Anyone here specialized in San Francisco rental market?

My mother-in-law has a house which she is considering to rent it out. The house is about 1400 sqft and is close to public transportation. The main level has 3 (small) br and 1 bath. Currently the basement has one bonus room and one half bath, and a two cars tandem garage. She is considering to finish the basement so that it would create one more living room, two bedrooms, and one full bath (will be losing one car parking space in the garage). This project will add about 550 sqft of extra living space. We asked a contractor, and the estimated cost is about 100K for such project.

My question is that, if she go ahead with such remodel project, who much more rent can be generated? The current zillow "Rent Zestimate" for this house is about $4200/mo. If she finish up the garage (which will increase the property value thus higher property tax), let's say maybe the rent can be increased to, say, $5500/mo. Would that $1300 rent increase justify such remodel project? Thoughts or comments? Thanks!

Our family own properties in San Francisco, and my brother in law has a house as you described. Hard to believe they go for over a million.

Do you plan to make it legal, and getting a C/O. In NY, where I'm more familiar with zoning, its hard to get a CO converting a SFR to a 2 family. And in CA, due to a court case, Gruzen v. Henry, you will have problems collecting rent if people don't pay.

In NY, units without C/O's are common, but it causes issues in evictions, and people can turn you in to authorities.

Is she planning to legalize the In-law? That would make the house into 2 rent-controlled units.

If it was me, I'd rent out the entire house that includes the in-law to 1 party, 1 lease, which would make the house not rent controlled. I probably wouldn't spend much money on the in-law either, other than some cosmetic stuff to make it look nicer.

She is planning to keep everything legal and keep it as a single family home. Since the house is pretty close to public transpiration and Google/Apple/Hi-Tech company bus station, so we were thinking that maybe finish up the basement to have more bedrooms and bathrooms, would attract those high-tech working professionals to share the house and bump up the rent? However, we are not sure about the current condition of the rental market in this area (the zip code is 94116), and whether this would be possible (to potentially collect more rent by renting to working professionals who is willing to share a single-family-home). Thoughts or comments? Thanks!

Your MIL would be better served spending the $100k on a down payment for another project. You will never get the value back in increased rents.

@Wen Chuang , As well as being an investor in the Bay Area/San Francisco, I also run a property management company in San Francisco and what you're asking and describing unfortunately doesn't have a simple answer and falls into those all too familiar words of "It Depends." There are many things to consider and think through which you may have already done, but here are some others if you haven't...

1. SFH/SFR in the city do not behave like anywhere else in the country. Location of your MIL's home, as with everything in real estate, is key. But even with a good location in San Francisco, the price point is so high for homes that your pool of prospective tenants will be very very low. Very few families can afford such a high price point and so you are instead left with a roommate situation and hopefully with professionals and not students. I see that you want to target professionals because of close proximity to 19th Avenue, but based on experience in the area, many of the homes we rent in Parkside and Sunset do not attract the IT professionals because or location and proximity. IT professionals lean more toward the other bus routes that go through Noe Valley, Marina and the Mission District. Sunset and Parkside tend to attract more students because of USF, UCSF or SFSU.
2. Rent control is another big consideration as @Joanna L. was eluding to. Under no circumstance would I ever recommend turning a SFH into a two unit property either formally through your construction and permits or informally by creating two separate leases for the upstairs and downstairs. One lease for the entire home so that you are 1) not subject to rent control and 2) have better marketability if you choose to sell in the future (ability for buyer OMI if unable to sell vacant).
3. Opportunity Cost is another consideration. The longer the home stays vacant under construction, the more in carrying costs you will have and you also miss out on all that the potential cash flow if you rented it as is. Definitively run the numbers so you can see what makes the most sense for your mom. One thing to keep in mind is not to place too much confidence on the projected rent after construction. The larger the size of the home the more unpredictable the rent will be as it can and will fluctuate greatly in San Francisco based on the available inventory of comparable rentals and tenant demand which will be low because of your prospective applicant pool.
4. Expansion/construction is something you are already considering, but more specific things to to think about is that a second bath is very valuable in the city, but not necessarily a fourth and fifth bedroom. Increase in square footage is always great, but not necessarily at the cost of another parking space given the scarcity of parking in the city. Some would argue that you have a driveway in addition to the garage parking, but you are also marketing to a roommate situation where more parking is more attractive than less. 
5. Target market is one last consideration I would recommend. You mentioned professional roommates as your target demographic. The biggest downside is that you're ruling out families. Given the increased difficulty of renting a SFH vs a 1 or 2 bedroom flat, reducing your applicant pool will impact your final monthly rent. One thing to note is that having 3 bedrooms on a single level is very attractive. I'm not sure how small your rooms are, but many families with between 1 and 3 children love finding these gems. Parents always want to be sleeping on the same level as all of their children.

