November 13, 2008

A Plugged-In Reader Picks An Apple For Himself (1968 Greenwich)

Excerpts from a plugged-in reader's comment on 1968 Greenwich (on which he is in contract):

I've gone apple picking in district 7 (1968 Greenwhich) and would like all of you interested parties to know that you're ALL wrong on your guesses. I've found this sites information very useful and many of you are right on with the correction that is happening.
This house is awesome. It's detached on the second floor and on the right side. It feels like a single family home. It has 11 foot high ceilings and celestial windows in every room...
As for the price, well....I think you'll see that I'm right on where the 'correction' is and that I'm paying what the place is worth. it's been renovated tastefully and is well maintained and turnkey. Frankly, I'm very excited.
The pro's in this house vastly out weigh the cons. The pictures tell you the pros...my only cons are there is no bathroom in the master upstairs. I don't care as a single guy, but for resale in the future it may turn some off. The other, is the size of the living room.
If I wanted, I could add a bathroom in the Master (on the deck off the master)...and in the living room, knock out that back wall of glass and push it back 10 feet (where the current deck is) and build a new deck on top of that section for the master, and put the old deck back off the living room....I'd loose about 10 - 15 feet of the back yard, but there is plenty to spare. There is also permits already to put on a roof deck on top of the master...I could have stairs off the master deck going up to the roof....I haven't seen it up there yet, but I'm assuming I could get some bay and bridge views....of course, all of this is just in my mind right now, but very possible. I think this stuff could be done for less than $200k...and I still wont be at the price they paid in '05.
I'll be curious to hear any comments about my purchase next week. This will be done by Friday. Until then....keep up the good work.... How do you like them apples?

Tasty, keep us posted, and let's not forget those invitations to the housewarming. We'll buy you a drink down at Balboa after. Or better yet, The Brazen Head.

A Renovated Cow Hollow Apple On The Tree: 1968 Greenwich Street [SocketSite]

First Published: November 13, 2008 8:15 AM

Comments from "Plugged In" Readers

Outstanding Apple Picking! Enjoy you're new home.

But you know us, so be sure to share the details. Cash or financed? If financed, what kind and how hard/easy was it to get? And are you a google millionare, empty nester, Venture capitalist, columbian drug lord or European investor?

Posted by: diemos at November 13, 2008 8:15 AM

Start your peppersteak diet at the Brazenhead after this friday...great restaurant!

Posted by: gh at November 13, 2008 8:43 AM

i must have been close with my $1.95M guesstimate

Posted by: spencer at November 13, 2008 8:57 AM

@Buyer,

An awesome house in an even better neighborhood. Enjoy!

Can't wait to hear more on "would like all of you interested parties to know that you're ALL wrong on your guesses."

Posted by: chuckie at November 13, 2008 8:58 AM

it looks like a bomb shelter from the outside. Do you get the taxi to drop you off around the corner and then walk the rest of the way home to keep some dignity? If you're going to remodel, start with that.

Posted by: scurvy at November 13, 2008 9:15 AM

awesome location. cow hollow, marina, and russian hill are all easily walkable. this is really close to where i live!

two words for apple picker regarding the roof deck: hot tub.

Posted by: yao at November 13, 2008 9:23 AM

Great apple picking. We're all happy you fell in love with the place and could afford it. It was listed under 2005 sale price, therefore that's probably a better deal than buying at the top.

Posted by: San FronziScheme at November 13, 2008 9:28 AM

Congratulations on buying a house you like at a price you like. Kudos, also, for resisting the mantra oft-heard here: "Just wait 6-12 months and you could buy more for less."

I think Apple Picker is proof that this is a smart-buyer's market.

Posted by: sanfrantim at November 13, 2008 9:30 AM

congrats!

All the bears seem to take up a new tune when one of their own buy a place, even if it's a full two years before $400/sqft condos open up in Pac Heights...

The time may not be now for all buyers, but the time is now for some buyers. The startup I founded just raised a round of VC, and I plan to live here for at least the next five years as a result. That's why I bought even at a time when it seems contrarian to do so.

Everybody has their reasons...

Not enough people on SS understand that...

Posted by: NewBuyer at November 13, 2008 9:37 AM

So are you saying we're at the bottom, sanfrantim?

Posted by: Dude at November 13, 2008 9:39 AM

I second the congrats to the buyer for getting a home that you seem really excited about.

And I'll add congrats to the seller for selling now and finding a buyer, before prices at this market segment tank even further over the next couple of years.

Posted by: Trip at November 13, 2008 9:39 AM

Why does a single dude need this much house?

Posted by: Foolio at November 13, 2008 9:44 AM

@ Dude: I am saying that Apple Picker makes a reasonable decision when purchasing this place, even if the Socketsite crowd has not cried "bottom" yet. Do you disagree?

Posted by: sanfrantim at November 13, 2008 9:50 AM

As I mentioned, I've been in this place during a party and I saw it before the current owner bought it and it's a great place.

A lot of the people taking shots at it are realtors and other owners who are trying to come up with reasons why it would sell for less than the peak price, to rationalize their decision that it's only the problem homes which have come down in price: THEIR home has (or for the realtors, homes in general have) not come down one cent.

Those of us who have been in this place know full well that it isn't the case. It's very pretty inside with all that glass, and very well done - not trendy, which would seem dated. It's just that the market is deflating and that's why it isn't getting its peak price.

Is the buyer buying at the bottom? Not by a long shot, but the seller is willing to sell at a market price, the buyer is willing to buy at today's market price and so the deal is going to get done.

As for the renovations, I think you'll find that the Cow Hollow Neighborhood association will employ strict guidelines about what can be done. For example, they expect additions on the back not to extend past the building envelope of the neighbors. I don't recall whether you can average the two (if one extends past your and the other neighbor does not). I also don't recall where the neighbors buildings end relative to this one.

You'll also find that they employ strict lot coverage guidelines, and that's probably going to stop any expansion plans cold. If I recall, the portion of the backyard that does not have the condo on it is probably not sufficient to allow any additions while meeting the lot coverage guidelines, but you'll have to check - it was many years ago that I was in there.

