Aspiring Investor In San Diego

[Ben Sellers]

Hello BiggerPockets!

This is my first ever post here.. I have been holding off until I figured out the niche of real estate that I wanted to get into, but everything sounds so tempting and interesting. Then I realized, who better to advise me than BiggerPockets?

My baseline goal is to achieve a portfolio of $5k+ passive income within the next 5 years and then from there reassess where I am in my real estate investing to continue growing exponentially and retire before 40!

A little background on me. I am 23 years old, I just graduated from San Diego State University with a bachelor’s degree in Mechanical Engineering. Since I graduated in May, I have been working full time as an Aerospace Engineer, saving as much money as I can hoping to find my way into real estate investing. I live in Lakeside, California (east San Diego county). I listen to the BiggerPockets Podcasts, watch the webinars, analyze potential deals, now I am starting to read the books. Before I get stuck in this endless cycle of analysis, I figured its about time to reach out to the community and see what others are doing.

I know it is best to ask specific questions here, but really with this post I am trying to narrow down my focus based on what others are successful with in my area.

So to my fellow San Diego folk, particularly eastern San Diego folk, what works in this area? I am really open to any potential ideas about real estate investing here. I’ve been particularly interested in owning multi-family rental properties (maybe even house hacking), but is owning rental properties a good idea in San Diego?

I hear that San Diego is a tough area to find any real cashflow. I do find that easy to believe but I’d love to hear that cashflow is possible in the area. For my first real estate deal, the ideal situation would be to start as close to home as possible, i.e. Lakeside, Santee, Alpine, Poway, El Cajon, etc. But I am also interest in learning about long distance investing, but the idea makes me a little nervous, especially for my first deal. I’d like to be as hands on as possible for my first real estate deal because this is really the best way for me to learn.

Thank you for taking your time to read this, I look forward to hearing what anybody has to say!

Happy Holidays!

[Dan H.]

San Diego RE has historically achieved outstanding cash flow.

Actual cash flow is the cash flow over the hold period. This is not the cash flow at purchase nor is it the projected cash flow. San Diego RE historically has poor initial cash flow, moderate projected cash flow (due to conservative projections - projections should be conservative), and outstanding actual cash flow due to rent appreciation.

In San Diego, SFH average rent has gone up over $500/month in the last 4 years. This implies that a purchase of a cash neutral home in San Diego 4 years ago would have ~$500/month positive cash flow today. In addition, they would have outstanding market appreciation of the SFH.

The higher rent appreciation market will always eventually have better cash flow than a lower appreciating market as long as the higher appreciation market Rent appreciation is greater than the expense increase which is virtually certain in San Diego with property tax being basically a fixed price and most mortgages being fixed rate.   As an engineer this should be easy for you to recognize.

The problem for you and most newbie investors are 1) handling the negative cash flow until some point in the future when it reaches cash neutral 2) Saving up the money necessary to purchase the home.

For item #1, you are an engineer.  You can likely afford the cash flow negative by making sacrifices that those with lower salaries have to make every day.  An engineer who wants to enter RE bad enough should be able to supplement a large negative cash flow but it will require some sacrifice.  Question is, are you willing to make this sacrifice for an unknown amount of time?

For item #2 there are some options: 1) house hack (owner occupied). Owner occupied can get 95% LTV. If you go this route I suggest starting with either a detached duplex or a SFH with a detached ADU. Due to the high LTV, this option will likely be significantly cash flow negative 2) Wait to purchase until you can save up 20% (maybe 25% depending on financing) plus reserves. If you sacrifice to save, an engineer should be able to save quite a bit each month. This approach has advantages of being less cash flow negative (note I said less, I expect it to still be cash flow negative) than a 95% LTV purchase. 3) Get help from family which is not an option for everyone.

The areas you listed I classify as blue collar areas.  Our primary market is a blue collar area (not one of the ones you listed).  I believe blue collar areas result in the highest achieved cash flow.  In rough areas (I will not name but you likely know the areas), the cash flow could look better but with tenant turnover, damage, etc. these areas often do not hit their projected cash flow.  White collar areas (Coronado, Del Mar, Carlsbad, Poway, etc.) are the easiest to manage but the rent is low compared to purchase costs so these may be easy to hit the projected cash flow.  However, the projected cash flow is worse than the blue collar areas.  In blue collar areas, with good tenant screening (more important in blue collar areas than white collar areas), you can hit cash flow projections.  Also with good tenant screening, these areas will not necessarily be harder to manage than white collar areas.  The key is the tenant screening as there are many good tenants in these areas and some not so good tenants.  You want to avoid the bad tenants.

Good luck