First time rental property in San Diego

[Tyler Hayes]

Hey everyone! I am looking to purchase my first house when I move out to San Diego for my first duty station this summer. I am going to be house hacking with some buddies. I am just looking for advice and guidance from anyone that has purchased in the area. Any advice is welcome. Thanks!

[James Hedgecock]

@Dan H.

Dan, I'll try to keep this transparent as everyone likes to interpret these definitions differently, so at least if I define it differently you can see where the numbers come from. Happy to discuss off-line.

My best rule of thumb I use, which seems to hold up in my niche, is that I want the projected monthly rent to be 0.7% of the purchase price plus rehab cost. EX: bought the house in 2019 for $475k. Rehab $110k (roof and foundation done while current tenant still paying, back detached ADU was a quick $10k and then rented quickly, so cashflowing well during this process). So total house cost $585k. Rents will be $2800 for the main 4/2 house, $1700 for the 1/1 detached ADU (currently $2050 for the 4/2, already $1700 for the ADU, will rehab front house over 2 months at end of current lease - and coronavirus - to then increase rent). So total future rent $4500. 4500/585000= about 0.77%.

This rule for me rolls up everything you asked into a simple tool to allow me to easily analyze most deals in my area. Other people will have other numbers that work for them. Most people I know do more volume and accept thinner deals than this.

In my detailed calcs I factor in 5% vacancy (never had anything over 1% since 2012, but maybe soon). Then expense for cashflow:

- Taxes, estimated expenses, insurance. Expenses are avg monthly maintenance and cap ex. I use 0.7% of purchase price per year for cap ex., and my experience on the maintenance is that it runs about $400/mo for each property.

- Mortgage payment

When I run the details I usually come out near 5% cashflow plus principle payment that will give me a starting annual net worth return of 8-10% without counting appreciation.

I run a separate checking account and separate Quickbook file for each of the 3 properties. Hopefully that helps you or others, feel like I am on a bit of a tangent on this thread!

These deals have become increasingly hard to find and the current crisis will undoubtedly change things. The 2019 property was unique (every deal is) in that the seller had to sell to complete a 1031 quickly, the property was not bankable (private interest only loan converting to a conventional after all rehab), and needed serious work. The other ones bought in previous years were easier. As you can tell this one still isn't done, but it is still cashflowing as I work through it. Maybe we will have easier deals in the future!