For the past eighteen months, I’ve been a proponent of buying small multi-unit buildings in San Francisco, because as competition for them has dropped off, purchase prices have come down allowing the rental income to cover a larger percentage of the expenses. Coupled with this, indicators suggest a reluctance at this time among affluent, young professionals to buy property. Together, these factors create a great opportunity for an investor. In other words, I think the fundamentals are in place here, and hard to ignore.
Rental Rates are going up on falling vacancy rates:
According to real estate statistical reporting service Reis: “Vacancy is rapidly retreating toward the typical rock bottom level in the San Francisco apartment market, and rent gains are accelerating. As of the end of 2010 the vacancy rate is below the 5.0% rate that is generally held to indicate a balanced market. The fourth quarter asking rent gain was the eighth highest among the top markets tracked by Reis. For all of 2010 the average asking rent increased 2.5% while the average effective rent rose 3.4%. The fourth quarter gains of 1.1% and 1.3%, respectively, were the largest of the year.”
Increased job growth equals higher rental demand:
According to Wanted Analytics – a business statistics company – in April, Facebook and other social media-related businesses added 2000 jobs, most of which were in the San Francisco area, while hiring demand in San Francisco increased by a whopping 69.3%. It’s a simple supply and demand equation: job growth + lower vacancy rates = higher rents.
Although large institutional investors have been buying in San Francisco this year, they are mostly interested in larger buildings and not the smaller buildings that make up most of the housing in San Francisco. This gives you, the smaller investor, a chance to get in on the action. What is prime now are 2- to 4 unit buildings, located in Nob Hill, Russian Hill, Lower Pacific Heights, the Castro and Noe Valley. These are the neighborhoods where you should think about concentrating: neighborhoods where young, affluent, well-educated people really want to live.