In my weekly emails to clients, my aim is to always offer useful information about buying and selling real estate in San Francisco.

This week, in lieu of a market update, I’m sending a piece I wrote for The Alameda Sun newspaper in 2003. I hope you enjoy it.

We’ll be back next week with further market updates, (including some information on that wacky TIC market!) But if you want to opt out of receiving these emails, please let me know and I’ll take you off my list.

Am I Stupid Or Am I Smart?

On December 28, 1988, I closed escrow on my first property, a two-flat building with a studio on Grove Street in San Francisco. It cost $375,000. I paid for it by putting down $75,000 and getting a new loan on the property for $300,000 at a rate of around 9 percent. I moved into the top unit.

Much of an investor’s success in the real estate market can be attributed to dumb luck. You can either look very stupid or very smart, depending on where the market is going at the moment you buy. Within a year’s time I was looking pretty stupid. The market had peaked and was now on a downward slide along with my income since I was a full-time, inexperienced Realtor whose earnings depended on a robust real estate market. In 1989, I saw my income drop to just half of what it had been the year before. The year after that, it dropped by another 50 percent. It’s likely that a manager at McDonald’s was making more money than I was then.

I scraped by and hung on while the market made a slow turnaround. By 1993, the adjustable rate on my mortgage had dropped to about 8.25 percent and my rent-controlled tenants had moved out so I could rent out the other two units at market. The building was still worth less than what I’d paid but I’d turned around my business in real estate sales and was making good money again. I also initiated the tedious process of converting the building into three condominiums, so I could hedge my bets against a further drop in the market.

While a real estate investor can look stupid or smart in the short term, I believe if they hang on long enough they always wind up looking very, very smart. By 1998, I was looking brilliant. Rates had dropped again to 7 percent and the units were renting for more than ever before. Even better, the building was now worth around $500,000 as an income property and even more as three separate condominiums.

In 1998 I sold the top unit, where I lived, for $335,000 and used the proceeds to buy and renovate the property where I am now — a Victorian home in Alameda with two small apartments in back. I paid $288,000. My timing for this purchase couldn’t have been better — the market was just taking off and as it rose it took the value of my little income property with it.

In the summer of 2000, when I was specializing in selling lofts and condominiums in San Francisco, I took a client to see some brand new condos at The Brannan– a luxury development near the ballpark. A small one-bedroom there took my breath away. It was the windows I fell for first — they were unusually tall, with dead-on views of the City skyline. I knew that at night it would be like living inside a Christmas tree. Then I swooned when I saw the view from the apartment’s tiny deck, which offered my favorite San Francisco postcard shot of the Bay Bridge.

It’s a rare day when I see an exceptional piece of real estate that I want to buy and can afford to buy at the same time. In short order I made arrangements to sell my studio on Grove Street and put the luxury unit under contract for myself. At $465,000 in a hot market it seemed like a good investment, especially when I found my first tenant right after I closed escrow, who happily forked over $2800 a month for the place.

Then the dot bomb hit. After the dust settled, I found myself with a condominium that was worth just a hair more than what I paid for it and a new tenant who pays significantly less than what I was getting before. The rent I get can’t cover my carrying costs so I have to come out of pocket each month just to hang onto the place.

Since I’m an investor who buys and holds, I probably look pretty dumb right now. That’s ok. In ten years, by the time this ride is over, I’ll look brilliant.

Afterword: This article was written in 2003. In early 2005 I sold the Brannan unit for $625,000 and traded it into 4 snappy looking units with parking near UC Berkeley. I paid $825,000 for the new building. It breaks even.

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