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Rent in SF is excessive. I thought a nice 1 bedroom in SF would be $2,500K+. For this deal to work, they need $4K+/mo for rent. Great question.
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I'll add a couple of comments:
1) 1890 Clay St is in Pacific Heights, the most sought after (and expensive) neighborhood in San Francisco. There is NO competition from new developments and I would say this is one of the hardest 2-3 neighborhoods in the US to build a new project. Could be #1. So the owners do not have to worry about new competition entering their neighborhood.
This point cannot be stressed enough. Anything you own in Pacific Heights will be worth considerably more in 10 years. Guaranteed. Investors overpay for assets in Pac Heights all the time. VERY seldomly does a deal like this come to market. Most single family homes in this area are $5M+.
2) While $540,000 per unit seems like a lot, it is still lower than replacement cost.
3) MJ is pretty close on his rent guess. In addition, the article mentioned they property was used as corporate rentals...as a furnished corporate rental in this area, $4k is easily attainable.