San Diego: Best Entry Strategy

[Jack Landry]

Hi all,

I am currently living in San Diego and looking to begin my real estate investing journey.

My ultimate goal is to build a portfolio that enables financial freedom through real estate. Regardless of the vehicle, SFH, multifamily, or other, my goal is to build a large portfolio of doors.

That being said, I am trying to find the best vehicle to get started in San Diego that will best enable me to grow this portfolio with speed.  
Building a portfolio of one property in 5 years is not something I would consider a personal win.

I intend on using an owner-occupied FHA loan to house hack the first property. Down payment and closing costs considered, I am looking to deploy $40k - $50k maximum as an initial investment.

The potential exit strategies I see are:

1) 1-5 year exit: after living in the property for 2 of 5 years, sell to capitalize on capital gains tax exclusion on up to $250k.  This would be dependent on property appreciation during this period, but appears to be a good strategy to utilize tax free gains to fund a next purchase.

2) Long-term hold: if market conditions are not primed for a sale, a long-term hold is a safe option so long as the property is able to cash flow or break even in the long-term.

3) 1031: would consider

Potential Strategies, Pros + Cons

First, what I am not considering: SFH BRRRR or SFH ADU - time and capital requirements are something I do not have. Not considering out of state at the moment because I am going to use my residence as an investment and want to be in San Diego.

Here are the potential strategies I am considering, and what I see as the potential pros and cons.

I want to note that I was prior convinced that a duplex with value add opportunity was my best option, but further consideration has brought me to this post.  I am also aware that building long term wealth is more related to equity building and not cash flow, and that negative cash flow situations are not necessarily a reason to say 'No' to an investment.  

1) Duplex.  I have been convinced that this is the best option primarily on the idea that I can acquire multiple doors (poor reasoning).

     CON: Most expensive entry point, requiring my maximum initial investment limit.  

CON: Initial negative cash flow, coming out of pocket to cover monthly expenses. With rent appreciation, full PITI payment by tenants seem achievable in the near term. However, when you factor in CAPEX and maintenance (running each at 5% now), and property management after I am out of the property, I haven't been able to see a situation where the property even closes in on breakeven. If true, coverage for these expenses comes from my own pocket, thus restricting me from using this capital for another investment, and hindering the goal of growth with speed. Now it appears as if I am forced to continue to "fund" this property until I can refinance out into a conventional loan at 10-20% equity, which on a $700k-%800k property, will take a number of years (I am estimating 4-5 years to have 20% equity with a purchase price of $800k and LTV of 96.5%). I am afraid of being sidelined to this one property for 4-5 years because of the amount of cash it appears it will eat up.

2) SFH.

     PRO: may provide a slightly lower entry point than a duplex.     

CON: Single family home does not appear to be a valid option if renting as a single family home because of the lower rental income it will generate. This means using personal cash to cover expenses (CAPEX, maintenance, property management). Covering SFH PITI with rental income, rented as a family home, seems a bit more challenging as compared to a duplex.

POTENTIAL: renting by the room or using a short term rental (STR) strategy may make this a more valid option. I have not spent much time exploring the STR realm but have heard good regarding cash flow, and bad regarding maintenance and time.

3) Condo.

CON: HOA. This is what initially pushed me away from considering this option completely.

PRO: entry point is ~50% less than the other two options. Less money needed for CAPEX and maintenance reserves. More personal funds available to deploy into a next investment.

POTENTIAL: STR seems like it could be a large cash producer, covering all monthly fees and generating cash that could be used to fund other investments. Renting on a traditional yearly lease could likely cover PITI + HOA if not immediately, in the short term.

That being said, I would appreciate advice regarding your agreement or disagreement with any points above.  Also, specifically:

1) What do you think is the best entry point to 1) maximize my capital 2) enable future growth and scaling?

2) What do you think about the idea of 'value add' being a necessary criteria?  I have been convinced thus far that being able to force appreciation through rehab is a worthwhile play, but would love to hear input and reasoning for why/why not.

Thank you in advance for reading and your shared insight!

Best,

Jack

[Marc Rice]

@Jack Landry

If your main concern is cash then I’d recommend to find a local lender who can do 1% down (with down payment assistance) for a first time home buyer on a single family. Then find a single family with a lot of bedrooms near San Diego college and rent out all of the bedrooms to students for a premium. Then in 9 months use that cash you generated to do a duplex.

OR find a single family (identical to above) that you could build a back ADU on that would rent for a lot as a STR or studio/1bd. You could even just buy a tiny home/airstream for $30k and make it work.

OR if you find a good enough deal that you could BRRRR to then cash out that would be great. It seems like not many deals are available in your pipeline now.

@Remington Lyman Any advice for my friend Jack in San Diego at such a high market premium?

Hopefully others can add insight to this expensive market...