San Francisco really has it all; it is the most densely populated area in California, the financial and business centre of the Bay Area and one of the most popular destinations for holiday makers the world over. Of course, all this activity makes for a particularly lucrative high end property market and with a constant inflow of people, there is a distinct market for buy-to-let property.

Letting property can be a great way of making your money work hard for you. Rent payments from your tenants can cover your mortgage repayments and might even provide you with some short run income. In the longer term, your property might just end up as premium real estate and could be very profitable when you come to sell it on.

Your central apartment in SF could be a great base for a professional couple to take a holiday or an ideal pad for a businessman to check into after a hard day’s work. Equally, there is flourishing demand for longer term lets in more suburban areas.

Letting a property can be lucrative, but can also be hard work. If you’re letting to short term occupants it’s easy to forget about the simple things; you should think about changeover days and how you will take on bookings. It’s also important to sort out your landlord insurance; if you’re letting a high end property it’s of paramount importance that it’s in good condition.

Despite the economic turn down, the rental market can still be very profitable. Invest well and you might just see the returns sooner than you think.

Matthew Read
Guest Post

The Federal Housing Administration (FHA) has extended its 90-day “no flip” rule on recently rehabbed properties for another year.  The ruling, which allows investors who acquire foreclosed properties at below-market value to be exempt from waiting the customary 90 days before reselling them, was set to expire at the end of January 2011.  Vicki Bott, deputy assistant secretary for single-family housing at the FHA, said that first-time buyers have responded overwhelmingly to the opportunity to buy “turnkey” renovated homes with low down payments and they have performed well on their mortgage obligations.

The 90-day waiting period originally was put in place to protect FHA borrowers against predatory practices of flipping where properties were quickly resold at inflated prices to unsuspecting borrowers.  Bott said that while the FHA is concerned about flipping in general, they have not seen any of the fraud problems, defaults and re-foreclosures that cost the agency millions in insurance payouts in earlier years.

From The Creative Investor: Income investing Years ago my brother Bill and I owned a beach house on Fort Myers Beach on Third Street, just down from Moss Marine. Buying it was a story in itself. At that time Bill and I lived next door to each other on Philips Creek – we had purchased 9 acres off route 41 and with two other partners developed it into 12 building lots and we each built houses on a single lot that we kept from the development. Often on Sunday mornings Bill and I would have coffee and then drive around and look at property. One Sunday we decided to go look for a boat slip to buy to keep our 23 foot Mako fishing and diving boat. We were touring around boat slips off of San Carlos Boulevard when I spied a slip with a for sale sign on it. Yes, this was already in the time of cell phones and by 10 AM it was a decent hour to call Marty Wallerstein, the agent. Marty informed me that the slip was actually part of ! a home sale across the street, but why not buy a house on Fort Myers Beach that came with a deep slip and the house could be rented? He had just such a house for us to see that morning. Long story cut short, Bill and I had that house under contract within a few days – it was a triplex formally owned by Paul Rosen, developer of Marina Village. We wound up setting up a partnership with two friends from Scotland to buy this house and set up a usage sharing plan and enjoyed that house for years until we sold it about 8 years ago. While owning that home I was accumulating rental properties on a regular basis. Knowing this,…Read More

From SFAR - Three new videos—one entitled Recognizing the Bottom, another entitled First-Time Incentives and a third entitled Can I Get a Jumbo—have been added to the Association’s Spotlight with Tom Sinkovitz video series. REALTORS^® who have placed a link to the series on the home page of their web sites need not do anything. When a visitor clicks on the link, a window opens up and displays all of the videos in the current series by subject. The video on whatever subject the visitor finds interesting can be viewed by clicking on an arrow next to the subject. Although it is not apparent to the visitor, the window is a page from the Association’s web site, www.sfrealtors.com, which contains all of the current Spotlight videos. When the window is closed, a visitor is back on the REALTOR’S^® home page.

