Posted on: June 21, 2006
A reader asks: I want to pull some equity out of my San Francisco property and pay as little as possible in taxes or none at all. Is there a way to do this?
Our answer: There are several ways to do this. When to do it one way or another might be a better question. Depending on the market conditions or current interest rates, you could refinance and pull some money out that way. During the past several years ago where rates were historically low, mortgage companies were swamped with people refinancing their homes. When you refinance, any money you take out from the proceeds is not taxed, and it does not raise your property taxes.
However, with interest rates going up (check our trusted mortgage advisor with Princeton Capital, Dennis Kowalski’s website for the most current information and new trends), that might not be the best strategy right now. It is always a good idea to talk to your accountant or financial advisor to evaluate your situation and determine the best time for you to refinance. There are many things to consider, for instance, the amount of the new monthly payments, what you are using the money for, what the future interest rate might be and how long you think you will hold the property.
Another way that defers most of the capital gains taxes is the Private Annuity Trust. As the Real Estate Journal put it, “Under this plan, the owner of commercial or residential property transfers ownership to a trustee prior to the sale of the property. The trust pays the seller with a special payment contract called a private annuity that stipulates that payments from the sale of the property go to the owner for the rest of his or her life. The trustee then sells the property to the buyer, getting cash for the property and holding it in a trust. The trustee also can invest the money held in trust.” With this method only the amount of the distributions are taxed at a rate calculated by the IRS depending on your life expectancy and only at the time the payments are made.
When you start hearing legal terms bandied about like “trust” and “trustee”, it can sound a little ominous. So check with the experts and ask a lot of questions!
– Mick Orton
Posted on: June 20, 2006
A reader asks: I’ve always wondered this. Why are buildings considered single family homes in San Francisco and not town homes when most of them are built side by side with no yard?
Our answer: San Francisco is one of the most unique and architecturally interesting cities in the world. Part of the charm comes from the way San Francisco has made use of maximum number of properties in such a small amount of space. San Francisco proper is only 7 miles by 7 miles so the city planners have allowed most houses to be built to the lot lines. Some neighborhoods such as St. Francis Woods are zoned as R1-D which means they have to be detached single family homes and cannot be built to the lot line. The lots in that area are much larger and can accommodate bigger detached homes. Most other areas the average lots are only 25′ wide and 100′ deep so a builder has to build across the whole lot in order to get a reasonably sized home.
San Francisco does have some “townhouses” but these are classified as condominiums and not single family homes and they share common walls. The short answer to your question is, town homes share a common wall whereas San Francisco’s single family homes actually have separate walls.
– Janis Stone
Posted on: June 19, 2006
A reader asks: I am considering buying a second home in San Francisco, but just about the time I decide to make the call to a Realtor, I turn on the news and hear that there’s been an earthquake in the San Francisco Bay Area. I really want to own a home there, but how worried should I be about earthquakes when considering buying San Francisco Real Estate?
Our reply: Disasters can happen anywhere with regard to “acts of God”. Consider places that have tornados, hurricanes, horrendous snow storms, floods. And disasters like these can happen every year. So what’s the big deal about an occasional earthquake???
Of course, we’re joking. And earthquakes are no laughing matter either.
On the whole, buying property in San Francisco should be considered relatively safe with regard to earthquakes. They can happen anywhere, and the effect it would have on your property depends on several factors.
Questions you might ask your Realtor when considering specific properties are; what type of soil is it built on? USGS has a soil-type map for San Francisco which might help you when considering certain areas. Another question you might ask is, when was the property built, and has it been retrofitted with shear walls? Does the property have a bolted foundation and adequate reinforcement over the garage if it has one? (we’ll discuss San Francisco parking issues in a later post!)
It is also going to matter how strong the earthquake is and where its epicenter is. After the earthquake in 1989 San Francisco adopted new building codes for any new construction or major remodeling using the latest engineering techniques and passed a law requiring unreinforced masonry buildings (called UMB by the building department) be reinforced to withstand the effects of an earthquake. So San Francisco has been preparing, and there are emergency systems in place. The City of San Francisco Department of Building Inspection has a site with lots more information on the latest building requirements.You might also buy earthquake insurance that would cover damage to your home. Though there is a substantial deductible, it could protect your equity in the event of a catastrophic earthquake.
