San Diego Multifamily Market for 1st purchase?

Question

Hi Everyone,I have been an avid listener to the Podcast and am super grateful for all of the free advise. For all of the reading and listening I have been doing I have yet to come across someone in this high of a market yet. Here is my situation, my wife and I want to buy our first property. We are both 34 with very reliable jobs. Household Income- 130kZero DebtCredit Scores in the Mid 700Down Payment - 100kWe are looking to buy a TriPlex or FourPlex that we can owner occupy. I have a very good mentor who has also been my landlord for the last 12 years. Between him and my mortgage guy, almost every deal we look at they say that the rents wont be strong enough to support the loan.So my question is this, with our current financial situation and income is this market just too expensive for us to get in?

Michael Lee · Answer

Hello and welcome to BP! I am going to give some tips for a Newbie. The best offers you use should be organized and clear. Even if you are financing you still as cash player It might be a check made out to you which is the same as cash but it is a loan for the buyer but it is as good as cash and it is fair to say you are "cash buyer." Since we are in a part of the cycle that is a "seller's market" and prices are increased and making their deal disfavorsbuyers that are investors.Try to maintain all that you control of all things you are responsible for. Do not assume anything will happen without your control. Track all of your income and expenses in report form and review the them regularly. Do the reviewing with exerienced employees or team members you trust and understand your goals. The goal of this is to help , hopefully, your company grow when you get any feedback that might reduce those expenses and hopefully increase your income with any ideas.Whenever you are looking at prospective properties do the math analysis on them and try to look at it before you make an offer or at least use a clause in the purchase contract that allows you upfront (usually about 10 days) to make a detailed inspection of the subject property without aa penaltythat hurts you too much. I would like to acknowledge SanDiego or its surrounding smaller cities, which I assume it has,has some good deals, You might just have to hustle in this kind of market.I am 60 years old and have been a BP member for about 21 months and I have been in the construction business since I was 17. I held an active real estate broker license in Texas for about 30 years so please take what I say with confidence and think I know what I am saying. Do not cut any corners in an attempt to make something look good jknowing in reality it will be different. Do not try to everything yourself. Find local and try experienced Team members in what you select. In the begining just try to do what iis in that neighborhood. Try to keep it simple in the beginning, at least.. Because it is a buyers market, your time may be better spent learning and networking with everybody and wait for the part of the cycle that produces better deals. Real estate has cycles.Good luck to you!

Andrew Johnson · Answer

Phaen Pittman I think Fabio Salas has an interesting situation/perspective. It sounds to me that he'd looking at his San Diego property as the appreciation/speculation side of his portfolio. Meanwhile he has a cash-flow positive property in Arizona to balance it out. So it's either strategy, random, or necessary. The latter is most likely as San Diego is, well, San Diego. You could live in SF or NYC and I still doubt you purposefully go out looking for a cash-flow negative property. But if you *want* to be in that market and occupy a unit you'll probably end up that way. I always say *want* because nobody has a gun to your head forcing you to invest in a certain market. You could always just decide it's an educated decision that you want to live where you want to live, that you want to lock in a 30 year interest rate, that you believe the market will appreciate, and all of that (on balance) outweighs losing a few hundred dollars a month.

Fabio Salas · Answer

@Phaen Pittman I bought a duplex in Imperial Beach last year and house hacked it for a year by living in one unit and renting out the other through Air BnB. This worked out well for me because I made enough money through Air BnB rentals to cover 2/3 of my mortage, leaving me a very cheap monthly rent. From June through the end of August I made enough to live for free. Now I'm deployed and I've turned both units into long term rentals. As mentioned above, the rents are not strong enough to completely cover the mortgage AND expenses. All said, I'm having to come out of pocket $200-$300 per month. This was something I thought a lot about before buying the duplex because I knew at most I would only househack for 3 years before turning it into a long term rental (it actually turned out to be just 10 months because I ended up deploying to the Middle East). In other words, this duplex is negative cash flowing right now. That said, for me this was a LOOOOOONG term investment. What I mean by this is, I knew I would be negative cash flowing this property for at least the first 10 years. After that things start to even out. By year 15 it starts to positive cash flow; additionally with the profits from tax breaks, equity, and appreciation I will greatly outperform just about any other form of investment I could take on with just $200-$300 per month. All of this said, I agree with everyone's reasoning that purchasing an investment that negative cash flows is not necessarily a good idea. However, for me, I felt like investing in a multifamily in San Diego was a worthwhile investment. For one, I do intend to keep the property as long as possible. For two, I've been an active duty Marine for 17 years; this affords me a steady paycheck that allows me to afford the out of pocket monthly expenses. For three (and this part is the biggest gamble), I believe SD's future real estate market will continue to perform as it has for the past few decades. In other words, there will be ups and downs over the next few decades, but in the long run I believe the SD market will continue to outperform just about any other market in the U.S. So if I'm able to hold on to this property, in the long run it will become a half million dollar asset that is paid off and provides incredible cash flow. In other words, this duplex is an investment in my retirement. Between now and retirement, the rest of my investments MUST cash flow. I have another rental in AZ that I've been renting out for 6 years and cash flowing steadily the entire time. I'm selling it this summer. The profits from that sale I'll be investing in rental properties in the Midwest where I can immediately cash flow. Additionally, I'll be looking to pick up 1-2 more properties that immediately cash flow as well.I'm sorry, this is a much longer post than I'd intended it to be. My point is, I believe investing in anything that negative cash flows is generally a bad idea. But saying it is 'generally a bad idea' is not the same as saying 'it's ALWAYS' a bad idea'. Personally I believe it comes down to your own specific circumstances and finances. Do the math, figure out what you can afford, analyze your situation (financial, family, etc), and then make a decision on what you want to do in the future.Either way, good luck with whatever you decide to do.

Phaen Pittman · Answer

I have been watching the MFR market seriously for a little over a year. We are also watching for seller finance options. Those are pretty rare around here from what I have learned. About 5% of the deals I guess. Even with the seller finance option from what I have found is that the properties still won't cash flow. It's starting to look like these markets you really need to be focused on appreciation rather than cash flow. If I could afford to service them in an absolute worst case scenario I would feel way better about it. I think we could afford it but I don't want to be cash strapped for the future if I want to buy another property.

Nick Mercurio · Answer

@Phaen PittmanMy wife and I are running into the same issue. We also want to owner occupy a triplex or fourplex using fha and we have been told the same thing. It's really frustrating. So now we are going to try to get a seller financed deal or settle for a duplex. How long have you been looking for deals?

Phaen Pittman · Answer

Hi Bob,I appreciate you taking the time to respond. Looking in different markets has come up a couple times. I guess to me it seems like a bigger risk if we don't plan on living there. And I also would like to stop paying rent at some point. The good thing is that my rent is stupidly cheap, I only pay 1200 for a 2 x2 that's only 4 blocks from the beach. Since our rent is cheap I'm not in a huge rush to get out.

Bob Okenwa · Answer

@Phaen PittmanWelcome to BP! I know San Diego is ridiculously expensive. I used to live there and I decided to stay here in Phoenix because of the lack of affordability. You may just have to look at distressed properties and put some equity into the deal or look elsewhere to get a MFR. Nothing is impossible. Keep trying.