The city will basically refuse anything that fails to comply with those guidelines. I would be especially interested if your realtor, the one who is making all that money from the transaction, told you any of this, or if he just stood there nodding his head (or saying noncommittal things like "you could look into that") while you identified all the possibilities.

In any event, as is, the place is great. So if you don't get to do anything to it, it's still a great place, just a lot cheaper than it was several years ago, in spite of the realtors and owners trying to pretend it's because of a property problem and not the market. And if you are the kind of person who goes to Balboa Cafe several times a week, I'm sure you'll really enjoy it.

Posted by: tipster at November 13, 2008 9:57 AM

@sanfrantim: I think the decision to purchase real estate is a continuum of both financial and emotional factors. For some people (like me), it's more financial than emotional, but I realize I'm an outlier.

I reside in San Francisco, and I have to live somewhere. I can buy or rent my shelter, just like I can buy or lease my BMW. I make the decision that optimizes my financial position based on currently available information. Just like a corporate CFO would decide whether to buy or lease new forklifts for their warehouse.

But I realize the calculation is more emotional for most people, based on their lifestyle, stage in life, family situation, and long-term plans. Plus future outlooks vary widely.

So long-winded answer, I agree it makes sense for some people to buy today, especially if they've found the home they plan to stay in forever and are getting a relatively good deal compared to recent bubble peaks. But that doesn't preclude further drops in prices, nor does it imply a bottom or a "smart buyer's market."

In any case, congrats to apple picker - sounds like he/she found the ideal house at presumably a good price, something they can afford and plan to stay in long-term.

Posted by: Dude at November 13, 2008 10:28 AM

All the bears seem to take up a new tune when one of their own buy a place, even if it's a full two years before $400/sqft condos open up in Pac Heights...

I'm not sure this applepicker is "one of my own" or not, but I'm always happy for someone to buy their place, regardless if I think it's a good idea financially or not. buying a home is super exciting, and I would never take that away from somebody, especially if they understand the risks associated with buying.

I have popped, and will pop, open many a champagne bottle celebrating the purchase of a home that was a bad financial investment. (including my own home). and I smiled with genuine joy each time (especially with my own home).

on a side note: as I've oft said, the downturn in RE won't be nearing an end until Dec 2011... so I guess it's 3 years until the $400/sq ft Pac Heights condo!
;)

Lastly, I see no reason why people are questioning his "need" for this place. None of us "need" to buy anything. Might as well buy a place he can grow into. we don't all need cubix lofts.

To Applepicker: congrats on the new digs. Definitely keep us updated if you close or not, and also if you are ever able to renovate!

Posted by: ex SF-er at November 13, 2008 10:49 AM

As for the renovations, I think you'll find that the Cow Hollow Neighborhood association will employ strict guidelines about what can be done.
I'll add to that and hope you read the CC&Rs. The condo association will have an architectural committee that you'll have to get your plans by (read: your fellow condo owner has veto power over external modifications not already approved). That said -- cool "turnkey" digs!

Posted by: EBGuy at November 13, 2008 11:33 AM

This is a bachelor pad. The only reno's you need are a sweet sound system, some Italian leather couches, a couple of 60" plasmas and a well stocked bar.

Oh yeah, please invite us to the housewarming. I'll bring a 6-pack.

Posted by: Jimmy (Bitter Renter) at November 13, 2008 12:17 PM

First of all, congrats Apple Picker! I hope to be in your shoes in the next year or two (depending on the RE market and economic situation). I owned a condo in Cow Hollow once, and love the neighborhood.

@NewBuyer and Sanfrantim: I don't believe that most bears on this site are saying "never buy RE"; instead, bears believe that NOW (and the near future) is not the most financially prudent time to buy because RE values are still falling and the economy is in the toilet. According to NAR, it's always a good time to buy, and that is simply not true. However, if one is ready to buy now, finds a house he/she loves and can easily afford, plans to stay in that house a long time, and is willing to risk his/her life savings on the purchase, then that is fine.

I'm financially conservative, partly due to a past experience: I bought a condo in 2000, then the company I worked for went under less than a year later. I was unemployed for 6 months and had to eventually borrow money from my parents to keep up with the mortgage payments (my condo was "only" 3x my salary and I had a 30 year fix). I never want to be in that position again.

Posted by: waiting2nest at November 13, 2008 12:34 PM

waiting2nest,
Is this gem anywhere near your parents house in the Berkeley Hills? The deals abound at 2350 Corona Ct.
Sold 6/29/2005 for $1,350,000 (90% financing via Countrywide, bet they didn't go quietly with some skin in the game)
Currently for sale at $774,900.

Posted by: EBGuy at November 13, 2008 1:07 PM

Hyperlink powers... failing... try this for 2350 Corona Ct..

Posted by: EBGuy at November 13, 2008 1:10 PM

"Lastly, I see no reason why people are questioning his "need" for this place. None of us "need" to buy anything. Might as well buy a place he can grow into. we don't all need cubix lofts."

Come on, this is a strawman. Sure, it's not a "need" in the strictest sense, but the alternative is not only a Cubix lofts. My only point was, 2500 sf for one person seems odd.

And I legitimately was asking the question. Perhaps he has kids from a former marriage that stay with him on weekends. Perhaps he has a fiancee and they're expecting soon. Perhaps a million things, that's why I asked the question. But one single dude (and from his discussion of Balboa and the neighborhood I get the sense he is a dude) living in a 2500 sf house sounds pretty lonely (and a lot of upkeep) to me.

Posted by: Foolio at November 13, 2008 1:13 PM

@EBGuy: No. Family members are in SF, NYC, and Washington DC. But I have to admit, 2350 Corona looks like a good deal, though.

Posted by: waiting2nest at November 13, 2008 1:55 PM

Welcome to the neighborhood! Instead of the Balboa or Brazenhead, try Terzo ... our favorite place.

Posted by: Oceangoer at November 13, 2008 2:02 PM

This week I went into contract on a 1925 three-unit property in the Marina in good shape, and paid $420/sf, it has two empty units and is well located.