Regardless, there are no guarantees in life! So if you are really worried about earthquakes then maybe the California, and San Francisco in particular, is not for you. Earthquakes happen all up and down the west coast, and have even happened as far inland as Yellowstone Park. So we do not feel that San Francisco is more “unsafe” than anywhere else on the West Coast or even Hawaii. Having been in San Francisco for over 30 years, it is actually easier to face the risk of earthquakes than have to worry about having tornados every summer as they do in the Midwest and South!
In closing, let us review. The most important thing you can do is be prepared; retrofit your home, have emergency supplies and good insurance. If you want more detailed information about earthquakes, the California Geological Survey has an interesting website which answers specific questions about earthquakes.
– Janis Stone and Mick Orton
Posted on: June 18, 2006
A reader asks: As a single man who really doesn’t like to cook, in which area should I be looking to buy if I want to have easy access to the best restaurants in San Francisco?
Our answer: You’re in luck if you choose San Francisco as a place to live. The City (as we like to call it) has a plethora of great restaurants. Areas (with links here to the San Francisco Chronicle’s website and Wikipedia) like Pacific Heights, Russian Hill, North Beach, Nob Hill and Telegraph Hill are really popular with people who want easy access to great restaurants. Some of the best restaurants are within walking distance regardless of which area you might choose.
There is a site where San Francisco restaurants are reviewed by the people who count; (the ones who pay to eat in them!) called SFSurvey. And just because you choose one area to live, doesn’t mean you can’t take a quick cab ride to another area and check out other dining options! You can also read the neighborhood guide on our website to get an idea about what different areas for San Francisco Real Estate have to offer.
– Mick Orton and Janis Stone
Posted on: June 17, 2006
A reader asks: I am thinking about buying multi-units in San Francisco as an investment and renting them out for income as well as building equity. Do you think this is a good idea?
Our answer: Buying multi-unit buildings in San Francisco for rental income is a challenging because of several factors. First of all, San Francisco properties are governed by rent control which restricts yearly rent increases to 60% of the CPI (consumer price index) and allows some tenants to be “protected”…. in other words they cannot be evicted even if you, as the owner, wants to live in their unit. (There is what’s known as the Ellis Act which is explained briefly in an article on the San Francisco Tenants’ Union which also has a link to a PDF of the actual law.) However, the Board of Supervisors is pro-tenant and tries to discourage individual ownership of units by passing laws that prohibit owners from converting their units to condos if there is more than one eviction. Go to the City of San Franciso webpage and do a search on condo conversions; you will see all the laws that are being proposed or that have been passed to limit the amount of condo conversions being done. Needless to say, there is too much to cover in the space we have here!
You might ask, why would a city government be anti-condo conversion if the producing of more real estate properties adds to the property tax base and increases the city’s revenue? Good question. At this time many building owners do not live in San Francisco so there are more renters who vote. Given this dynamic, I think you understand who the politicians tend to cater to. The San Francisco Tenants Union is one of the most powerful lobbying forces we have. Fortunately, the San Francisco Association of Realtors (which tends to be more pro-property rights) is another strong lobbyist.
Another reason your idea is challenging (you thought we forgot the question, didn’t you?) Many of the units sell for a large gross multiplier which means you will not get positive cash flow unless you put more than 50% down. And in that case you lose the advantage of the normal leveraged investment that real estate normally provides. Horizon Financial Associates has an article from 2004 which explains leveraged investments rather nicely.
So what do investors do? Therefore, investors in San Francisco Real Estate depend upon appreciation to recapture their investment. That appreciation has been due in part during the past few years to reselling multi-unit buildings as TIC’s (Tenancy – in – Common) and/or doing conversions to condominiums. However, with the passage of the new law mentioned above, it undermines the ability of owners to vacate their buildings so they can sell the units individually. (Owners have been using the Ellis Act to be able to deliver vacant buildings to potential buyers or sell to individual parties as TIC’s.)
