investing in Idaho because it's close, the returns are better and it's probably the most landlord friendly state. Happy to connect you with some people who invest over there if you are curious about their experiences and the teams they use.

Amit M.

Rental Property Investor · San Francisco, CA · Member since 2013 · 1k+ posts · 1k+ votes

@Becca F. if you add an ADU in San Francisco you change the status of the SFH to a 2 unit building, and then you're definitely under rent control. Not recommended IMO unless you have some pretty unique circumstances.

This is why ADUs have been a big fail is SF. Some apartment bldg owners added them (to an already rent controlled building), but few SFH owners have done it. Plus they are getting super expensive to build. Even the apartment bldg owners didn't make a killing in equity; they mostly added new income, as the build cost of +/- $250,000 per unit didn't provide much equity upside. Lots of hassle for so-so return IMO.

Sean O'KeefePro Member

CPA | Accepting new clients | 50 States · Member since 2022 · 1k+ posts · 871 votes

[email protected]628-241-0888

@Danny N.I'm based in the Bay Area. It's difficult to get to cash flow positive on investment properties here.

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

Quote from @Becca F.:

I would have chosen Option 2. I tend not to favor selling off Bay Area property and you have a 3% rate. As far as Option 3 selling the house and looking elsewhere, the places I'd consider are Sacramento, Nevada or Arizona (where I would buy if I sell off all my Indianapolis properties). NV and AZ have low property tax rates compared to my 2.72% and 2.78% Indy property tax rates, which also saw a 17% increase the last assessment. I would rather have a few high quality appreciating properties in the western states vs. lots of less expensive ones in the Midwest. I think cash flow is going to be tough right now on LTR anywhere so I'm looking at appreciation.

I'm a little surprised that doing an ADU wasn't recommended in the comments. This is what I was considering with my S.F. property, adding a kitchenette and a separate entrance for ADU -it wouldn't affect garage space. I haven't gotten estimates on how much this would cost. I'm also negative cash flow on the SFH because of renting to family members. I don't plan on selling this house - my kids will inherit it and they can keep renting it out or move in themselves.

Could you raise the rent on your existing tenants?

what I did is I sell Bay Area property (without ADU) and replace with another Bay Area property that already has ADU. Cost to repair is very cheap. he key for this is to find land/home that has large lot and home built around 1950s. Same strategize for the poster, if he intends to live in San Diego then just sell Bay Area homes and purchase another one in San Diego, with ADU.

Building ADU , cynically, is like we're subsidizing California government for housing problem that they're created lol but that's my personal opinion. If you could buy one with existing ADU, all these problem is resolved by itself.

Do not do Ohio/Oregon/Idaho investment B.S. ; just stick to our local neighborhood where to invest.

Allan C.

Rental Property Investor · Member since 2018 · 826 posts · 810 votes

@Danny N. I also vote no to ADU option - it's not going to add much value relative to your building cost. It'll be very hard for you to increase revenue in SFH, so you can expect to be CF negative for some more time. The 3% rate and lower tax base will give you an advantage down the line, but it'll likely be 5+ yrs.

The highest probable outcome to increase your wealth is to sell now and keep all the gains. It took me some time to reach the conclusion to sell all my Bay Area SFHs, but I’m glad that I did. I deployed the capital in MF, which helped diversify risk.

Raju BalakrishnanPro Member

Rental Property Investor · Santa Clara, CA · Member since 2016 · 223 posts · 112 votes

Calculate your return on equity. Say if you have 1 MM in equity in home and your rental+ADU is going to give you 50000 per month after interest an expenses including appreciation, your return on equity is 10%. If it is small (say less than bond market) it is a strong indication that you will better off to sell and redeploy your capital.

Becca F.

Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes

Quote from @Amit M.:

@Becca F. if you add an ADU in San Francisco you change the status of the SFH to a 2 unit building, and then you're definitely under rent control. Not recommended IMO unless you have some pretty unique circumstances.

This is why ADUs have been a big fail is SF. Some apartment bldg owners added them (to an already rent controlled building), but few SFH owners have done it. Plus they are getting super expensive to build. Even the apartment bldg owners didn't make a killing in equity; they mostly added new income, as the build cost of +/- $250,000 per unit didn't provide much equity upside. Lots of hassle for so-so return IMO.

$250,000 for an ADU?! That is really expensive! The downstairs has a very large room that could become potentially a studio apartment.

I'm trying to navigate the S.F rent control laws. I was also told if my SFH is a 2 unit it would be subject to rent control. I was going to try to rent out ADU as MTR to travel nurses since the house is close to hospitals and accessible to MUNi bus line - not sure the MTR part could get around the rent control issue since the main house is LTR.

Manuel Llanas

Member since 2024 · 27 posts · 12 votes

I'm curious about something. I know that ADU's was an alternative to building from the ground up. I was wondering about situations with the ISO container homes that cost no more than 15k from this one youtube I had seen. Then there is the Tesla home that looks pretty nice. I'm guessing that there is a lot of negative things about implementing these types of housings?

Jeremy H.

Pleasanton, CA · Member since 2015 · 66 posts · 9 votes

Currently I found this advertised price from a Bay Area booklet I got in the mail

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

Quote from @Becca F.:

Quote from @Amit M.:

@Becca F. if you add an ADU in San Francisco you change the status of the SFH to a 2 unit building, and then you're definitely under rent control. Not recommended IMO unless you have some pretty unique circumstances.

This is why ADUs have been a big fail is SF. Some apartment bldg owners added them (to an already rent controlled building), but few SFH owners have done it. Plus they are getting super expensive to build. Even the apartment bldg owners didn't make a killing in equity; they mostly added new income, as the build cost of +/- $250,000 per unit didn't provide much equity upside. Lots of hassle for so-so return IMO.

$250,000 for an ADU?! That is really expensive! The downstairs has a very large room that could become potentially a studio apartment.

I'm trying to navigate the S.F rent control laws. I was also told if my SFH is a 2 unit it would be subject to rent control. I was going to try to rent out ADU as MTR to travel nurses since the house is close to hospitals and accessible to MUNi bus line - not sure the MTR part could get around the rent control issue since the main house is LTR.

$250k for non existing space conversion is not expensive for your area. It will cost more than that if hands off

If the main house is over 15 years old, many jurisdictions have it go rent control as soon as the ADU goes into service.

It is my view, based on the rationale of the 15 year exclusion and based on what senator Weinkowski indicated, that it is an interpretation that does not match the intent of the law makers. The intent of 15 year exclusion is that adding a unit does not get rent controlled for 15 years to encourage adding units. To apply rent control on a SFH that just became MF discourages this addition and the SFH was not MF for 15 years. The issue is battling a jurisdiction on this would be tough and costly. So it is what it is even though logically it should not be.

The worse part of rent control is not usually how much you can raise the rent. This is especially true of the statewide rent control of 5% + CPI capped at 10%. Unless there is a crazy year of inflation, this is adequate rent increase. The worst part is the difficulty of getting rid of poor tenants. Tenants that are rough on property, pay late, are alcoholics or drug users, are rude to neighbors, are a pain in the a$$, etc. good luck getting rid of these poor tenants. Best way is repeatedly max rent increase but in some areas that still has the rent below market rent.

Good luck

2 Reply

Raju BalakrishnanPro Member

Rental Property Investor · Santa Clara, CA · Member since 2016 · 223 posts · 112 votes