Can't find cashflow in San Diego, am I doing something wrong?

Question

My partner and I, using the BP Rental Property calculator, have crunched numbers on properties in different areas of San Diego. We are basically seing that to buy and hold in San Diego makes no sense, for example in one property we saw there was -$541 in cashflow with -26% ROI. Also, the problem is that 20% down is roughly 100k over here. Is anyone buying and holding right now? Or what would make sense to do in this market?

thanks!

Dan H. · Answer

As @Justin R. indicated SFR purchased at retail do not cash flow at purchase.  Duplex to quad can cash flow in certain areas upon retail purchase but not like they would in the Midwest.

However there are a lot more SFR than duplex to quad.  This implies there are a lot more opportunities to purchase SFR below retail then there are opportunities to purchase duplex to quad below retail.

However if you purchase a cash neutral or cash negative property you can expect rents next year to be at least $100/month higher than today.   This anticipated rent appreciation couple with property appreciation is what justifies the high property costs compared to current rents.

San Diego has always had a poor rent to value ratio compared to many locations but historically its ROI on financed buy and hold has been near the top in the nation.  This great ROI holds for virtually any duration going back more than 50 years.

So if you want to have good cash flow upon purchase do not invest in San Diego.  However if you desire to invest in a location that has histically produced outstanding ROI on financed buy n hold RE for more than 50 years than consider if San Diego is the best location.

Good luck

Angel Morales · Answer

Thank you for all the good replies!

Sounds like time to look for another investment strategy  in San DIego, since im looking for cash flow upon purchase.

Matt R. · Answer

It might take some sort of added value plan ( convert garage) or alternative vision ( short term rentals). It certainly is a difficult place to start right now if you need higher initial cash flow as compared to the majority of other locations. You might only come across worthy prospects a handful times a year and then be prepared to pay extra. Why is that? Some might (corelogic) say it is because it is the 3rd most profitable location in the nation since 2000.

Good luck!

Thomas S. · Answer

Investing in CA is primarily for appreciation investors. You must have deep pockets, already be financially well off, and be prepared to supplement tenant rent payments for a possible pay off some time down the road.

CA is not for income investors looking to pay for groceries.

There may be some pockets that work but probably not worth the small income to justify your time, effort or risk.

Best suited for those investors seeking to park surplus cash.

Jeff Schechter · Answer

Yeah, I would concur that B/H is not a strategy for most of CA....especially if you want real cash flow.  You'll have to start looking at other markets (like the Midwest) to find the lower prices, and the price-to-rent ratio that would be favorable to make B/H numbers attractive.

Justin R. · Answer

@Angel Morales It's a common question - lots of discussion on other threads if you search.

In short, for the urban and suburban areas of SD at this point in the cycle, you'll only find a reasonable ROI with duplex/tri/quad or higher unit counts ... and then only in certain cases.  It's a tough ask to start with just buying something and holding it without either (A) doing a lot of searching combined with some luck or (B) doing something to the property after you've purchased it.

It's not beginner friendly right now.

Brian Adzadi · Answer

@Angel Morales

I watch Clayton Morris of Morris Invest on Youtube and he said something about how the price of a house can be a detriment to how much rent you can collect. Meaning if you own a 60K house, you can see your rent range from $500-$900, a 100K house can get you $900-$1200 in rent and a 120K house can get you $1200-$1500. However, if you own a 300K-500K house, do you think your tenants are willing to pay $2500-$5000 in rent every month for these houses? I think not. And even if they are willing to pay that much in rent, the amount of money for upkeep and expenses would eat tremendously into your profits. This is why you are seeing negative cash flows and negative ROI. So if were you, start looking out of state, into more affordable markets where the 20% down payment does not equal to 100K or more. The Midwest is a great start.

Hernell D. · Answer

@Angel Morales It is pretty tough to cash flow in SoCal but it is possible! You have to look at twice the amount of deals others look at in other places and you may have to put up a larger down payment or get creative with financing but it's possible.

Jeff Greenberg · Answer

It sounds like what you are doing may be right, but the location is wrong.  It is very difficult to cashflow in California, especially in this stage of the market cycle.

Can't find cashflow in San Diego, am I doing something wrong?

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