The Virtues of the 3 Unit Building

Why do I love their aesthetics? I think their appeal evolves from SF’s historic zoning ordinances that restrict building heights and establish a standard lot size that is almost always 25 ft wide and from 100 – 120 ft deep. These limits have pretty much dictated that a building can have only three occupied floors above a ground floor set aside for storage and parking, an arrangement that best balances lot usage, construction cost and resale value.

The classic SF 3 unit “pancake stack” was built between 1910 and 1930, usually with excellent materials (2X4s that actually measure 2X4 inches!) and interior and exterior ornamentation that is more modest than the painted edifices of the Victorian Age. I refer to buildings as a “pancake stack” when they feature flats with nearly identical floor plans that differ only at the building front where the bedroom layouts vary to accommodate the entry stairway. These flats typically measure from 1,200 – 1,600 sq ft, have separate street entrances, contain from 2-4 bedrooms, have a living room / double parlor in the front, a split bath in the middle off the hallway and kitchens in the back next to a dining room. They often have a small, shared rear yard and decent parking and storage on the ground floor. In short, they are perfect as rental units for small groups of co-tenants, and, as ownership units, are ideal for today’s young urban families.

They are attractive from an investment perspective because they are cheap...for San Francisco.

I recently analyzed 2009 – 2010 sales data for several central SF neighborhoods, and the results showed that, not surprisingly, Single Family Homes are the most expensive property class by both absolute sales price and by cost per square foot with condos close behind. At the other end of the spectrum were 3 unit buildings, which sell for the lowest price per sq ft of any property class, followed by 4 unit buildings.

So there you have it: 3 unit “pancake stacks” are large and well built, offer comfortable floor plans and are the least expensive class of SF property on the basis of both price per unit and cost per square foot. That sounds like a no-brainer to me.

“Why are 3 unit building such a good deal?” you might ask. The answer is condo convertability. SF’s political establishment tends to discourage condo conversion, and a number of local ordinances have been enacted to regulate and restrict them. While condo conversion of 2 unit buildings is relatively easy, conversions of 3-6 unit buildings are limited to 200 units annually, allocated using a lottery system. It is this restriction that has kept the price of 3-6 unit buildings relatively low compared to 2 unit buildings and single unit options. Look for more discussion on condo conversion in an upcoming post.

In closing, a quick word on communal living: while 3 unit buildings offer exceptional value for a buyer seeking to live in a traditional flat in an older neighborhood with extra income to help pay the mortgage, they are also ideal for groups of buyers who pool their resources and like the idea of living close by friends or other like-minded folk. I purchased my first SF property this way. When I was 29 (ahhh, those were the days) I joined forces with two friends (who remain friends to this day) and we purchased a 4 unit building on Oak Street. We each lived in a unit and rented out the fourth. We held the building for nine years, condo-converted and then sold the four units individually, for a decent profit. It was a great lifestyle – you always had someone nearby to go to the pub with, but you avoided the mess, drama and disappearing Chinese food leftovers you get with roommates.