Thinking about buying a 2-4 unit building in San Francisco and not sure how to pencil it out? You’re not alone. Small multifamily in SF sits between a home and a commercial asset, which makes the math feel tricky. In this guide, you’ll learn a clear underwriting workflow tailored to San Francisco, how lenders view income, and the local rules that can make or break your pro forma. Let’s dive in.
Why SF 2-4 units are unique
San Francisco’s 2-4 unit properties are a hybrid asset. They often trade like homes but operate like apartments. Lenders, insurers, and city rules treat them differently based on owner-occupancy and use.
SF’s long-term housing demand is strong and new supply is limited. That supports values, but rent stabilization and tenant protections can cap upside on covered units. Expect higher operating costs than national averages, including taxes, utilities, insurance, and labor. Older buildings are common, which raises maintenance and potential retrofit needs.
In practice, SF’s investor demand can compress yields relative to other metros. Always verify current neighborhood comps before assuming a cap rate or GRM.
Underwriting workflow: step by step
1) Verify income sources
Start with documents you can trust. Request:
- Current rent roll, executed leases, and 12 months of tenant payment history
- Bank statements showing rent deposits and Schedule E tax returns
- Utility histories if the owner pays, plus records for laundry, parking, or other income
Match leased rents to actual collected rents and note any concessions or temporary discounts.
2) Normalize the rent roll
Your goal is to convert in-place rents into economic rents you can rely on. Key steps:
- Identify units subject to rent stabilization or special arrangements and estimate current market rent using comps for context.
- Remove nonrecurring income like one-time reimbursements or insurance payouts.
- Amortize concessions over the lease term and note lease expirations that could change near-term cash flow.
- Separate tenant-paid and owner-paid utilities and reflect owner-paid utilities in expenses.
- Reconcile seller’s rent roll with Schedule E if the tax return includes non-cash deductions.
When rents are stable and well-documented, you can underwrite to actual collections. If rents are suppressed by regulation or nonmarket occupancy, model a separate market-rent scenario for comparison.
3) Vacancy and collection loss
Apply a vacancy and collection allowance to move from Gross Scheduled Income (GSI) to Effective Gross Income (EGI).
- A practical SF underwriting band is typically 3%–8%. Long-term, rent-stabilized buildings with low turnover may sit near the low end. Renovated properties or higher-turnover assets warrant a higher allowance.
Formulas:
- GSI = sum of scheduled rents + ancillary income
- EGI = GSI − vacancy and collection loss
4) Operating expenses in SF
List each expense category and be explicit about whether numbers are historical or stabilized. Common categories include property taxes, insurance, utilities, repairs and maintenance, property management, supplies, professional fees, marketing, legal, and replacement reserves.
- A practical expense ratio range for small multifamily is 30%–50% of EGI. In SF, budget toward the higher end, especially for older buildings or where the owner pays utilities.
- Property taxes: model reassessment to market value at sale under Prop 13 and include local parcel assessments.
- Insurance: premiums can be higher due to earthquake risk. If you plan to carry earthquake insurance, treat it as its own line item.
- Repairs and maintenance: allocate 5%–10% of EGI for routine upkeep, with more if there is known deferred maintenance.
- Management: many third-party managers charge 4%–8% of effective gross or a flat fee per unit. Self-management lowers costs but increases your time commitment.
- Utilities: use historical costs for water, sewer, trash, gas, and electric where the owner pays. City-administered water and sewer can be higher than national averages.
- Replacement reserves: set aside $300–$1,200 per unit per year depending on building age and systems.
Remove one-time items like legal settlements or capital repairs from your stabilized expense run.
5) NOI, cap rate, and GRM
Calculate Net Operating Income (NOI) by subtracting operating expenses from EGI. Debt service is not part of NOI.
- Cap rate = NOI ÷ Price. Cap rates help you compare income to value.
- GRM = Price ÷ GSI. Useful for quick screens but it ignores expenses.
For 2-4 units in SF, many deals first get screened with GRM and then underwritten with cap rate and NOI. SF historically shows compressed yields, so use recent, local comps to avoid overestimating returns.
6) Sensitivity and stress tests
Run multiple scenarios so you understand your range of outcomes.
- Income: actual in-place rents, market rent upside, and a downside case with delays or higher vacancy.
- Expenses: test inflation on utilities, insurance, and maintenance.
- Debt: model higher interest rates and calculate DSCR if you are using investor or portfolio loans.
Financing 2-4 units in SF
Loan options at a glance
Several loan types serve 2-4 unit properties:
- Conventional conforming (Fannie Mae/Freddie Mac) for 1-4 units
- FHA for owner-occupants, often with low down payment and mortgage insurance
- VA for eligible owner-occupant veterans
- Portfolio lenders or local banks for flexible terms and investor purchases
Owner-occupancy expands low down payment options, while investors typically face larger down payments and more conservative income treatment.
