Hello everyone, I am still trying to learn a lot about RE investing. I've binged listened to a lot of BP podcasts, read the forums and 3 BP books, and still trying to learn the best strategy for me. Currently a renter but have enough capital to buy a property. I have great credit, no debts and good income. I wanted to house hack but living in San Diego, I can only afford a 1/1 condo, most of them staying in the market for only couple of days, sometimes going for 15 to 20K asking price. I thought of long distance investing to help get started and get some cash flow, and I found I can afford to get a SFH about few hours away, do vacation home loan with 10% down, convert into STR when I'm not using it, cash flow $2k (conservatively) all while staying in my current apt. With either one, I would still have a year of reserves in the bank (and only ever use for emergencies) I don't mind not getting my primary place for couple more years but now I am thinking I might get priced out of my area. My goal short term is to get some cash flow but my long term goal is to be financially independent in 15 years. Is it better to put 3-5% down (and save some $) and get a primary residence in SD in a prime or up-and-coming neighborhood, live for a year or so, then get a HELOC and invest in another property? OR Get the STR, force appreciate the place with minor updates, cash flow, and get capital back sooner then invest in another property then get a primary? Thank you so much for sharing all your knowledge!

Primary or Investment property first?

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

I would be real interested to see your pro forma that conservatively projected a $2K cash flow and what market at your investment point.

At 90% initial LTV, you would need outstanding value add or outstanding appreciation to be able to extract any significant amount of capital.

House hacking you can get 96.5% LTV and therefore your saved money should be able to purchase nearly 3x value property local than you vacation home loan plan.

Which is better? The future is not ours to see ...

I would go with the high LTV FHA house hack value add as being likely better. This basically is a house hack flip which if you live there 2 years has no tax on the gains. I do not do flips, but on my BRRRRs I expect the value add to be at least 2x the cost of the rehab. If I spend $30K on the rehab, I expect at least $60K of value add. These are not easy to find, but it is possible. In 2 years, you have the value add profit, the market appreciation, a place to live (not pay rent), the equity paydown, all with no tax obligation.

Good luck

2 Reply

Emy Bernardo

Investor · San Diego, CA · Member since 2017 · 112 posts · 92 votes

4y

@Sarah Enero - it's a good dilemma to have - you have options! That said, are you expecting to cash flow $2000 a month or a year off the STR? What city are you looking at for a STR? Keep in mind that 2nd home loans are going to have a hefty fee added to them starting April 1st of this year. Please view this article I wrote about the new fee here: https://emilybernardo.exprealt... No one has a crystal ball to know what housing prices are going to do here in San Diego over the next 5 years, but I think it's safe to say that interest rates are going to go up. That could make getting a HELOC risky and if the market softens of the next 5 years and you buy now at the top, you aren't going to have any equity to take out.

IMO, instead of the STR option, I would look at investing into a turn key rental in a less expensive and more stable market. The mid-west (ex. Ohio) has stable rental markets w/o the huge price fluctuations we have here on the west cost. You can cash flow a couple hundred a month and have a property management team that will take the hassle out of being a landlord. Plus, you will get all the tax benefits of owning real estate.

Cash flowing in San Diego is a long term proposition unless you have a lot of capital upfront to force equity through adding an ADU or doing a rehab. If you aren't opposed to having a roommate, you could look for a 2 bedroom here and rent out a room to help cover your mortgage. You can even rent rooms out to travel nurses - they are gone all the time and usually take assignments from 30-90 days.

3 Reply

Mollie Hess

New to Real Estate · Columbus, OH · Member since 2021 · 36 posts · 19 votes

4y

Hi Sarah! My first thought is to ask if you've looked at areas close to San Diego that you could buy a house hack in? Even if you are 30-45 minutes away, you would have the benefit of living for free (or low cost) and be gaining equity and loan pay down. Now I do not know anything about your market so I could be off but I'd suggest looking it that option. A mix between the two somewhat in terms of strategy. You'd be able to get in with a lower down payment to keep a fair amount in reserve without having the risk and management of a STR.

