I'm an agent- and I actually own and live in a two unit building in the Marina. Most of these were built around the same time, so I would assume yours is similar in structure to mine. You might think of buying the place and doing the repairs little by little if you're on a budget, since the price sounds good. If you have some money to put into it, you might want to get an architect and open up the kitchen/living areas. Many people add master suites on top of the upper unit, sometimes along with a roof deck. There is also the possibility of adding a master suite underneath the bottom unit with doors out to the yard. Three bedroom units add huge resale value. I definitley don't think you will need to tear everything down unless there has been severe damage of some sort. Get yourself a good contractor and he will be able to work miracles. You will also want to consider whether or not it has had seismic upgrades before purchasing becuase if it hasn't, you'll want to do that before starting work- and it can be expensive! All that said, I think 2 unit buildings are the best deal on the market right now and it would be a great investment for your future...
Though i agree with the other great answers here, i'd like to propose a totally new idea; why not buy a single family home? at your budget, it would be difficult to find something in 94123, but SF is small and there are many great neighborhoods in the City and you probably visit more than one or two in your daily life.
Generally speaking, a house preserves value and appreciates better than a condo. Also, any building built before 1978 falls under rent control, in addition to renter's rights (as you are already familiar with), which makes being a landlord more difficult than one would normally think.
But no matter what you buy, i hope you enjoy all the money you save through tax benefits and the incredibly low mortgage rates!
San Francisco has some very arcane rules about tearing down anything. Anything over 50 years old is a historical building and will need to have a review done. (read time and money)
If the building is in such bad shape that there is nothing worth keeping then you will probaly have to do a remodel where you keep the facade and replace everything else.
I'd say the answer to your question depends on the structural integrity od the existing structure. You can save allot by using and changing what exists rather than tearing down and do everything new.
The wood used in the 20's was very good quality redwood and you will not be able to replace that quality with anything avialble today.
I will vote for remodel the existing, changing the interior use and flow but keep the original look. Condo convert in the process or if you are to live there I'd convert it to a single family home. Be aware that the planning commission doesn't like to see rental units take away so converting to SFH can be difficult also. Convetiing to condo is pretty straight forward for a two unit building since you can bypass the lottery.
If the property has good bones and doesn't require an enormous investment to make it habitable (which it sounds like that is not the case since you're renting one of the units) it may be faster and more cost effective to renovate the existing structure.
Doing a tear down and building a custom home will have certain benefits including building a living space to your specs but there will be the challenges of working with the city and getting your project approved which can take several months let alone the time required to build the project.
If you go the route of renovating the existing space I'd also look at consulting with a foundation contractor to evaluate the cost for seismic upgrades-certain areas of the Marina didn't fair well in our last big quake. You will also want to think about condo conversion as part of your overall plan.
I'm happy to refer you to service professionals if needed.
Sounds like a great project . I'd recommend that you have a home inspection done as a contingency of your purchase, this will give you a good idea of the condition of the roof, heating system, foundation and much more, as well as giving you a good idea of what type of investment you will need to make in repairs to deferred maintenance. Feel free to contact me should you want a list of reliable home inspectors. Good luck and let us know what you decide!