I’ve bought two fixers in Golden Gate Heights, the best neighborhood with the most upside potential in San Francisco in my opinion.
I’ve also built a new bathroom in another property in the Marina district before I sold it.
Buying a fixer is one of the most profitable ways to make money in real estate. It’s all about converting sweat equity that nobody wants to do or simply doesn’t have vision to create, into real money. You always want to expand your property’s livable space.
If you have time, patience, connections, and want to make money, buying a fixer property in San Francisco is a good idea.
Pros Of Buying A Fixer Upper In San Francisco
- Lower price: Homes that require some updating tend to be priced lower, and many renovations can quickly add value to your home.
- Creative control: When you’re the one in charge of updating your home, you can customize it however you choose.
- Tax incentives: Many renovations you do to your home can be dedicated from the overall property value when you sell your property, which will reduce the amount owed in capital gains taxes (Disclaimer: We are not accountants! Make sure to check with your professional CPA before embarking on your renovations to ensure accurate tax planning).
- Unique finds: San Francisco has many historical homes in need of repair that could make your fixer-upper the most unique home on the block.
- Staying in budget: Purchasing home at a price that is lower than the market average may be necessary for your budget.
- Purchasing a fixer-upper allows you to buy a house you can afford, and then you can take your time to save for the costs of fixing it up.
Cons Of Buying A Fixer Upper In San Francisco
- Delayed move-in: The planning and work involved to fix it up can significantly delay your move-in date.
- Unexpected costs: No matter how well you plan, major renovations are always subject to unforeseen expenses.
- Building permits: All cities require permits for major home renovations, but San Francisco in particular has several building codes that need to be followed due to the number of historic homes and neighborhoods.
- Time: Any renovation project is going to take up a significant amount of your time, and can almost be like having a full-time job when all is said and done.
- Massive stress: Make no mistake about it, making a fixer a beauty can and will be one of the most stressful things you can do in your life. Many marriages have been ruined by extensive remodels!
Benefits Of Buying A Move-In Ready House
- Quick move-in: Can’t wait to begin nesting? With a finished home, you can start moving in as soon as you get your keys.
- Energy-efficient technology: New and renovated homes are often outfitted with the latest energy-efficient options when it comes to kitchen appliances and heating and cooling systems, which can save you money over time.
- Less paperwork: Since the home is already in a move-in condition, you won’t need to spend the time filling out the paperwork and permits that are required for home renovations.
- More options: Since most homes on the market tend to be in move-in ready condition, you will have more options available for the type of home you want to purchase and the neighborhood in which you want to live.
Negatives Of Buying A Move-In House
- More expensive: To recoup the costs of updating, sellers often price move-in ready homes much higher. This is especially true in San Francisco seller’s market.
- Creative restrictions: Move-in ready homes don’t always allow for easy customization.
- Questionable quality: When you’re not there to oversee the update process, you’re unable to ensure that high-quality work and materials are used for your home.
I’m assuming that if you are reading this article, you are probably leaning towards buying a fixer. So let’s look at an example of a fixer property in San Francisco to do some math and help you make a decision.
A Fixer Property In San Francisco Example
Let’s take a look at a fixer in 1484 Newcomb, a 3 bedroom, 1 bathroom home that’s only 798 square feet. It’s on a standard 2,500 square foot lot in the once very rough Bayview district.
The asking price is only $759,000. What a steal compared to the median home price in San Francisco of $1.6 million as of 2019.
1) If you can buy any single family home for under $1 million on a standard 2,500 sqft lot in San Francisco, that’s a win in my book. Let’s say the house goes for $1 million, or $241,000 over asking and you put down 20%. A $800,000 mortgage at 3.5% is $3,592. Add on property tax and maintenance, we’re talking roughly $4,800 a month before any deductions. Not outrageous by San Francisco’s standards. The homeowner could spend a reasonable $50,000 to redo the floors, paint the house, remodel the bathroom, and do other cosmetic work.
2) If there really is approval to build to a 3 bedroom, 3 bathroom, 1,648 sqft home as advertised, then that is huge. One of the big pains for any homeowner is going through the San Francisco Planning Department to get a permit approved. If you ever go down there to get a permit and your plans approved, prepare to wait at least two hours to get a permit to maybe be approved. The SFPD is like the DMV, but worse because there are different levels you have to go through. If I recall correctly, I had to go through three stations.
If you value your mental health, you will highly value an approved plan. The more you value your mental health, the higher your income, or the busier your life, the more you will value an approved plan.
3) If you want to completely tear down and rebuild a new house with the approved plan, It will cost about $400/sqft to build an average quality new home in SF. Therefore, the cost to build a 1,648 sqft home will be $659,200 for a brand new home up to code. $659,200 + $1,000,000 potential purchase price = $1,649,200. The final price for a brand new home on a standard 2,500 sqft lot is therefore $1,000/sqft, which is right around the average price/sqft in SF.
After about $1,000,000, the home doesn’t seem that attractive if you plan to go the build route. But if you plan to just spend some money remodeling the home ($50K or less), then paying up to $1 million seems quite reasonable. With a view of the city and a standard size lot, I think the home will do well over time.
Buying A Fixer Is Usually Worth It
The key to buying a fixer and making money is having a great contractor who can do the work on budget and in a timely fashion. If you don’t have a great contract and a good idea of what you want to do, then forget about buying a fixer. You’ll probably get snagged up in the SF Planning Department and not even be able to get started.
As you gain more responsibilities in life, like being a parent, and as you gain more wealth, buying a fixer becomes less worth it because your time becomes too precious. A lot goes on with design, managing, choosing material, and so forth. A general contractor often takes 30% more time and costs 30% more as well.
You also need to stay disciplined and not overbid on a fixer upper. Do the math like I did above and create a 30% buffer for overages. Many bidders go crazy for fixer uppers because they are initially priced so cheap and make buyers think they can make a lot of money. But the market is efficient, and sometimes the final price goes way beyond market value.
Remember, labor costs continue to go up in San Francisco, and the SFPD is notorious for making life difficult for homeowners and contractors.
If you don’t want to go through the hassle of buying a fixer I would consider investing in real estate passively through a real estate crowdfunding platform like Fundrise or CrowdStreet. Both are free to sign up and explore.
These two platforms real estate crowdfunding platforms allow you to invest as little as $500 in commercial real estate across the country that was once reserved for ultra-high net worth individuals or institutions.
After selling my Marina rental property in 2012, I reinvested $550,000 of the proceeds into real estate crowdfunding in 17 commercial properties around the country. It feels great diversifying my real estate holdings and earning rental income passively. Managing tenants and maintenance issues were becoming too much for me, especially after my second child was born at the end of 2019.
San Francisco net rental yields/cap rates are only about 3%. But you can get a 10% cap rate in Austin, Texas or Charleston, South Carolina 100% passively. I think taking advantage of this geographic arbitrage is smart, especially as more and more people work remote.
Fundrise is for all investors and CrowdStreet is more for accredited investors. CrowdStreet is particularly interesting since they are focused on 18-hour cities that have lower valuations, higher cap rates, and potentially more robust growth.
I’ve personally invested $810,000 in real estate crowdfunding since 2016 and really enjoy the diversification and passive income.