I love all the people on this site who are so self-aasured to be calling the 2012 bottom...I wonder how many are disgruntled renters in disguise who don't have the money or the gumption to ever actually make a purchase. My renter friends with no downpayment money are always the ones who give me the hardcore doomsday real estate scenarios. I even heard a 'rising ocean levels' warning this week, that was especially pathetic. Meanwhile, I buy a commercial property every year or two and go about my business.

Simple advice: Shop in a down market, don't ever bid, identify the quality location (the key), inject enough equity, pay the mortgage down, and sit tight.

All the renters can keep flushing their funds down the toilet in the meantime.

Posted by: gh at November 13, 2008 2:19 PM

Basically on-topic to a thread on apples, one of my favorite local RE sites has the sales numbers for October up:

http://www.rereport.com/sf/index.html

He does a good job breaking things down by district. The one thing I wish he did was break the data down by market segment (i.e. price ranges). My sense is we're starting to see things move downward much faster now in the higher-end ranges, but I confess I have no concrete numbers to support that (and this is where apples-to-apples comparisons become more critical as the mix can change significantly with such smaller samples).

Posted by: Trip at November 13, 2008 2:27 PM

@EBGuy: No. Family members are in SF, NYC, and Washington DC.
My bad, I confused you with jordan park, another "waiter", from the infamous Sticky to Slippery Revisited thread. She mentioned taking some flack from her MIL who lives in the Berkeley Hills.

Posted by: EBGuy at November 13, 2008 2:29 PM

@2350 corona

Here's a fun game!

Click on this map for 2350 corona, and note the property's proximity and relation to the intersection of Keith & Euclid. For those who are map-challenged, it is southwest of the intersection.
http://maps.google.com/maps?q=2350%20CORONA%20CT,94708,CA,US&hl=en&CFID=3108089&CFTOKEN=30231808

Okay. Now, find the intersection of Keith & Euclid in the photograph and on the map here....
http://www.sfgate.com/cgi-bin/object/article?f=/c/a/2004/12/20/MNGRAAEL4H1.DTL&o=2

Can you say, "Hi neighbor! Mind if I come over?"

Finally, this is the best current listing at redoak:
http://redoakrealty.idxre.com/idx/phototour.cfm?cid=1&pid=40379490&bid=1&pt=SFR&actv=0

Posted by: debtpocalypse at November 13, 2008 4:10 PM

Trip - The RE Report does a nice job of displaying MLS data. I have found that their prior month data is static and not always updated for tardy listings (sales) that inevitably trickle in - but that issue is relatively minor. The district data is useful - but I'd rather see actual monthly results rather than a 3-month rolling average.

So far in Nov, there have been 70 sales reported with an overall median of $765K (higher than Oct - but way down from Nov 07). For all of Nov 07, there were 428 sales in MLS so we'll likely fall short of that volume.

The highest price sale so far was that weird house at 625 Duncan. Selling price shown as $5.818M versus a listing price of $6.25M. I recall that some had expected it to be even lower.

[Editor's Note: 625 Duncan thunder officially stolen (but more tomorrow).]

Posted by: FSBO at November 13, 2008 4:28 PM

"All the renters can keep flushing their funds down the toilet in the meantime."

And this adds value to the conversation how? Congratulations on the purchase of your property gh, hopefully it will give you something more constructive to do with your time.

Posted by: pica1986 at November 13, 2008 4:38 PM

"All the renters can keep flushing their funds down the toilet in the meantime."

Unlike the proud property owner selling this place who lost $300K+ over the past 3 years? That's rich...just like a buyer who "lost" out on this place in 2005 and rented instead would be.

Posted by: Michael at November 13, 2008 5:16 PM

@debtpocalypse
Regarding the listing at 614 Grizzly Peak. Wow, sweet views. Did you notice the agent is also the owner. He's a serial homesitter that has been harvesting tax free capital gains every two years. Looks like the music has finally stopped.
Bought 3/21/2007 for $970,000. Currently listed at $899,000.

Posted by: EBGuy at November 13, 2008 6:44 PM

gh,

Interesting post in line with the "renters are bitter because they cannot afford to buy" theory.

I'd bet some of the renters posting here have the means for a down-payment or two... Plus, they're saving big time (if they're careful with their investments) as rental is 50% cheaper than buying today while buyers from the top of the bubble are getting the double-whammy of decreasing property value and high property taxes + cost of holding.

Follow the posters for a few weeks and you'll notice some potential investors who still don't recognize much value in this market. But when value will come back, these will be posting less on SS, busy snapping good deals.

So far, the market appears to start showing strong signals of fatigue. Outlandish asking prices are being lowered. Some investors are losing a few 100Ks here and there. Others are making less than expected but are still turning a profit. Some see their places unsold for months. Who knows where we will be in 1-2-3 years? This is a long term game.

But I think time is on the renter's side on this side of the cycle.

Posted by: San FronziScheme at November 14, 2008 8:12 AM

gh wrote, "This week I went into contract on a 1925 three-unit property in the Marina in good shape, and paid $420/sf, it has two empty units and is well located."

I love this site and the insight both bears and bulls bring. The threads I love the most are the ones like this one about this applepicker because that's where the rubber meets the road. Some other people like NewBuyer, ester, SkyGuy, 11223, paco have shared what they are doing now or have done in the past and. I hope you will share more numbers.

Anyways, from what you have shared, looks like one unit is occupied with a long-term and possibly protected tenant paying maybe $1 psf per month. The other two are vacant and you can rent at market rate and I'll venture you can get $2 psf per month. So your blended rent is $1.70 psf/month. You have paid about a GRM of 20 and expect to get a cap rate of a little over 3%. Is that in the ballpark? Now depending on the investor, that may or may not be a good deal.

Certainly would love to hear more.

Posted by: chuckie at November 14, 2008 8:41 AM

GH wrote:

This week I went into contract on a 1925 three-unit property in the Marina in good shape, and paid $420/sf, it has two empty units and is well located.

