Real estate investing in San Diego.

[Alejandro Romero]

How does one start out in real estate in a high market place like San Diego? I'm a resident here and I would qualify for FHA loans. I don't see much opportunities for cash flow. Where do I start?

[Dan H.]

The FHA typically will not finance the best BRRRR candidates.

@Mark Frattini is correct that RE has poor to negative initial cash flow. This is more so with the extreme high LTV of FHA loans. Eventually the rent increases will create good cash flow until value is extracted and then the cash flow situation resets (back to poor).

If you have confidence of your BRRRR skills, you could use conventional OO loan and have more opportunity to purchase the more thrashed properties (conventional still has limits as it must have a kitchen, furnace, etc.). Note with the refinance, a moderate successful BRRRR traps 10% of ARV. An outstanding BRRRR (probably should not expect outstanding on the first try) would extract all of the investment. In this case you end up with even less invested than the high LTV FHA loan. In addition, you have added a lot of sweat equity which helps with the initial return. This immediate boost to initial return gets you over the period where the cash flow is terrible.

I would recommend someone starting out combine multiple concepts. I would purchase a detached duplex (duplex does not have same sustainment rules as a triplex) that is in need of a rehab to house hack. I would live in the unit in more need of rehab and rehab in place. When the rehab is complete, I would rent at top of market (it has just been rehabbed) and move into the other unit. I would repeat the process on that unit. When both units were rehabbed, I would refinance to lower my investment amount to ideally less than 10% of the new increased value (the ARV). Definitely refi before moving out due to better terms for owner occupied.

Good luck