First Time Investment Property Strategy - San Diego

[Ari Lagunas]

Hi everyone,

I’m based in San Diego and looking to purchase my first investment property by March 2025. I earn around $15k/month from my business, but my income is somewhat variable, which might make securing financing challenging. I'm exploring different strategies and would appreciate your insights.

• - What are your thoughts on using an FHA loan with a 3.5% down payment for a multifamily property?
• - Is buying a foreclosure a viable strategy for me, and what should I be aware of?
• - My family lives in Indiana. Would it make sense to buy my first investment property here in California, and to build the rest of my portfolio in Indiana? That way, the flights be considered a business expense?
• - If I were to buy in Indiana, how should I go about finding a reliable property management agency?
• - Would partnering with someone be advantageous in this situation?
• - Should I purchase the property through an LLC for potential tax benefits?
• - Do you think it's a good idea to start a whole life policy and use the cash value to fund the down payment?
• - Are there alternative financing options, like private lenders or hard money loans, that could be suitable for someone with fluctuating income?
  - What tax credits or incentives might be available for first-time investors or those purchasing multifamily properties? How can I take full advantage of these?

I’m open to creative strategies and any other suggestions you might have. I'm just trying to think outside the box. Thanks in advance for your help!

[Dan H.]

Quote from @Zachary Jensen:

Hi Ari!

I would not recommend investing in SD as a fellow San Diego resident myself! Zero cashflow, sure there is "appreciation" But I have never met anyone who can make that argument seriously when comparing it to other asset classes.

Indiana is great, especially south bend Indiana for investment. I have done private lending out there for years. Please message me if you need an introduction!

tax advantages for multifamily investors fall around this concept of "real estate professional".
i wouldn't touch life insurance for this purpose.

>I have never met anyone who can make that argument seriously when comparing it to other asset classes.

I will take this challenge. I will use neighborhoodscout as my reference but use NAR, Zillow or any reputable source.

This is neighborhoodscout stats

- since 2000: 287.98% or 5.75% annually which is 10/10 nationally

- for last 10 years: 125.30% or 8.46% annually which is 9/10 annually

not bad but not that impressive until you factor in leverage.
at 80% LTV:

- since 2000: 28.75% annual

- Last 10 years: 42.3% annual

that is getting impressive. Better than virtually all options.

@Ari Lagunas I would chose the 95% OO loan over the higher FHA LTV due to fha sustainability rules (applies for more than 2 units), fha stringent criteria regarding condition, and fha rules regarding PMI. Because of this recommendation I will do 95% LTV instead of 96.5% LTV, but realize the annual return from appreciation would be higher at 96.5% LTV.

At 95% LTV
- since 2000: 115% annual

- Last 10 years: 169% annual

now that is very impressive.  Especially considering this performance is over an extended period of time.  

I recognize my numbers did not include closing costs and as you pay down the equity, the LTV decreases (but you get the equity paydown), but this return is so high that even if it had a modest hit, it would still be a great return.

https://www.neighborhoodscout.com/ca/san-diego/real-estate

Adding in forced appreciation can create an infinite return via brrrr. My first 6 RE investments achieved this infinite return as I extracted all my cost via a refinance. Can you think of any other asset class that can obtain infinite return from appreciation? How about any that has achieved San Diego RE average annual return at 95% LTV of 115% annually for a duration as long as 24 years?

now to address the cash flow.   Initial cash flow has a poor correlation with achieved cash flow over a long hold.  This is because rent growth has a much larger impact on cash flow than initial cash flow over a long hold.  There are few markets that have better long term rent growth than San Diego.  Subsequently, there are few markets that have achieved better cash flow over a long hold.  Let me put it a different way.  If in the year 2000 you invested $200k in Cleveland and $200k in San Diego both with same level of leverage.  Which do you think would have achieved the better cash flow over the hold?  San Diego wins even if it were not for prop 13, but add in the benefits of prop 13 and it wins by an even wider margin.  

Something’s to ponder.  Good luck.