I have not seen anything in the Marina sell for under $425 in ten years. Any reason that you were able to buy a place for less than 50% of what 1920’s buildings have been selling for recently???

I love all the people on this site who are so self-aasured to be calling the 2012 bottom...I wonder how many are disgruntled renters in disguise who don't have the money or the gumption to ever actually make a purchase.

This sounds like Realtor © talk…

My renter friends with no downpayment money are always the ones who give me the hardcore doomsday real estate scenarios. I buy a commercial property every year or two and go about my business.

I really own two apartment buildings (and my parents own many more) and have never heard a real owner say anything like “I buy a commercial property every year or two and go about my business.” I have sold and financed commercial property for the past 20 years…

All the renters can keep flushing their funds down the toilet in the meantime.

Most people that say that “renting is like flushing money down the toilet” is a Realtor © (and is probably having a tough time getting people to buy today)…

Posted by: PresidioHtsRenter at November 14, 2008 8:49 AM

PHR, I think you're right. The last bulls left are real estate sales men or people with still some hope to make a buck (or to lose less).

Posted by: San FronziScheme at November 14, 2008 9:27 AM

right fronnzzz,

so when everyone is bearish on an asset class isn't it time to wade in?

Posted by: paco at November 14, 2008 9:49 AM

PHR,

I really like your insights/experience, and I'd be interested in your take on a dynamic that I think must be playing out in the small landlord market (say, less than 50-100 units).

I would guess that many of the older buildings owned by these landlords (such as your family) must generate very strong cash flow now, and that also for tax purposes strong taxable income. High taxable income is because (I would guess) that (1) the units have been fully depreciated and/or have low depreciable basis anyway, (2) prop 13 means that tax expense has not gone up with the value of the properties and (3) rents have risen significantly over the last 20 years (although less so of course on the controlled units within SF).

If I am right about this general framework, then the existing landlord would be a stronger bidder in the current market than a new entrant because of tax considerations. The new units - considered on their own - may generate low and/or uneconomic cap rates. However, they will generate relatively larger noncash depreciation expense (good) and cash prop 13 tax expense (not so good, but not necessarily too bad), both of which could be used as an offset to otherwise taxable income elsewhere in the portfolio of units.

All this assumes of course a legal structure that would allow this pooling, but I don't see that as any impediment, because sole proprietorships to corps and family structures would all flow their numbers up to the taxpayer(s) on a consolidated basis. Perhaps this would not work with separate investor groups in partnership structures, however, because of control/ownership issues (but that gets a little far from my expertise).

Does that tax treatment analysis make sense to you, or am I off base here. Also, could this partially explain the willingness of investors to keep buying at these low cap rates even if appreciation is uncertain? In effect, they would be trading some uncertainty about the future cash flows for immediate tax benefits in existing investments.

Posted by: Laughing Millionaire Renter in Marin at November 14, 2008 9:55 AM

"so when everyone is bearish on an asset class isn't it time to wade in?"

So, are you selling all your real estate and jumping into stocks with both feet??

Posted by: Laughing Millionaire Renter in Marin at November 14, 2008 9:57 AM

PHR, I tend to agree with you - but I did find a few multi-unit sales/listings in the sub-$500 psf range in District 7A (Marina):

- 1452 Francisco: Active since Sep 15. Asking $1.795M for 4 units at $463 psf.

- 1950-54 Lombard: Sold 7/29/08 for $2.2M - 3 units at $459 psf.

- 2375-79 Chesnut: Sold 3/25/08 for $2.125M - 3 units at $493 psf.

There were some other possible sales in that range but the square footage was missing and I didn't take the time to search for it elsewhere. I couldn't find gh's $420/sf under-contract property. Maybe sf is missing (or maybe he can just tell us where it is)?

Posted by: FSBO at November 14, 2008 10:01 AM

FSBO posted that he found some sub $500 ft. multi unit sales/listings in the Marina and I'm willing to bet that all are occupied with tenants paying low rents (gh said he had two empty units). You can olly OMI one unit and with the TIC sale market dead it is not a good time to try and make money doing an Ellis and TIC. I have not seen a "vacant" single family home or multi-unit building in the Marina sell for anywhere near $500 a long time...

Posted by: PresidioHtsRenter at November 14, 2008 10:19 AM

dingdingding,

we have a winner! many do not understand why owning investment rental property is so favorable tax wise.

this is one of the primary reasons why the wealthy usually have a fair amount of real estate exposure. and in a city where its quite possible to rent a portion of your building to tenants its easy to find opportunities to spend before tax money on polishing your assets...

Posted by: paco at November 14, 2008 10:24 AM

PHR, excellent point about occupied units - I'm sorry that I had overlooked that. From the listings, it looks like the active Francisco property is fully occupied (all 4 units). For the Lombard and Chesnut sales, it looks like only one unit was occupied at each property.

Posted by: FSBO at November 14, 2008 10:28 AM

"So, are you selling all your real estate and jumping into stocks with both feet??"

why would i sell my real estate? esp. in this market?

as for buying stocks, none other than the oracle from omaha has suggested that this is the buying opportunity (for equities) of a lifetime. he has reportedly invested $50BILLION already this year. (says bill ackman on charlie rose's show a coupla nights ago). so yes, i do see some interesting stocks.

personally tho, i think the world will see deflation which will lead to war and drastic changes. but as 'the london banker' has detailed i think the u.s. under hank n ben and TPTB is going to make out bigtime at the expense of the rest of the world's economies.

Posted by: paco at November 14, 2008 10:39 AM

paco & LMRM - the structure portion of a rental property investment can be depreciated over 27.5 years, right? So, if you allocate say 80%(?) to the structure and 20% to land, you get to deduct about 2.9% of the purchase cost each year against your rental income. So this is worth after-tax about 1-1.5% of the purchase price (at least for some taxpayers) - and would therefore add to the effective cap rate. Plus, as paco points out, you also have the opportunity to deduct additional "expenses" if you dare (or maybe even hide revenue!). However, do these extra "benefits" justify a purchase price with an initial cap rate of 3 or 4%?

