Is the Dream Dead?

Question

I scrimped and saved since college with a low/middle income job and I finally got into a condo in 2020 at a 3.25% rate in Southern California. Fully remodeled it myself for about, I think, all in 12k. I got rid of the PMI last month and the assessment came back with 400k in equity with an initial investment of 50k. I’ve always aimed to use real estate as a vehicle to build some wealth since my career choice will never provide that. I’m also a recent Father and this 700SF place with no parking and shared laundry is just not doable anymore and I can’t seem to figure out next moves to keep moving forward and not backwards on my real estate investing journey.

In March, I could have rented the place out for 5.5k a month but since then rents have fallen to 3.1k a month while my HOA+property taxes and mortgage total at 3.6k/mo. I can only assume this is a result of the tech scourge being recalled to their homeland in the Bay with full time work from home being increasingly rare. Regardless BRRR is out along with renting out the condo while renting a home in a less desirable area. Home rents have not fallen even in the undesirable locations of the city and have actually increased about 20% since March.

Additionally, selling the place and trying to house hack and taking advantage of the State’s huge push for ADU’s and JADU’s does not pencil out. Rates are just too high and home prices here are ludicrous. The grant money the state was offering is also all gone.

Anything I’m missing or angles I can pursue? This place is small for a family and I don’t want to just throw out years of careful finances in the rush to just buy something, anything but I can’t seem to figure out how to make something more out of this equity.

Bill B. · Answer

Count it as a blessing that you are low/middle income. That means you can bail on California. You aren’t handcuffed with an income you couldn’t make somewhere else. If you have $400k tax free income. That will buy you a paid off full size home in many many locations. There are people who don’t have $400k of taxable income in their 401k’s after 30 years. You already won. If that $400k was regular taxable income you would have had to make $600k? More?

Texas, Florida, Tennessee, even Nevada. I can’t imagine raising a family in 700sf, you need to double that. ps. Heck, but 2 x $400k properties with 50% down on each. One primary and one rental. Or if you have the patience.  But 1 new $400k primary home every year with 25% down for 4 years straight. Moving out and renting it after that year. That’s what I did.

Dylan Vargas · Answer

@Kevin Koenig Welcome! Are you sure about the rental amounts? Seems like a rather large amount to fall in rental price. At any rate as @Bill Brandt stated count yourself lucky. Man, take the money and run. So many options with 400k equity. You won, take the victory lap. Onward and upward. Good luck and keep us posted.

Michael Key · Answer

Leave CAYou can get into a lot of real estate elsewhere with that 400k. I'd just start researching, like right now. "Where I am I moving to"

Kevin Koenig · Answer

Thank you. I know, I know. I just have my whole family here in Cali, personal network and am really personally and emotionally tied to surfing and the ocean. It will kill me to leave. Even though on paper leaving is the most logical and clear answer. My wife and I are giving it 1 more year to try and make it work. If not, as you say the worst outcome is taking the money and running. Could be worse for sure, thank you for the encouragement!

Kevin Koenig · Answer

Thanks Mike. It’s the most logical answer but not the emotional one. It’s still very much my home here. But i get you. I’d listen to people complain about SF and think “dude just move, that place sucks.” But when it happens to your home it makes much more sense why it’s so hard to let go. My wife and I are giving it a hard stop at 1 year though and have a few ideas.:)

Julien Jeannot · Answer

Sounds like a solid start.

REI is a long term game. Slow to start and picks up as YOY rents and appreciation kicks in.

Nexts steps could look like: increase your own personal income to purchase the next one or hunt for a deal to take down by yourself with creative financing or a partner.

Sam Yin · Answer

@Kevin Koenig

The dream is never dead. Its alive and well. YOU keep it alive!

Based on you post, you have many advantages. You are already doing great. The next few  questions you need to ask yourself,  and your family, is do you (and your wife) want to make this REI a business that will bring an income to free you from the bonds of your work? If so, can you treat REI as a business and keep your emotions out of it? If not, than are you overall happy in your current situation and likely repeating scenarios because your emotions are tied to it all?

If the answer to the first two questions are resounding YES, then the dream is alive and you know what to do. Make the necessary moves. Cash out and reinvest. Find other areas that pencil more efficiently and invest aggressively. Your market is awesome and there are opportunities everywhere. Especially with the equity you have. It just takes a little sacrifice up front for great gains in a few short years... a decade at the most.

If the answer to the last questions is a YES, then you are good. Enjoy the life you have and keep trucking along slowly. Stay in the area, move to something larger if you feel like it, and go enjoy the ocean. There is absolutely nothing wrong with a slow and steady investment strategy that is lesser stress than aggressive growth.

Either way, you are already on track with this current property. You just need to pick which direction to take from here on. And you can always change your mind later.

Last thing... happy wife, happy life. It's not a cliche, it the truth!

Carlos Ptriawan · Answer

Leaving CA is NOT the best answer LOl but a lazy answer.

Especially if one is having tech job.

The best strategy in CA is househack. Even with higher interest rate , it doesn’t matter since your mortgage would be reduced/eliminated, if you have large lot you could always rent out a place.

the only problem in your case is only the condo ownership, it is drop dead advantage for condo unless you use it for good school district for the kid.

Dan H. · Answer

Your rent does not make sense to me.  I look at rent rates quarterly for San Diego.  San Diego 3/2 SFH rent increase is near top of nation in both percentage and dollar terms ($700/month YOY).  I see rent increases across all BR sizes.

An option if rents are down in your submarket is keep your condo, but rent a larger condo on the same submarket for your growing family.  In virtually every large city market in the US, it is initially cheaper to rent than to own.  Keeping the condo maintains your prop 13 advantage, keeps your current low rate loan, keeps you in the local ownership game, and due to 2 of 5 rule you have up to 3 years of renting keeping your gain exemption.   No one knows what will have occurred in RE in 3 years, but if the prices have skyrocketed you will be glad you stayed in the market.

I own a fair amount of properties in San Diego.  My lowest appreciating property has appreciated $2.3K month (and this is the lowest by far) over my hold period.  I have a property that has appreciated over $10K/month over its hold and another that has appreciated close to $10k/month over its hold.  My point is that San Diego RE historically has produced outstanding return.

Good luck

Twana Rasoul · Answer

I'd take a second look at the rental numbers which will help you make a better decision.  You can call 3 to 5 property managers and get their rental opinion.  a rental at 5,500 for a 2 bedroom is on the extremely high end and dropping to $3,100 is extremely drastic and not in line with whats happened/happing in San Diego atleast.  My guess is the $5,500 number is too higher, the way you'd be getting around $5k/month in a 700 SF spot is if you are in a decent location and the unit is furnished as a medium term rental.   There is always options but I would certainly exhaust all options before deciding to sell and leave...If you sell and move to a place that you end up hating, you likely won't be able to change your mind and come back here to purchase something.

You can also consider making your place a medium term rental and go rent something slightly bigger until you figure out your options if you really don't like where you guys are staying....I'm happy to give you a few pointers for your furnished rental if you'd like, feel free to reach out.

Is the Dream Dead?

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