With the addition of these three videos, there are now eleven that are viewable. They cover the following subjects:

1. Recognizing the Bottom
2. First Time Incentive
3. Can I Get a Jumbo?
4. Appraiser
5. Green Homes
6. Value of Green
7. Why It Makes Sense to Use a REALTOR^®
8. Shared Equity Mortgages, An Alternative for Some
9. What to Do If You Have a Problem Mortgage
10. Fighting Foreclosure (What you can do about the threat of foreclosure)
11. Curb Appeal (How to make your home stand out)

To view the videos, click on the following link: http://www.sfrealtors.com/media_center.html

Background

Tom Sinkovitz, the KNTV political reporter and anchor, has been working with the San Francisco Association of REALTORS^® for two years producing video features on contemporary real estate subjects. The features, called “Spotlight with Tom Sinkovitz”, are intended to be of interest to clients and prospective clients of REALTOR^® members and a link to them is intended to be posted on the home page of each member’s web site. To obtain the link, click on http://www.sfrealtors.com/media_center.html. To post the link, send the “landing page” on which the link appears to your web master and ask the person to add the link to the home page of your web site. Alternatively, you can obtain the code needed to paste the link into the home page of your web site on the same landing page and do the work yourself, if you have the technical expertise to do so.

The video features are intended to serve several purposes. First and foremost, they are intended to underscore the value of using a REALTOR^® in real estate sale and purchase transactions, with validation coming from clients and real estate service providers. Second, they are intended to provide the public with information they need to know to better understand the dynamics of the current real estate market. And, third, they are intended to establish REALTORS^® as the “go to” professionals for everything having to do with real estate.

A new survey found that 12.1 percent (one out of eight) of today’s home buyers plan to purchase a home as an investment property, compared with 5.6 percent in March 2009, according to the Move.com Homeownership Survey.  Of those interested in buying a home as an investment, 15.8 percent were men and 8.1 percent were women. 

The survey also found that buyers who plan to purchase foreclosures expect to profit both from deeply discounted purchase prices, as well as healthy appreciation rates over the next five years.  Most foreclosure buyers (58.2 percent) expect to pay 20 percent or less than market price for a foreclosure, while 38.5 percent expect a discount of 25 percent or greater.  While, 73 percent expect their properties to appreciate ten percent or more in five years, 28 percent expect their purchases to appreciate 20 percent or more during that same investment horizon.

From the Wall Street Journal - Buyers hoping to purchase deeply discounted homes may want to consider purchasing homes in the high end—especially those priced $2 million or more.  In some cases, buyers may be able to command even lower prices on these homes, as financing continues to be a challenge for buyers of luxury homes.

 MAKING SENSE OF THE STORY FOR CONSUMERS

• While data from the Federal Housing Finance Agency (FHFA) showed that average home prices rose 0.3 percent nationwide between June and July, including a 1.6 percent increase on the west coast, the data only relate to homes purchased with conforming loans guaranteed by the FHFA.  These loans are mortgages of up to $417,000 or up to $713,000 in the country’s most expensive regions.  The outlook for homes priced above that amount remains bleak.
• In many areas across the country there is a new level of value being established.  According to one broker, homes that used to sell for $8 million now are selling for $6 million, while homes previously priced in the $10 millions are selling for $8 million.  The price adjustment in the high end appears to be about 20- to 30 percent lower.
• A recent survey by Trulia.com showed that sellers listing homes for more than $2 million have reduced their asking prices by a total of $7 billion, with an average price reduction of 14 percent.
• Chip Case, economics professor at Wellesley College and coauthor of the Case-Shiller index, says that some of the markets finally may be catching up to the wider housing market downturn.  “That level was more in the hold-out category,” he says.  “Up until recently, the foreclosures weren’t hitting that level.  But they are now. There’s no question about that.  You’re seeing some contagion from the prime level to the luxury end.”
• Sooner or later, even high-end homeowners need to sell.  And, when they get tired of waiting, they reduce their asking prices.  Factoring in taxes, upkeep and the opportunity cost of keeping money in a non-performing asset, an empty luxury home may be costing owners a lot just by sitting there, giving them a powerful incentive to make a deal.

To me it makes sense. I put myself in the situation where I’ve owned my house for quite a few years. I am retired and have to live on Social (in)Security. What better way to increase the quality at which I can live by pulling money out of my house?

In an Associated Press story yesterday in the San Francisco Chronicle, they talked about the ads featuring James Garner pushing reverse mortgages as an alternative to provide seniors age 62 or older an influx of cash. (Perhaps if Ed McMahon had done this…)

As with any type of investment there are things to watch out for, but overall, the plan sounds reasonable to me. Again, from my point of view, money now versus money later when I am dead makes about as much sense as “death” insurance. This is for the people I leave behind, not for myself. So why not “borrow” from the biggest asset I own to make my retiring years a little cushier? Makes perfect sense to me… Just be sure to structure it so that the money doesn’t run out before I pass on!