Posted by: FSBO at November 14, 2008 10:51 AM

Millionaire Renter in Marin wrote:

> PHR, I really like your insights/experience, and I'd be
> interested in your take on a dynamic that I think must be
> playing out in the small landlord market (say, less than
> 50-100 units).

Over the past few years with 2% real cap rates about 90% of the sellers of small rental buildings have been long time owner operators and 90% of the buyers have been people who know little about owning and operating apartments hoping to get rich owning real estate (who will soon learn that owning apartments is not the same as owning tech stocks)…

> I would guess that many of the older buildings owned by
> these landlords (such as your family) must generate very
> strong cash flow now, and that also for tax purposes strong
> taxable income. High taxable income is because (I would guess)
> that (1) the units have been fully depreciated and/or have
> low depreciable basis anyway,

My Dad first started buying rental homes on the Peninsula in the late 1960’s (when you could buy a nice home West of El Camino in Burlingame for $20K and after making a 10% down payment have the rent cover the 1st TD, the Seller 2nd TD and all the expenses (if you did all the work yourself and made your kids work for free). In the 70’s my Dad started buying apartments in San Mateo and Burlingame (and saving money on gardeners by making me drive around with our lawn mower , edger and blower doing yard work at all the property). All the property loans were paid off in the 90’s and my Dad was happy as can be making more (after taxes) per month than he ever thought that he would earn in a year. In the last 10 years we have renovated almost every unit/home spending from $10K (for the San Mateo rentals East of 101) to $200K (for the Burlingame homes that would sell for over $1mm) so we now have a lot more rent per month coming in and also have a nice big depreciation deduction again to reduce the tax hit. All the property is in a Family Limited Partnership/FLP and there is an ability to manage cash flows from all the property to try and keep everyone in as low a tax bracket as possible

> (2) prop 13 means that tax expense has not gone up with the
> value of the properties and (3) rents have risen significantly
> over the last 20 years (although less so of course on the
> controlled units within SF).

It is my guess that we will soon lose the prop 13 cap on rental property (but my parents will still be paying $50K less per year in some of their neighbors in the home I grew up in). The only rental property my parents own in SF is the home in Balboa Terrace that my Mom grew up (it has been a rental since my Grandfather moved in with us in the late 60’s)…

> If I am right about this general framework, then the existing landlord
> would be a stronger bidder in the current market than a new entrant
> because of tax considerations.

I have not seen many landlords with strong cash flow overpaying for Bay Area real estate except the Lembis (Walt lives a few blocks from my parents) and they have some property that is not doing real well (but they are doing fine since old man Frank made a lot of great purchases years ago)… Long time owners are all waiting with cash until Cap Rates and GRMs get back to normal. A friend of my Dad was just reminding us that he bought a couple Palo Alto REOs in 1994 for about half of what they sold for in 1989…


Posted by: PresidioHtsRenter at November 14, 2008 11:01 AM

so when everyone is bearish on an asset class isn't it time to wade in?

Maybe, maybe not. People were bearish in August last year when the financial crisis started to hit and some analysts called a bottom. Then came January and March (double-bottom! this is it! Reversal is coming!). Then October (Capitulation! Everything goes up from there!).

We're at the beginning of a recession triggered by too much leverage on overvalued assets (yes paco, this means your property too and the 2 places I still own, btw).

This is a new game (huge personal debt but most of all deficits that "didn't matter" and that "will matter" one day...). We're all playing this by the ear including the geniuses at the Fed and Treasury. The book on how this crisis will play out hasn't been written yet.

Posted by: San FronziScheme at November 14, 2008 11:10 AM

fronnzzz,

"We're at the beginning of a recession triggered by too much leverage on overvalued assets (yes paco, this means your property too and the 2 places I still own, btw)."

fwiw, i'm a severly underleveraged overconservative investor.

time will tell...but the rents will still come in.

Posted by: paco at November 14, 2008 11:16 AM

paco,

I guess we can agree on that. I am too collecting decent rent on non-leveraged property (5-year personal loans paid off a few years ago). My current value-to-rent ratio is around 25 for both but I won't sell these. Always keep some RE. But most importantly always keep some dry powder.

Posted by: San FronziScheme at November 14, 2008 11:30 AM

"However, do these extra "benefits" justify a purchase price with an initial cap rate of 3 or 4%?"

Probably not for a rational investor. An extra 1-1.5% shouldn't be worth taking the price appreciation risk inherent in the low cap rate of the new investment.

But people aren't always rational, and 30 years of rising prices, the last 20 years of which have been turbocharged by prop 13, has worked a powerful effect, and it is the highest bidder who sets the price.

Consider it from the point of view of someone very inexperienced who just inherited the 3-unit building in San Mateo (no rent control issues to worry about) that his dad bought 30 years ago for $100K and now owns it outright (let's just make up some illustrative but plausible numbers). It's "worth" $1M today. Rent is $40K per year, taxes are about $2K, other operating expense around $8K, leaving $30K NOI or 3% on its current value. He owes, say, $10K to the tax authorities on this income.

Now the legacy owner buys the 3-unit sitting next to his for $1M because he thinks his dad was a fuddy duddy and didn't understand how special the SF Bay Area has always been, or how specially special it is becoming. The depreciation on the newer unit alone wipes out all tax liability on his NOI for the first. In order to buy the new property, he borrows 50% against his "equity" in the fully depreciated older unit and plunks it down as a downpayment on the newer one. He has effectively borrowed 100% of the $1M at say 7% (on a consolidated basis, the lender sees him with 50% equity now in his 2 building portfolio). Now, his entire rental stream for the new prop (assumed $40K) is wholly sheltered by the interest cost alone, and on a current basis he is now collecting $80K of cash rent on the two buildings against $70K of interest, $16K cash maintenance expense and $24K of prop 13 tax.