Bottom line is that your original plan doesn't have to be final. You can still construct, but with less scope of work so your time to complete is faster and overall out of pocket is reduced as is your opportunity cost and the saved money can go toward another investment as @Dennis W. suggested.  Run the numbers and see what works!!  If you have any other questions or want to talk more, you can PM me anytime.

Cheers, Lawrence

If you intend on keeping it as a single family then the answer to your question lies in simple math.

The zip which you provided leads me to believe that the house in question is in the Outer Sunset where in the past 180 days we have seen an average of $909.71/sqft. If you can recapture 550sqft that is an additional $500,340.50 in equity. If you can do the construction for $100k (it will be more), even at $200k its a no brainer. 

I am trying to think of this very simply....

Originally posted by @Michael Kovac :

If you intend on keeping it as a single family then the answer to your question lies in simple math.

The zip which you provided leads me to believe that the house in question is in the Outer Sunset where in the past 180 days we have seen an average of $909.71/sqft. If you can recapture 550sqft that is an additional $500,340.50 in equity. If you can do the construction for $100k (it will be more), even at $200k its a no brainer. 

I am trying to think of this very simply....

It is never just a "simple  math" when it comes to San Francisco rentals. 

Thanks for the mention @Joanna L.

I am not speaking in reference to a rental in any capacity. Only in recapturing square footage for resale in this specific scenario. 

Originally posted by @Michael Kovac :

Thanks for the mention @Joanna L.

I am not speaking in reference to a rental in any capacity. Only in recapturing square footage for resale in this specific scenario. 

Since the OP's MIL is planning to rent the house out, once she legalized the in-law into a separate unit and have (rent controlled) tenants in both units, the resale value will be greatly affected. At that point, the square footage is not going to be as relevant as occupied units.

Thanks everyone for your wonderful feedback! :)

@Wen Chuang - I'm so glad you asked this question. I own 3 SFR's in San Francisco including one that is zoned as a 2-unit and one that looks, smells and feels like a 2-unit but technically is not (and is connected by a staircase to the "other floor"). I have often wondered the same thing!

Here is a lucrative option to consider, which is similar to what @Michael Kovac suggested: Get the permit and add the square footage including the additional bedrooms, bathroom, wet bar, etc. Add a door separating the "new area" from the old area so it acts like a separate unit. But don't add a stove and don't get it permitted as an in-law/ADU (Accessory Dwelling Unit). This way it is legal square footage but NOT a second unit. Then you can rent out the new space, get good cash flow and eventually sell it as a single-family home at full value. I think the key is that someone from your family needs to live in one of the spaces so you don't create 2 leases and a rent control situation.

For downstairs construction: Increase rent from approx. $1400/mo (a guess) for a Bonus room with 1/2 bath (150 sq. ft) to $3400/mo for a compact 3BR/1.5BA with livingroom (700 sq ft.). The extra $2000 a month will pay for $100K of construction in 1 year!

@Lawrence Leung - I'm looking forward to speaking with you since clearly you know a lot about this. 

I think @Ethan Cooke has the best idea for you. Legalize the area as part of the main house, but plan it so you can lock the separation door and informally ‘seperate’ the units. (You’ll need to have an exterior enterance for the lower unit.) You can do the wet bar, and leave a space for a stove, which you can put in after inspections, so the kitchen is complete. This way you get the resale value of the added square feet, without the liability of 2 units subject to rent control. Basically have your cake and eat it too!

Remember, if you informally make it an inlaw (no permits) and you get a notice of violation (example, a neighbor or disgruntled tenant can easily turn you in) then you are really screwed: the city will force you to legalize that unit, and you won’t be able to just ditch it, or merge it into the main house (some political issue of reducing housing units.) You really don’t want the city dictating what you can and can’t do.