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!

[Account Closed]

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. 

[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. 

[Thomas Rutkowski]

Quote from @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!

Using the Whole Life Policy (or Indexed Universal Life) is very powerful. When you borrow from the insurance company, it is a loan against your Cash Value. That means you can earn an infinite rate of return because you'll be using 100% Financing. Your Cash Value remains in the Policy earning dividends and serving as collateral for the loan. Your money is literally working in 2 places at 1 time.

The Cash Value of a Maximum Over-funded Policy is also a great place to park your Cash while you are looking for a deal. Dividend and Interest Crediting rates are over 6% right now. What you lose in fees is quickly made up by the higher rate of growth. It's also important to realize that the fees are minimized in a Maximum Over-funded Policy. These are not typical life insurance policies.

[Dan H.]

Quote from @Thomas Rutkowski:

Quote from @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!

Using the Whole Life Policy (or Indexed Universal Life) is very powerful. When you borrow from the insurance company, it is a loan against your Cash Value. That means you can earn an infinite rate of return because you'll be using 100% Financing. Your Cash Value remains in the Policy earning dividends and serving as collateral for the loan. Your money is literally working in 2 places at 1 time.

The Cash Value of a Maximum Over-funded Policy is also a great place to park your Cash while you are looking for a deal. Dividend and Interest Crediting rates are over 6% right now. What you lose in fees is quickly made up by the higher rate of growth. It's also important to realize that the fees are minimized in a Maximum Over-funded Policy. These are not typical life insurance policies.

If the down payment comes from an existing asset whether it is money from money market, money from savings account, money from CDs, money from heloc, money from selling stocks, money from stock margin, gift from family, money from life insurance it does not achieve a 100% LTV with respect to determining return. It is just a different source of the funds.

100% LTV implies no money from any other source. 

This is not to imply that life insurance is not a decent place to obtain the down.  Just recognize it is just another source of funds to use to meet the down payment of which there are many.

best wishes

[Ko Kashiwagi]

Hi Ari,

For PM, you can compare by checking reviews, getting references, reading over their contract. At the end of the day you can switch PM if you have a terrible experience. I personally would try to get a family member to manage it if that's an option.

You can get conventional financing as a business owner if you go with a non-QM or bank statement program. Usually they'd take your 12-24 month average so even if it's variable it would be okay. 

I wouldn't recommend taking private/hard money unless you have higher risk tolerance and you are ready for an active strategy (BRRRR/flip). If you prefer passive style, house hack or out of state rental makes sense. With conventional financing on a primary residence, you can put as low as 3.5-5% anyways.

LLCs are more for liability protection over tax purposes.

[Ashish Acharya]

Considering your situation, using an FHA loan with a 3.5% down payment for a multifamily property is a solid strategy, especially for a first-time investor. You can live in one unit and rent out the others (STR can help you save taxes), helping to cover the mortgage. If you're considering buying a foreclosure, it can be an excellent way to get a deal, but be aware of the risks like property condition and the competitive market. It’s essential to do thorough due diligence and be ready for potential renovation costs.

Starting in California makes sense since you’re local, making it easier to manage your first property. Expanding your portfolio in Indiana could be smart due to lower property prices and possibly higher cash flow. Plus, if done correctly, you might be able to deduct your travel as a business expense. Partnering with someone might also be beneficial, especially if your income is variable and you find a partner with complementary strengths.

Purchasing through an LLC could provide liability protection and some tax benefits, but it might make financing a bit trickier, so weigh the pros and cons carefully. Also, consider tax credits and incentives for energy-efficient upgrades or first-time homebuyer programs that could lower your costs and improve your return on investment.

In summary, starting in California with an FHA loan and considering partnerships and LLC structures can set you up well. Expanding into Indiana later can diversify your portfolio and offer additional opportunities.

[Thomas Rutkowski]

Quote from @Dan H.:

Quote from @Thomas Rutkowski:

Quote from @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!

Using the Whole Life Policy (or Indexed Universal Life) is very powerful. When you borrow from the insurance company, it is a loan against your Cash Value. That means you can earn an infinite rate of return because you'll be using 100% Financing. Your Cash Value remains in the Policy earning dividends and serving as collateral for the loan. Your money is literally working in 2 places at 1 time.