He's no longer a taxpayer! And, the excess tax losses (here, $30K) that he could use against other properties (or even his nonpassive income if he meets the passive loss rules). Now, of course, there is no free lunch. He has given up his $20K after tax income from when he only owned the first property. But now he is TWICE as rich (in his mind, remember he has drunk the koolaid). $20K is only 2% appreciation on the second property (again, in his mind, this is a ridiculously low hurdle). And, of course, to the extent that he can use the additional $30K tax loss elsewhere, this would "replace" part of the income foregone so that he is not really even giving up the entire $20K net stream he used to enjoy. At a minimum, he could roll the losses forward into the basis and shelter some of the expected gain.

Obviously, the numbers are just fudges to illustrate the way this might work behaviorally. It blows up of course when the price of the buildings fall. When that starts to become commonly accepted, the cap rates will rise IMO.

Posted by: Laughing Millionaire Renter in Marin at November 14, 2008 11:33 AM

LMRiM,

That's precisely the reason why I didn't double-up in the bull market. When you're winning, it can be wise to pull some of your chips off the table. Some people will always double-up following "good proven principles" that risk takers are always winners and the rest is just a bunch of losers/renters. They will likely double down in a down market and lose their chips if it doesn't reverse fast enough.

Posted by: San FronziScheme at November 14, 2008 11:48 AM

PRH -

I just read your post. Thanks for the insights - very sensible analysis. I don't have any real experience here but your post clears up a misconception I had about who was buying.

BTW, I doubt they'll take away prop 13 for rental properties. Much of the premium in the "real" Bay Area results from prop 13 effects. Any even seemingly innocuous weakening (say, removing it for non-owner occupied, or disallowing inheritable prop 13 basis under prop 58) would knock down equilibrium pricing on all housing stock. TPTB understand this, even if most of the population doesn't.

Anyway, from a rational economic point of view I hope they do remove it! It is a huge distorion that is going to end in tears for many recent buyers. But from a personal point of view I sort of hope they continue it. Removal might make it impossible to rent a $1.2M house for $2800/mo (owner inherited the property from father, along with the $1500 tax bill) in Tiburon, and would deprive the recent buyers of the opportunity to subsidize us by funding the public schools with their $15=20K tax assessments!

Posted by: Laughing Millionaire Renter in Marin at November 14, 2008 11:49 AM

moral of the story? do not buy 3-4%cap rate properties.

"but that's all that is available" say some. i beg to differ.

the reality is that it pays to buy fixers w/issues (low rents, bad tenants, needing lots of work, etc..). you then simply unlock the value waiting underneath.

easy? no. competitive? yes. still doable? more and more these days.

so while bear arguments against low returning strawman rental buildings sound good the fact is that with some patience and skill you end up with 10-15%cap rates.

its similar to buffet again in that he owns companies that spit off lots of cash and he is able to use this to buy more investments
(when the time is right). rinse and repeat.

Posted by: paco at November 14, 2008 11:49 AM

If the moral of the story is to "buy fixers w/issues", then who are the suckers that are buying your places after you fix them up and have already unlocked all their value? At that point they're no longer a good buy, right?

Posted by: Anna at November 14, 2008 12:01 PM

That's all good and well, guys.

But the vast majority of people are not contractors or property managers, and we don't inherit portfolios of real estate. In other words, we wouldn't be able to replicate the results of paco, fronzi, or PHRenter. At least not without a lot of growing pains. And this is hardly the market in which to test your hand at that sort of thing.

But I think paco's Buffett analogy is perfect. Buffett buys entire companies, or large stakes in companies, giving him control of the operations, or at least a board presence. A small fry investor buying 100 or even 1,000 shares of a company should not expect the same results as Buffett does. Nor do they have the same ability to ride out bad spells or absorb losses. Same thing goes for real estate.

So while it may make sense for people with existing apartments to buy more (or fixers) today, that's a completely different analysis than whether I should rent or buy my 2-bedroom Soma condo.

Posted by: Dude at November 14, 2008 12:06 PM

paco,

If you can do that, more power to you. You've got the skills.

That's why I never understand why you are so hostile to my posts ("laughable" millionaire because I rent). My skills are in trading - that's where my capital is best deployed, and I know a few millionaires up here who do the same.

The tax arbitrage argument for people with means who weren't lucky enough to be born in the Bay Area (as your family was) and who have arrived releatively recently are compelling. I would have been a fool to buy a $1.3M+ place in Tiburon, when I could rent it for $2800 per month, don't you think? There are people on our block struggling to pay their monthly nut I know for SURE. Not us!

(BTW, paco, this is a tough tax year for us because of large short term options gains. For the last few years, living in CA has been virtually tax free, because of tax free income + long term cap gains from the 2002-03 period. The Bay Area has been remarkably inexpensive for us in view of what we have receoved in quality of life and amenities. However, I'm glad I don't own my personal residence now! We seriously might have to flee Cali - there is no way those fools are getting 10% of next year's trading gains if this is the new trading reality.)

Posted by: Laughing Millionaire Renter in Marin at November 14, 2008 12:07 PM

anna,

i did not mention selling. when i do a deal that involves converting a rental to a tic then i believe i have added value that was not available before-and i am selling that value usually at a slight discount to make the deal go smoothly.

remember that this conversation referenced low yielding properties that people buy- so there is plenty of room for people like me to get in there and address problems that others shy away from in order to sell a newly palatable investment.

Posted by: paco at November 14, 2008 1:21 PM

@EBGuy
The in-laws are much further up the hill, around Grizzly Peak and Creston. Unbelievable views up there. They believe their house has appreciated to ~$600k. I think that's a huge understatement even in a declining market, although I know approximately diddely/squat about Berkeley real estate, but why argue the point. Given that they plan to be hauled out of the house zipped in black plastic on gurneys, it hardly matters. In the meantime we've arranged a truce in the real estate wars in exchange for ultrasound pictures.