- Mick Orton

When we bought our contract to build at Red Frog Beach 3 years ago, we were on the cutting edge of US citizens who were beginning to buy property in Panama and retiring there. There were many articles about it being the next craze, similar to what happened in Costa Rica. Check the Internet and Google Panama and retirement you get about 201,000 results.

Not long ago, I got an e-mail from a woman from my high school graduating class who found me by searching on my name, and Panama kept coming up. There just are no secrets on the Internet, I guess. Turns out she is buying in a development near Panama City and wanted to hear about our investment.

Anyway, our project in Bocas del Toro looked like a dream come true. We could buy our beach front villa at the price of a small condo in San Francisco. The cost of living down there is practically nothing compared to the cost of living in the United States.

So we eagerly put our money down and got into contract. Several months into the building phase, the workers went on strike. In that time (over a year now) we learned a lot about buying property in other countries! Here are some things you might want to think about:

1)       Get an “in country” representative that knows the country and local laws regarding owning real estate like an attorney or Realtor. The worst thing we did was buy in Panama without representation or an understanding of the local laws and customs.

2)       Depending on the country, it might be best to own the property in an entity like an IBC (International Business Corporation) to protect yourselves from lawsuits. But that is for your legal person to clarify.

3)       Check into financing options. They are probably different from buying in the US; unless you are paying cash, then it’s a moot point. But if you want to get out, it will affect your ability to sell.

4)       Be aware of rights of possession land versus titled land. Sometimes they are not treated the same. Find out the difference in the country you are buying.

5)       Is it a home, condo or in a planned development? Find out the tax situation for that country. For example, in Panama, they keep changing the laws. What was once a tax haven has now changed and property taxes will be due on all titled properties. This all happened within 3 years.

6)       Safety – pick a country with a safe government. Not all countries are created equal. Some of these island possessions change government by coups and in those turnovers, people lose property rights. Check what the history is for that country.

7)       Property management – see if the representative knows anything about managing rental properties and see if they can give you information or point you to someone who does rentals so you know what to expect. We found that handling our own rentals is a pain, especially the tax reporting (Hawaii). We prefer letting a professional company do it, and they file all the taxes.

       It’s only money. As long as you know it’s a risk, you’ll be in good shape if anything bad happens.

We have had an education from the school of hard knocks. Fortunately, we were able to restructure our deal and are now in a pretty good equity position once the construction starts back up.

Happy investing!

- Mick Orton
Marketing Director

A reader asks: How will new buyers be affected if they are purchasing a unit in a two unit building, in the middle of the condo conversion process?

Our reply: I am unclear what you mean by in the middle of the condo conversion process. It is a very complicated process so I would recommend asking the condo attorney who is drawing up the CC&R’s for that building. They should be able to tell you if there is any risk in losing your “1 year” occupancy requirement.

- Janis Stone

Recently in TheFrontSteps blog there was a question posed by a reader:

In Andy Sirkin’s famous online article on condo conversion in SF, the graph seems to suggest that vacant 2 unit TICs are fetching the same price as condos (Condominium Conversion in San Francisco), implying there is not much upside in condo conversion price-wise. However, I have also heard from some Realtors that condo conversion of duplexes can increase the building value by 10%. What’s your thoughts on this?

Our reply:

Not being a Realtor, I am speaking from a purely investment point of view. Because the laws are changing all the time. SF Supervisors are trying to close the loopholes to keep people from converting 2 & 3 unit apartment buildings into condos to avoid rent control. But the market finds a way. And TICs have now become that way.

Essentially people are buying “shares” of building and, depending on the TIC agreements, specific space can be designated as “owned” by one party or another. It is a more open arrangement than a condominium and works well for people who want to buy something, not rent, especially those who are buying for the first time. Also, there is not the same expense in setting up an HOA and all the bureaucracy and reporting requirements that are associated with condominiums.

But back to the original question. Yes, TICs seem to be selling for almost the same price as condos, though there are some deals to be had in different areas. I think that is mostly due to the fact that people are overcoming their fear based on a better knowledge of the product.
The challenge to date has been financing. Fractional loans have a higher interest rate (in general) than traditional loans. But lenders are quickly working to fill this need so new loan products are being introduced all the time. Once again, free market enterprise comes to the rescue.

- Mick Orton
SFResidence.com