Real Estate Uncategorized

Investing in the Bay: A $818K Duplex Purchase with Tenants Becomes a Huge Headache

*Name changed to protect identity.* 

Andrew, a FP&A Manager of a series C startup, bought a duplex in 2017 for $818,000 in San Francisco with tenants included. What was thought to be a steal ended up being an ongoing headache and a pile of costly legal bills. 

In the southern suburbs of SF, his duplex sits as two units side by side. Each unit holds 2 bedrooms and 1 bathroom. Both units are still currently occupied, with a family in one and a single professional in the other. They’ve been living there for years, which has given them low rent prices and tenant protection.

His Tenants’ Rent

  • $1500 / month – Family pays rent for the entire unit  
  • $675 / month – Single professional pays for a room

Notoriously known for outrageous market costs and complicated housing regulations, San Francisco can deter even the most experienced veterans of property investing. When asked about why he chose to buy specifically in San Francisco, Andrew explained, “For me, it was an easy decision because I grew up in the Bay Area, and my community is here. I don’t see myself living elsewhere; it’s obviously better to buy somewhere else, buy a bigger house for less, and live more comfortably. However, I can’t give up my family and friends–it just means too much to me to stay close to them.”

At age 28, Andrew bought his duplex and became a landlord. At the time, the idea excited him. He was excited the investment property was coming with tenants, resulting in passive income. “It was a great deal because I had tenants who could pay rent and cover part of the mortgage.”

When ownership was transferred to Andrew, the family quickly served Andrew a legal letter, demanding for him to fix certain parts of the house. They even prepared for their own lawyer on standby. It was clear that this was purely going to be a landlord and tenant relationship. In hindsight, he wishes he’d done more background information on the tenants. The family was demanding on even the smallest things, all while dangling a legal battle over him. 

Andrew shrugged, “I ended up hiring a property manager who managed the tenant relationship, handled the repair requests, and took away my headaches. He is specialized in the Bay Area; he knew as a landlord what I was responsible for paying and not, when it came to property fixes.” 

San Francisco also mandated a cap of only 2.6% annual increase in rent this year 2020. Rent can only be increased once a year and the cap has always hovered from 1-2% increase previous years. Andrew’s tenants have purposely stayed and taken advantage of this low rent cost for almost a decade; they were paying incredibly low rent prices for the city and neighborhood they were in. 

After a few years, it came to a point where Andrew decided it was better to just sell the duplex altogether and buy a property he could live in himself. He made the decision to evict his single tenant from that unit, as it’d be easier to sell this duplex with an empty unit before listing on the market. That tenant has lived there for 9 years, throughout college until now. He decided to formally begin the eviction process and hired a lawyer. 

Lawyer fees: 
$375/ hour for his average B-rated lawyer 
$450/ hour for premium lawyers 

He nodded, “Lawyers bill by the hour. You’re paying for their time–it can be me asking questions, meeting him in person, follow-up, his time spent researching, and the worst, his time in court because that’s a timesuck. My lawyer charged me 3 hours for a settlement agreement and even spelled my name wrong on it. I complained that it seemed like a pre-written template, and my lawyer responded that this flat rate fee was the minimum for an agreement like this.” 

After weeks of negotiating back and forth, Andrew and his tenant agreed on a buyout, where Andrew would pay a lump sum for him to move out. This agreement was made, but quickly followed by the escalation of COVID19 and his tenant decided to stay for a couple more months. With the current situation, San Francisco is not allowing landlords to evict tenants until August 30, 2020. In addition, if tenants are affected by the financial hardships due to COVID19, they can defer their rent payment until December 30, 2020 with no late fees. 

However, landlords are not being excused to make mortgage payments.  

His current plan is to persuade his tenant to move out regardless, and help him find a new place to live. Once that is accomplished, Andrew will prepare that empty unit for modifications and immediately list the duplex on the market. Market value shows that he’d gain at least $100-200K if he were to sell now. 

Learnings Andrew wants to share:

  1. The bidding war in San Francisco is highly competitive and discouraging at times. Andrew bid on at least 20 homes; he realized he was not going to find his “perfect” property and would have to settle for what you can get. 
  2. The housing regulations in San Francisco caters heavily toward the protection of tenants. To protect the livelihoods and to maintain housing for low to middle income families, the city has always been tightening control on increase of rent.
  3. Lawyers are incredibly expensive. Trying to find lawyers to fight legal issues on behalf of landlords are scarce and hard to find; it’s like walking into a losing battle because tenant protection is so strong. Even if found, these lawyers charge a premium. 
  4. Do your due diligence. Don’t make investments out of hastiness or because you think a chance is slipping away. Do all the research and weigh out all the costs and risks. When there are warning signs, take close attention. 

When asked if he had plans to buy another investment property in San Francisco, he laughed, “Definitely not. I’m just going to buy a house in the city and live in it myself.” 

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