0 Reply

Michael Swan

Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes

4y

Hi @Sarah Enero

This is Swanny. I was a guest on Podcast 238 and live in San Diego too. Me personally at these extremely inflated San Diego prices would not have purchased and only rented for now. I would look into buying out of state rentals where you can get the 1% rule or greater. I would try to chunk in my rent with rental property income and the eventually replace a portion of my w2 before tax income and then maybe more and more and more until you have eventually replaced all you after tax w2 income, making you financially free.

I love this stuff and am available to talk. I just retired from my teaching job this past June of 2021 and am now financially free!! My first little rental property I purchased was about 10 or 11 years ago. Now I have about 200 front doors and counting.

Don’t be afraid to reach out!!

Swanny

Guest BP Podcast 238

6 Reply

Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

4y

@Sarah Enero either strategy is better than doing nothing. So, whichever you choose will be a good option.

How can you binge BP podcasts, read forums, read 3 books and then decide to buy a primary residence??? It sounds like REI excites you but you're looking for an opportunity to NOT get started. My vote, for whatever it's worth - but since you asked, is investment property first.

1 Reply

Joe HammelBusiness Member

Real Estate Agent · Metro Detroit, MI · Member since 2018 · 614 posts · 666 votes

4y

@Sarah Enero

Interested in a house hack? Live in one side rent out the other? It combines the best of both options.

Otherwise, I’d probably purchase the primary first. Save up and then go buy a rental.

Like you mention buy a primary and force some equity, then in a year or two, sell it and repeat and use the profits to fund another rental.

[email protected]248-422-1685

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Mike Davis

Lender · Annapolis, MD · Member since 2022 · 154 posts · 70 votes

4y

@Sarah Enero definitely look at the house hack option. If done the right way, you should be able to build a portfolio faster.

0 Reply

Twana RasoulBusiness Member

Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes

4y

@Sarah Enero

1. Starting out, it is usually best to start in the market you are in, going long distance is not easier...numbers may be smaller but it is certainly not less complex.

2. If you are planning on being here in the long term, it would definitely worth giving San Diego a second look before pursuing random cheaper markets that may be unfamiliar to you.

3. You can always find markets that cashflow right out of the gate. Deciding on a market/property strictly for cashflow and nothing else is not a great way to build wealth in real estate. Cashflow is only one component of overall return. Most wealth in real estate is built through appreciation over time which is tax free growth (unrealized gains, cash-out refi, 1031 exchange, passing on property through step up basis) vs cashflow, which is taxed at the highest tax rate, based on income tax rate.

4. Never ever use the 1% rule to buy property anywhere. 1% rule in San Diego would be amazing, 1% rule in many other areas would be an absolutely horrible deal.

5. If you plan on being in San Diego in the long term it would be a good idea to buy here first and leverage the ability to put 3%-5% down which would be a much bigger bang for your buck

6. Think about why you want to invest in real estate and what your goal is before moving forward. Your answer will help lead you to a decision.

Best of luck! :)

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Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

4y

@Sarah Enero in an expensive market it might make the most sense to focus on income generation rather than buying something. If you have some time freedom to respond to the occasional issues, are willing to learn the VR biz and self manage (it’s an active biz), don’t mind trading a little drama for a better return, it’s a great way to go. If you can generate more income you will then be able to afford a primary. House hack later to break into an expensive market. If you can find a way to house hack in San Diego now (?) that might yield better net worth results over the next 5 years due to the valuations there but you will still need to convert that net worth growth into income provided your goal is to grow a portfolio. FWIW, we live in So-Cal and we opted to focus on growing our income through the VR biz and plan to house hack once our income is high enough. Good luck!

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Sarah Enero

OP

Member since 2022 · 15 posts · 11 votes

4y

Thank you for all your responses! I have learned so much and really considering your points. I find it will be so much harder to house hack in San Diego because of the how much prices are going for, even for a 2 bedroom condo. Add this to the very hot market, 2 condos I was following sold after a few days for $30K over asking price. This is why I looked into investing in other places. I'm following few markets right now, 2 in California near very famous vacation areas, and if I go on STR route, I can cash flow conservatively $2K/month. I used different STR calculators, one of which was Avery Carl's. And the markets being in California, they are projected to appreciate.

@Emy Bernardo I did hear about it and that is also why I am having this dilemma now. I also used to be a travel nurse so I know what they are looking for, but there are a lot of options in SD so I'm also considering a higher vacancy rate.

