Location. Location. Location.
San Francisco is one of the most desirable cities in the world and nearly every neighborhood is attractive to renters and investors. The better the location of the property, the higher the rental income. The higher the rental income or rental income potential, the higher the value
Building values are largely determined by the rental income they produce. Properties with higher incomes may present greater returns on investments and therefore may be considered significantly more valuable. However, San Francisco’s rental ordinances prohibit some units from receiving current market rate income, which makes it difficult for owners to realize the full potential value in the short-term. Low cash flow can also hinder the ability of buyers to obtain financing, which can often result in a lower property valuation. Nevertheless, in San Francisco you will find many buyers who are willing to sacrifice today’s cash flow for long-term potential.
In general, the larger the building, the higher the value. Another important way to value a building is by considering the Price per Square Foot ($/SqFt) and Price per Unit ($/Unit). Investors often use $/SqFt as a tool to compare property investments. Buildings with owner-user opportunities and/or extremely low rental income may skew the $/SqFt. Unless the property has a distinguishable advantage/disadvantage or there has been a drastic change in the market, a property’s $/SqFt will not deviate too far from the average comparable. Separately, $/Unit can be viewed as a representation of income potential.
Tenant profile and building vacancy matters. Most investors aren’t looking for a problem; they are looking for a reliable return. Vacant units give investors an opportunity to control the potential income. Vacant units make the property more attractive to many investors, particularly owner-users looking to occupy the unit and developers looking to renovate the unit or entire building.
Once the above information about a property is taken into consideration, the property’s location, size, income, GRM, and other factors listed above will be compared with those of recent nearby sales. While some properties have many comparables, others may be very limited. Every property is different and thus the prices of comparables will vary. However, if a price is significantly higher or lower than the rest of the comparables, the value must be justified by an unparalleled trait.
Market conditions are changing all the time and, therefore, need to be taken into consideration when deciphering property value.
The better the condition, the higher the price. Cleaning up your building before the sale will greatly increase its marketability. While some buildings may be ready to sell as-is, others may benefit from certain improvements in order to add value. Improvements may include exterior and/or interior paint, power washing, new carpet or carpet cleaning, and minor landscaping.
The quantity and quality of inventory in the current marketplace can affect property value. Due to the high demand for investment properties in San Francisco, a lack of inventory has put upward pressure on pricing.