Recently, a client of mine asked me which is better to purchase as an investment property – a multi-unit building or a home. While they each have their pluses and minuses, buying a home as an investment property has a number of advantages over a multi-unit building. The biggest advantage is that rent increase limitations do not apply to many homes. The first question to ask is does the rent control ordinance apply to a given home; in other words, was it built before June of ‘79? “A property is subject to the rent ordinance if a Certificate of Occupancy was first issued before June 13, 1979.” See “Tenant Evictions in San Francisco” Grove, Meirson, and Klein, April 2015.
There are two main features of the Rent Control Ordinance – rent increase limitations and eviction restrictions to consider. While a home built before 1979 is subject to eviction restrictions (essentially, a renter has the unit for life unless one of the 16 exceptions to the ordinance applies, like non-payment of rent) “pursuant to the Costa-Hawkins Rental Housing Act, single family homes are not subject to rent increase limitations if the tenancy began after January 1, 1996.” See “Tenant Evictions” cited above. To put it simply, since there are no rental restrictions for most homes, you can raise the rent on a regular basis with no restrictions which is not the case with a multi-unit building built before June 13, 1979. A multi-unit building in this instance is subject to rent control, or raising the rent as authorized by the city which is typically less than 1% per year.
Another benefit of buying a home as an investment property vs. a multi-unit building is that the interest rate on a loan for a home used as an investment is less than the interest rate on a multi-unit building used as an investment. Therefore, you spend less on your loan for a single family home than you would with a multi-unit building.
Homes in neighborhoods which are “up and coming” cost less than a multi-unit building. Clients of mine bought a 3 bedroom home in 2012 for $530,000 in Mission Terrace. It would now sell for between $900,000 and $1,000,000. They haven’t done that much to it. Obviously, timing is everything and they had excellent timing. They live there but they could have easily rented it, which rent would probably have paid for their mortgage with 20% down. With more listings coming on the market and some properties not getting offers on their “offer dates,” this may just be the time to purchase that home in an “up and coming” neighborhood as an investment property!
If you are interested in buying an investment property, don’t hesitate to give me a call.