@Twana Rasoul Thank you for sharing your great points. I am still undecided if I want to be here in SD for long term but I will definitely be here for the next couple of years. I do consider that appreciation > cash flow so I'm really looking at what is the best option for me.

Thank you again so much!

2 Reply

Sarah Enero

OP

Member since 2022 · 15 posts · 11 votes

4y

Quote from @Jon Kelly:

@Sarah Enero either strategy is better than doing nothing. So, whichever you choose will be a good option.

How can you binge BP podcasts, read forums, read 3 books and then decide to buy a primary residence??? It sounds like REI excites you but you're looking for an opportunity to NOT get started. My vote, for whatever it's worth - but since you asked, is investment property first.

You made a good point! :) It made me reconsider investment property first after one podcast when David Greene suggested to one listener that if you buy a primary residence, then get the equity out then buy a house hack every couple of years then move and rent the previous one, is the easiest, simplest model to go. And since San Diego market is almost guaranteed appreciation, my thought was to follow this idea.

What do you think?

0 Reply

Sarah Enero

OP

Member since 2022 · 15 posts · 11 votes

4y

Quote from @Michael Swan:

Hi @Sarah Enero

This is Swanny. I was a guest on Podcast 238 and live in San Diego too. Me personally at these extremely inflated San Diego prices would not have purchased and only rented for now. I would look into buying out of state rentals where you can get the 1% rule or greater. I would try to chunk in my rent with rental property income and the eventually replace a portion of my w2 before tax income and then maybe more and more and more until you have eventually replaced all you after tax w2 income, making you financially free.

I love this stuff and am available to talk. I just retired from my teaching job this past June of 2021 and am now financially free!! My first little rental property I purchased was about 10 or 11 years ago. Now I have about 200 front doors and counting.

Don’t be afraid to reach out!!

Swanny

Guest BP Podcast 238

Hi Swanny, congratulations on being finally free! I just listened to your episode and I learned so much! Like you, I have been reading all the books I can get my hands into. If you are teaching a class on real estate investing, I'd like to sign up! :)

Your idea of getting rental property income replacing W2 income is definitely my goal. Some markets I'm looking at are near tourist spots in California and so STR/Vacation rental route can make great returns. I know it's a lot of work but based on what I've done calculating and analyzing, it can put me in a better financial spot at this time vs paying a higher mortgage with a condo in SD. There may be more in MLS but I just looked at Zillow and there are only 12 properties available within the price range I'm comfortable with. There is just not enough inventory.

Thank you for responding. Hoping I can replicate your journey!

0 Reply

Sarah Enero

OP

Member since 2022 · 15 posts · 11 votes

4y

Quote from @Brian G.:

@Sarah Enero in an expensive market it might make the most sense to focus on income generation rather than buying something. If you have some time freedom to respond to the occasional issues, are willing to learn the VR biz and self manage (it’s an active biz), don’t mind trading a little drama for a better return, it’s a great way to go. If you can generate more income you will then be able to afford a primary. House hack later to break into an expensive market. If you can find a way to house hack in San Diego now (?) that might yield better net worth results over the next 5 years due to the valuations there but you will still need to convert that net worth growth into income provided your goal is to grow a portfolio. FWIW, we live in So-Cal and we opted to focus on growing our income through the VR biz and plan to house hack once our income is high enough. Good luck!

Thank you so much, you definitely understand my way of thinking. I don't mind to do extra work, (because I'd have to work extra W2s if I push to buy house hack now). Exactly my thinking of doing a STR/VR and self manage, get more returns to get more income to get a primary that I can house hack later. I know numbers are different, but can I ask how long it took for you to gain your capital back after your first rental? I listened to Avery Carl's episodes and it just made me realize STR/VR is definitely but returns are higher and I can scale better.

0 Reply

Anthony Dooley

Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes

4y

Your plan sounds great, as long as everything happens the way it should. The tenant always pays, nothing breaks, property taxes don't increase, insurance premiums don't increase, etc. If all that works perfectly, what would the return on your investment be? If you don't know, you should. I will guess it is 4%, but I guarantee it will not be close to 10%. The U.S. stock market has averaged 11% for the last 80 years. 12% over the last 10 years. San Diego is a great flip market, but hardly any cash flow.