Posted by: jordan park at November 14, 2008 1:30 PM

dude,

the choice between renting and buying a new luxury condo in this market is easy. (renting this kind of product is better imo).

buying something that is readily available and interchangeable while the prices are falling and the funding is tightening is not a good idea.

otoh, buying a fixer (like 179delmar) that has great potential, is rarely available and is unique can be a very good idea.

and though it takes some design sense and perseverence it does not require that you be a contractor.

as i mentioned before, i recently had foundation work done. as a homeowner i engaged the struc.engineer, took his calc's to the building dept and paid for the permit. this is not hard-anyone can do it. then i called over a dozen contractors and over a coupla weeks time i had enough quotes to pick my guy. now here is the interesting part; the prices i received for the job ranged from $16k up to $114k!

so my point is that if you put in the time its you who will keep most of the money as opposed to the contractor.

Posted by: paco at November 14, 2008 1:39 PM

lm,

"That's why I never understand why you are so hostile to my posts ("laughable" millionaire because I rent). My skills are in trading - that's where my capital is best deployed, and I know a few millionaires up here who do the same."

since you asked...i find your internet persona to be inconsistant
with my idea of a saavy trader.

if your skills are in trading then why are you doing it from home in a retail acct? that's for amateurs, not 'professional traders'. the trading action is phenomenal right now and good traders are making size.

maybe you dabble from home with your retail acct. as a pastime
b/c you made so much money in the past and are now retired?

but if that is the case then i am dumbfounded that anyone who made that kind of money would not want to own a house.

you talk/brag about thousand dollar rounding errors in your household so i would think that you would be more bullish on the future of real estate-prices will come down and smart people will add to their portfolio. instead you have this idea that its never a good time to buy; repeatedly pointing out how flippers have flopped or how dumb homeowners subsidize smart renters.

to my ears it just sounds like jealousy. it makes you boil when you hear about some dumb owner lucking into the big 'artificial' run-up. you are smarter than that-you did not buy-and that guy who did will give it all back-hee hee and all that.

anyway, whatever. you seem like a nice enough fellow and i would enjoy talking about this and misean theory with you at a cocktail party.

i would sound just as obnoxious but in a more likeable way ;-)


Posted by: paco at November 14, 2008 2:31 PM

Here's going back a long way... to when the house had but a single story. My sister and her hubby lived in the house and through the addition of the second floor, which was underway at the time of Loma Prieta. The house sits on a rock outcropping. No damage whatsoever, while the nearby Marina was slip sliding away, and burning, too. At that time it was just a house on the front of the lot with a 2S cottage in back, not two condos as at present. It seems pretty big for one guy, but good luck and take the long view! Despite all the negativism, SF real estate tends to work out just fine in the long run as long as you can afford to hang on for the ride.

Posted by: Johnny Boy at November 14, 2008 7:34 PM

WoW....I didn't realize that my post invoked such a response.... for the people that congratulated me....thank you. For those who question, or criticize me....well, that's ok too....you can still come to the housewarming party to see how nice this place is.... I'm buying this place for two reasons....1) because I love it...FOR ME...2) Because I can....no financing, no BS...just cash. Could I of waited for Thanksgiving to come and go...sure....could I of waited to see if it made it to X-Mas....sure....I know that most people (even with good credit) can't get a loan over $700k. but I also know that it only takes ONE other person like me out of 6 billion, and the one house I saw in 4 months that I really, really liked...could be gone like Keiser Sosea in a blink. Could I of waited another 6 weeks and with cash, get this place for $1.65....$1.6....maybe....but that would be gambling....and I don't gamble. whether it's a 44 year old mother of two Cougar at Balboa, or a $2.1 million $ condo in Cow Hollow, If I see it, and I like it, I'm going to try my damnest to get it !! Those fortunate enough to know the house hunting experience know that just the process of looking is mentally and physically exhausting.....as well as time consuming....and as many of you know (even you "renters") time is money.....and I don't want want to waste anymore time....it's like finding your "wife".....when you do, and you know it...."JUST DO IT".....are their hotter girls out there?...probably...maybe....but if that chick is the one you like....and she's the one you want to be with....then go get her tiger !!! yes, the opportunity cost is you may be passing on some hot steamy nights with some incredibly hot girls....but you could also be sitting in your 500 square foot/ or your 2,500 sq/ft residence by yourself.....most importantly, this is a HOME first....and an investment second. This is going to be my castle....my home....my domicile.... this isn't a place I'm going to buy today and flip tomorrow. I hope everyone is as fortunate as i am and lucky enough to be in this position to find what you want...in the meantime, at 9am.....I've got a person I need to convince that a 33 year old single guy (with NO kids ) needs a 2,418 sq/ft house....

Posted by: Apple Picking at November 16, 2008 3:51 AM

I like this Apple Picking guy! (well, not so sure about the 44 year old divorced mother of two at Balboa.... but I haven't been in the market in 15 years and I shudder to think where I'd have to cast my net.... :) )

It sounds like you have a great attitude about your house. Not an investment decision, you've got the cash, that's the way it should be done. Enjoy it!

(I know I always sound like a rational optimizer when I post, but for consumption goods that I want I'm profligate too - I've spent at least $40K on acoustic guitars in the last few years, and have a bicycle "collection" easily worth $25K. We also plan on taking advantage of the crushing new car environment and there should be a collective 16 cylinders of new expensive cars in our driveway next month as long as the salesmen pay the proper obeisance to those magic words: "all cash deal".)

Again, enjoy your purchase, and try to derive a little joy from the knowledge that you have $300K+ more (at least) to blow on drinks at Balboa than the previous owner. Happy hunting!

Posted by: Laughing Millionaire Renter in Marin at November 16, 2008 6:34 AM

Apple Picker has nailed part of the equation that the extreme rationalists have not: Homes are more than investments. But if you want to talk about them in investment terms, then how does one value the intangible value of having a place that will always be there for your family? I can look my wife and children in the eye and know that the place they live in now will always be our place. We can get whatever pet we want. We can paint and move walls to our hearts content. We can customize our living space to the nth degree. We can be creative with our landscaping. It is our rock in stormy times and our shelter from the intransigence of renting. If you're not in the space to set this type of foundation for yourself, please do not mock those who do so. America used to be a pro-growth nation and I think if we have another hard recession, we will go back to that mentality as traders understand the total profits to be made in a declining scenario are much less than those made in a growth economy. Those that wish for the destruction of value of others know not what they wish for.