So before buying any units as investments, analyize the current income, understand that any increases will be limited by rent control, and have a good attorney to talk to when and if you have tenant issues. I would never suggest you negiotiate with any tenant without using an attorney who specializes in tenant/landlord issues. Tenants have successfully sued well meaning landlords for simple misunderstandings. Also be sure to have good insurance with protection for tenant issues. As we like to tell our clients: “It’s not how much money you make, it’s how much money you keep”.
Note: Since we wrote this article, we found details on the condo conversion process from legal consulting firm G3MH which we have downloaded to our website in PDF format. We hope you find this useful.
– Mick Orton and Janis Stone
Posted on: June 16, 2006
A reader asks: I keep reading in newspapers and magazines about a San Francisco housing bubble and wonder if I should buy now or just keep on renting. What is your opinion?
Our answer: About our San Francisco Real Estate market… You’ve heard of supply versus demand? Low supply and high demand equals a great seller’s market. The San Francisco Real Estate market is somewhat unique to other places in the United States in that there are a lot of factors that help create a strong market. One is that there are not many places to build. San Francisco is land locked by the bay on the north and east sides, the Pacific on the west and incorporated cities to the south. And because the city government is so restrictive, it is hard to get building done, thus decreasing the supply. With lots of cultural events, beautiful architecture and great weather most of the year, San Francisco is a much sought after place to live. This increases the demand. These two facts keep the San Francisco Real Estate market in pretty good shape most of the time. (Check our website to look at our history of market reports to see the numbers for the past several years and you will see what we mean.)
Now for the bubble. What bubble? What we have been experiencing with soaring prices, multiple offers driving home values up and up; this is not a normal market. Up until recently, the average marketing times for properties have been anywhere from hours to 10 days to 2 weeks! And over asking price sales have been common. When a frenzied pace like this begins to slow down, it’s easy to assume that there is a bubble as things settle back toward a “normal” market.
As of this writing, according to the Realty Times in its June 16th, 2006 edition (and other sources such as the California Association of Realtors have said it as well), marketing times in San Francisco and other hot areas are changing: “…The market has shifted from a Seller’s market to a more normal market, requiring 6 months or more to sell a home, far removed from the market of just a year ago. With 5-6 months worth of inventory, price negotiations between buyers and sellers are common place…” This actually could mean that buyers have move leverage than they have had in the recent past. Our suggestion? Make an offer!
In our opinion, there is no reason to rent when you can buy, as long as you buy something you can afford. Here’s what Fox News contributor, Jonas Ferris, said in a March 2005 article on MaxFunds.com, “The main reason investors should worry about real estate bubbles is this: most experts say that real estate bubbles are simply impossible…” and about buying versus renting and investing in real estate he says, “…There are three main reasons real estate has generally been a successful investment for most people: 1) by buying a home, investors are effectively paying themselves rent 2) a mortgage is essentially a forced savings program paid into each and every month 3) because of the nature of the investment, real estate investors tend to avoid the poor decisions they make when they invest in other major asset classes…”
– Janis Stone and Mick Orton
Posted on: June 15, 2006
A reader asks: Recently I was denied a loan because my credit score was lower than the lender wanted to see. I got my credit report from Free Credit Report but could not tell from what I saw that thing that was hurting my score. Do you have any suggestions?
Our answer: We posted a little explanation about how the reporting agencies work in our September 2005 market report which came from our friend and associate, Jay Bransfield. It showed how different factors are weighted to come up with your credit rating.
Most recently, Dennis Kowalski of Princeton Capital introduced something new and really exciting for those who have been turned down for loans or had to accept higher rates due to their credit rating. Princeton has a new CREDIT SIMULATOR which they use to show how people might improve their credit rating if they, for example, paid off their credit card debt or made other financial changes to their credit report. Call him at (415) 229-1241 for details!.
– Mick Orton, Dennis Kowalski and Jay Bransfield