How lenders view rental income
Lenders commonly underwrite rental income in two ways:
- Schedule E approach: uses historical net rental income from tax returns, sometimes averaged. Non-cash items like depreciation may be added back per program rules.
- Rent-roll approach: uses leases and rent rolls, often with a haircut to reflect vacancy and expenses. Many lenders verify with ledgers or bank deposits.
Some programs use a percentage of gross rents, for example 75%, to qualify. Requirements vary by lender and loan product, especially for owner-occupants relying on unit income to qualify.
Debt service and reserves
Expect reserve requirements measured in months of payments or a dollar amount per unit. Investor loans or portfolio products often look for DSCR in the 1.20x–1.35x range. Owner-occupant conforming loans typically focus on debt-to-income ratios instead of DSCR.
Local financing realities
Rent-stabilized units can reduce underwritten income and increase scrutiny. Proof of city compliance, including seismic retrofit status and permits, can be required by lenders or insurers. Local lenders may better understand SF overlays and property types.
SF regulations to model
Rent control and tenant protections
San Francisco’s rent ordinance and tenant protections affect many multi-unit properties. These rules can limit rent increases, add relocation requirements, and extend timelines for certain actions. Verify whether each unit is covered and model conservative rent growth assumptions.
Building codes and retrofits
Older buildings may be subject to seismic retrofit programs, including soft-story requirements. Review Department of Building Inspection records for open violations, permits, and mandatory work. Obtain bids for required or deferred items.
Short-term rental rules
Short-term rentals are regulated. If a seller counted illegal short-term rental income, do not include it in your pro forma. Treat historical STR revenue with caution and confirm compliance.
Property taxes and assessments
In California, a sale generally triggers reassessment to market value under Prop 13. Model the post-closing tax bill and include local parcel taxes or assessments.
Insurance and environmental risk
Earthquake risk is meaningful in SF and premiums can be high, often with a large deductible. Flood or landslide exposure may apply in certain areas. Request insurance renewals and claims history and decide whether to budget for earthquake coverage.
Due diligence checklist
Financials and leases
- 12–24 months of rent roll and tenant ledgers
- Copies of all leases and concession history
- Bank statements showing rent deposits and Schedule E tax returns
- Records for laundry, parking, and other income
Legal and regulatory
- Confirm rent control status for each unit
- Review eviction history, pending litigation, and security deposits
- Verify required registrations and permits
Physical and capital
- Full inspections: roof, structure, plumbing, electrical, HVAC, pest
- Check DBI for violations, permits, and retrofit orders
- Recent capital improvements and replacement schedule
Insurance and taxes
- Current insurance renewals and claims history
- Assessor parcel history, current tax bill, and modeled reassessment
Tenant relations
- Payment history and any arrears
- Unit condition and turnover patterns
Heuristics and red flags
Red flags
- Missing or inconsistent rent ledgers
- Open DBI violations or retrofit orders without bids
- Heavily discounted units to friends or family that distort cash flow
- Evidence of illegal short-term rental income
- Lapsed coverage or repeated insurance claims
Heuristics
- Always model post-sale tax reassessment
- Reconcile Schedule E with rent roll and bank deposits
- Use conservative rent collection assumptions for lender qualification
Next steps
If a property passes your initial numbers, use contingencies and due diligence to validate assumptions. Tighten your rent roll, verify expenses, price any required retrofits, and confirm lender criteria before you remove contingencies. A disciplined process helps you move fast when the right deal hits the market.
Want help building or pressure-testing your SF duplex, triplex, or fourplex underwriting? Reach out to Katie & Mark Lederer for a tailored, investor-minded review and introductions to local lenders, managers, and inspectors.
FAQs
What vacancy rate should I use for a 2-4 unit in San Francisco?
- A practical underwriting range is typically 3%–8%, with lower rates for stable, long-term tenancies and higher rates for properties with turnover or renovations.
How does SF rent control affect my pro forma?
- Rent stabilization can cap annual increases, add notice and relocation requirements, and limit vacancy-based rent resets, so model conservative rent growth and verify coverage for each unit.
What expense ratio is typical for SF small multifamily?
- Underwrite 30%–50% of EGI, leaning higher for older buildings or owner-paid utilities, and include 5%–10% of EGI for repairs plus $300–$1,200 per unit per year for reserves.
Can I use FHA or VA to buy a 2-4 unit in San Francisco?
- Yes, for owner-occupants: FHA and VA allow 1-4 unit purchases if you live in one unit, with FHA mortgage insurance and program-specific documentation requirements.
How should I estimate property taxes after purchase?
- Model reassessment to market value at closing under Prop 13 and include local parcel assessments to avoid underestimating your tax line.
Should I budget for earthquake insurance on a 2-4 unit?
- Earthquake coverage is optional but the risk is meaningful in SF; premiums and deductibles can be high, so either budget the cost or explicitly accept the risk in your underwriting.