Posted by: Homes are More than Investments at November 17, 2008 10:57 AM

Wow, that was the most emotional post on SS I have seen so far.

Is this from the new NAR playbook? Can I get a copy?

Posted by: San FronziScheme at November 17, 2008 11:07 AM

Well yeah, owning property can serve as a the center of gravity for a family and generate a feeling of stability.

That's why it is so sad that so many people were sold too much too soon in the prior years. Now their immovable rock is being yanked out from beneath them.

Since home purchase is such a large transaction and most buyers and not financially savvy, it would help if a professional could serve in a fiduciary capacity to advise buyers to ensure that they were not falling into a trap. Its far better to be told things like "You can't afford this, consider a less expensive place. Or if you really want a home like this, save up a few more years to build a larger down payment." than to have the market tell you the same a few years down the road.

Instead we got advice that looked nor further than the expiry date of the loan teaser rate.

Posted by: The Milkshake of Despair at November 17, 2008 12:39 PM

Always good to have the full story.

Someone who has over $2 million in cash to spend on a house isn't exactly doing a buy vs. rent analysis or worrying about their monthly budget.

Posted by: Dude at November 17, 2008 3:18 PM

San FronziScheme,
I wrote that post as a hard-working parent. I hate the NAR just as much as the next literate person who understands they're nothing more than a cheerleading squad. They're almost as bad as the people who are praying for foreclosures so that they can receive their "justified" price on real estate. Buy or don't buy, but don't run around trying to cut other people off at the knees. Be cognizant that there are other buyers who look at homes with more factors than just dollars and cents. The lack of acknowledgement of (much less respect) these factors is pretty unseemly.

Posted by: Homes are More than Investments at November 17, 2008 9:01 PM

Posted by: John at November 17, 2008 11:24 PM

For those interested parties for 1968 Greenwhich, (or those who want an invite to the house warming) I'm pleased to announce that by Thursday night the keys will be mine. It will take some time to get the place furnished, but I see a nice party on the horizon and will welcome many of you to check the place out. As for Scurvy, if you do come, make sure you don't get lost when the taxi drops you off a block away! As for coming to the party Scurvy, there is no back entrance so you'll be forced to walk into the front door of my new "Bomb Shelter".....but I don't playa hate, and you'll be welcome....just do two things...1) eat more vegetables....2) let me know what you really think when you see the place in person!.....as for everyone interested in the price...well, I think I got a great house at a great price. It is as close to a single family home that you'll find in this area that's not $3 mil+ I got a large, renovated, turnkey property in Cow Hollow for $723 sq/ft for those whipping out the calculators, I paid $1,750,000 for the property. As I stated before to you people looking for the bottom...how much lower do you think this is going to go? This is SAN FRANCISCO and at the moment we are in a momentary blip....things will return somewhat where they were before. Maybe not as crazy, but it will be close. I'm confident this place is going to be worth more than what I paid, soon. But as I stated in a previous post, this is a HOME first, and an investment second ! If you're interested in the house warming party, I'll probably set up a facebook page to make things easier. [Removed by Editor] Thanks for all the wonderful insight (and not so nice comments) Time to make this baby a bona-fide APPLE !!

[Editor’s Note: Love the attitude (although we might disagree on how soon is soon). And we’ll be bringing the champagne. Cheers.]

Posted by: Apple Picking at November 18, 2008 12:52 PM

Again, congrats on your purchase, Apple Picking. But....

"I'm confident this place is going to be worth more than what I paid, soon."

I thought this was a home not an investment decision? I got the sense that you were rich enough that you didn't really care about whether it went up or down? Well, if by "soon" you mean 10-15 years, I agree with you. Time will tell.

"how much lower do you think this is going to go?"

Another 25% IMO, to about $1.3M. BUT, of course, this particular property would have sold before then, and so if you wanted to get this particular one (looks nice to me - you won't find any criticism above from me over the aesthetics or location), you made the right move. Good luck at the nearby bars.

Of course, the post mortem needs to be done on the prior owner. Schadenfreude - or a desire to illustrate just how costly bubbles can be to individuals' finances (it should be getting pretty clear what it is doing to our national finances by now) - who knows what motivates the morbid curiosity. It looks like the previous owner lost (after transaction costs) about $500K in nondeductible personal loss, or about $12k per month. Add to that almost $100K paid in property tax, or a little more than $2K per month (at least that's deductible). Add maintenance and mortgage cost (assuming it was financed - and only interest on $1M of the debt would have been deductible), and you are easily looking at over $20K per month in total of real cash that was spent on a $2.1M (now $1.75M) property!

So, I know it’s all very micro (bro), but this is the “real” SF last I checked. 17% below its 2005 price? The prior owner must have “overpaid” I guess.

Posted by: Laughing Millionaire Renter in Marin at November 18, 2008 2:30 PM

Homes are More than Investments ,

Buy or don't buy, but don't run around trying to cut other people off at the knees.

No poster is cutting you at the knees, market reality does the job by itself.

I used to purchase 1, sometimes 2 small rental places a year between 1994 and 2002. I stopped buying property in 2003 after seeing so many bids way over what I considered "fair prices".

I had very strict criteria for buying and I wanted to keep my buy vs. rent ratio in check. I didn't have a strong enough back to have so much fixed expenses.

I guess the crazies from 2003-2006 did "cut me off at the knees" from my goal as you say. There were not many complaints at the time about high RE prices as everyone had his cut or was expecting his own.

In 2005, it was clear that this was a bubble of enormous proportions. An opportunity of a lifetime for some. A road to pains for others as the market ultimately went down to earth.

I couldn't believe the prices and the overbids as I sold my places one by one in 2006...

Posted by: San FronziScheme at November 18, 2008 2:32 PM

@ Applepicker

Congrats on securing the new home! If it's not too personal, I am very curious about what industry you work in, or what you do for a living in this current economy. As others have stated, the world does not seem well with bankers, VC's, and even Googler's or start-ups?

Thanks a lot, and beautiful place.

Posted by: Notel at November 24, 2008 10:09 PM

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