The Cash Value of a Maximum Over-funded Policy is also a great place to park your Cash while you are looking for a deal. Dividend and Interest Crediting rates are over 6% right now. What you lose in fees is quickly made up by the higher rate of growth. It's also important to realize that the fees are minimized in a Maximum Over-funded Policy. These are not typical life insurance policies.

If the down payment comes from an existing asset whether it is money from money market, money from savings account, money from CDs, money from heloc, money from selling stocks, money from stock margin, gift from family, money from life insurance it does not achieve a 100% LTV with respect to determining return. It is just a different source of the funds.

100% LTV implies no money from any other source. 

This is not to imply that life insurance is not a decent place to obtain the down.  Just recognize it is just another source of funds to use to meet the down payment of which there are many.

best wishes

 A life insurance policy loan is not your own asset. It is not a source of funds. The insurance company is loaning you THEIR money with your Cash Value as collateral. 

[Dan H.]

Quote from @Thomas Rutkowski:

Quote from @Dan H.:

Quote from @Thomas Rutkowski:

Quote from @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!

Using the Whole Life Policy (or Indexed Universal Life) is very powerful. When you borrow from the insurance company, it is a loan against your Cash Value. That means you can earn an infinite rate of return because you'll be using 100% Financing. Your Cash Value remains in the Policy earning dividends and serving as collateral for the loan. Your money is literally working in 2 places at 1 time.

The Cash Value of a Maximum Over-funded Policy is also a great place to park your Cash while you are looking for a deal. Dividend and Interest Crediting rates are over 6% right now. What you lose in fees is quickly made up by the higher rate of growth. It's also important to realize that the fees are minimized in a Maximum Over-funded Policy. These are not typical life insurance policies.

If the down payment comes from an existing asset whether it is money from money market, money from savings account, money from CDs, money from heloc, money from selling stocks, money from stock margin, gift from family, money from life insurance it does not achieve a 100% LTV with respect to determining return. It is just a different source of the funds.

100% LTV implies no money from any other source. 

This is not to imply that life insurance is not a decent place to obtain the down.  Just recognize it is just another source of funds to use to meet the down payment of which there are many.

best wishes

 A life insurance policy loan is not your own asset. It is not a source of funds. The insurance company is loaning you THEIR money with your Cash Value as collateral. 

I am not going to split hairs on whether an insurance policy is your asset or another’s asset but it is not the subject property.  You cannot extract from it indefinitely; there is a limit to the number of properties you can
purchase in this manner without paying back into the life insurance which does not exist on a true 100% LTV. 

I would compare this to both heloc and margin loans.   They are limited in how much you can extract, but all are worthy of consideration for the source of funds.  

good luck

[Thomas Rutkowski]

@Dan H.

If you are using 100% borrowed money for a deal, it's an infinite rate of return. You have NO money in the deal.

[Jai Johnson]

Our situations are a little similar, I'm in San Diego and currently buying my first property now. It's a condo that I'll be living in, I'm buying with 0% down, and longer term aim to leverage the equity that I build up and put it into other property, likely out of state. I found it near impossible to even break even out here when buying with little to nothing down, especially with the current rates. So cash flow isn't my immediate goal with the condo.

Come next year around June however, I will be buying a second property, most likely out of state, and on this property I will be putting 20% down and buying for the cash flow.

[Wesley I.]

@Ari Lagunas

Are you planning to stay in San Diego for the next 5, 7, 10 years?

If you are, I recommend buying a small multifamily and house hack to reduce your largest living expense while building equity.

I recommend talking to a lender (i can connect you with one) about the income fluctuation and see how much you can qualify.

Your best bet is to get a owner occupied loan with 30 yr fixed rate. You will get better rate and terms compared to the hard money route.

[Wale Lawal]

@Ari Lagunas

Starting with a multifamily property in San Diego using an FHA loan is a good strategy for first-time investors, offering advantages like a low 3.5% down payment and unit living. Expanding to California or Indiana can make multifamily properties more affordable, but it's better to start in California and expand to Indiana. Purchasing through an LLC offers liability protection and tax benefits, but requires upfront costs and maintenance fees. Alternative financing options include private lenders, hard money loans, and tax credits.

Good luck!

[Scott Albritton]

Quote from @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!

 Hi Ari, 

You've presented many different options and ideas for possible ways to get started investing. Have you spoken with a lender to see what you'd qualify for? I would recommend to start there and branch out as needed.