0 Reply

Michael Swan

Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes

4y

Hi @Sarah Enero

I am always available to talk.

Swanny

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @Anthony Dooley:

Your plan sounds great, as long as everything happens the way it should. The tenant always pays, nothing breaks, property taxes don't increase, insurance premiums don't increase, etc. If all that works perfectly, what would the return on your investment be? If you don't know, you should. I will guess it is 4%, but I guarantee it will not be close to 10%. The U.S. stock market has averaged 11% for the last 80 years. 12% over the last 10 years. San Diego is a great flip market, but hardly any cash flow.

>San Diego is a great flip market, but hardly any cash flow.

San Diego is outstanding for cash flow for a long term hold. Case Shiller has it as 3rd best return for buy n hold this century. How can this be? Simply initial cash flow has a poor relation to long term cash flow. This is not happenstance. It is because RE markets are efficient and price in expected appreciation and expected risk. The cheap markets with good initial cash flow are cheap with good initial cash flow because they either are expected to have poor appreciation or be high risk.

Here is San Diego versus Columbus (Columbus is 10/10 for state of Ohio for appreciation (neighborhoodScout) and therefore likely the highest 2000 price to current rent ratio of major cities in the state of Ohio) for a purchase in 2000:

San Diego: ave price in 2000: $253K (neighborhood scout) and average rent today for 3 BR apartmentt is $4597 (source apartmentlist.com). I suspect rent is higher for SFH, but could not find the value. This is a 1.82% ratio.

Columbus: average price in 2000 $109K (Neighborhood scout) and average rent today and average rent for 3 BR aprtment today is $1717. I suspect SFH is higher but probably in similar percent as San Diego. This is a 1.57% ratio.

San Diego has the higher rent to purchase ratio. This ratio would indicate better cash flow in terms of purchase price. In addition, in CA property tax is basically fixed at purchase price further increasing the cash flow for long term holds.

In addition the San Diego property would have appreciated 198% ($501k) versus 87% ($95K) for the Columbus property (neighborhoodscout). Note Columbus appreciation is 10/10 for state of Ohio, but only 5/10 for nation (San Diego is 10/10 nationally).

Using initial cash flow to predict actual cash flow over a long term hold does not recognize that markets project the expected appreciation into the price and therefore initial cash flow has poor correlation of actual long term cash flow.

1 Reply

Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

4y

@Sarah Enero I’ve only been in the VR biz about 2 years and the last 2 years have been very abnormal. In the current market 20-25% coc is very achievable if you self manage. The good thing about the VR biz is just 3 or 4 well performing properties can completely change your financial trajectory. And if you learn how to self manage remotely you can take that skill and enter any market in the country that makes sense. Good luck on your journey!

0 Reply

Brandon GoldsmithBusiness Member

Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes

4y

As many of the others said, house hacking is the best option. If it is not feasible to do that in SD then I would consider OOS investing. This really all depends on your goals. if you are looking for more capital then flipping in your market might be a decent idea but if you are trying to get some passive cash flow and put the money in a property for longer-term then OOS would be the better bet. I would check out some markets in Ohio. There hare a lot of investors who have benefited from the state so far @Sarah Enero

[email protected]614-963-3340

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Mark Frattini

Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes

4y

@Sarah Enero

When you follow pricing and how much over list price a house sold for just remember list price is not always tied to the actual value of the property. For example: A house that is worth $700k listed for $650k and sells for $40k over list is still a deal. Agents strategically under-price houses to drive up interest and attention. The market in San Diego is still very competitive and houses that are priced right and/or show well are receiving multiple offers.

1 Reply

Andrew McGuire

Real Estate Agent · Chandler, AZ · Member since 2022 · 216 posts · 156 votes

4y

@Sarah Enero

Find a fixer house that has a guest house, live in one and rent out room by room or as STR as you mention. Fix up while you live in, I know San Diego is different and more expensive than Phoenix where I invest but that is a hard to lose strategy in this market. Go for it!

0 Reply

Bob E.

Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes

4y

@Sarah Enero I would buy your personal evidence first, and look to rent rooms for corporate housing. FurnishedFinder is a good place to start and has a lot of travel nurses. I would expect you could have a fairly stable tenant base with less work than a STR.

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Primary or Investment property first?

Primary or Investment property first?

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