San Diego Real Estate: Too Much For a Newbie?
Member since 2021 · 2 posts · 2 votes
San Diego Real Estate: Too Much For a Newbie?
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesFHA (FHA implies Owner occupied) will finance at up to 96.5% LTV, but there is an inverse relationship between LTV and cash flow (higher LTV = lower cash flow, lower LTV equals higher cash flow).
With $150K and reserving $15K for closing and reserves would give $135K. At 96.5%would permit a purchase of over $3.8M. The point is if you have $150K you have enough accumulated to invest in San Diego. Next question is what would you really qualify for. One of your early steps should be to find a good lender and get prequalified. A good lender for a newbie should know the loan options including FHA, be a good communicator, be willing to guide you through the process and be organized.
Initial cash flow will be real bad (real large negative) at 96.5% LTV. In San Diego average purchases have bad initial cash flow (large negative) at 90% LTV. In San Diego average purchases with realistic expense allocation have poor initial cash flow (negative cash flow) at 80% LTV. It is the reality of the market. This implies you need to find good investment properties that produce better initial cash flow than the average purchase. For this you want a great investor realtor. I do not know if it is possible to be a great investor realtor without the realtor being an RE investor. One of your early steps is to find that great investor realtor. Even with such a realtor, you will be challenged to find local RE that is positive cash flow at 80% LTV.
Typically higher unit counts produce better cash flow. However, FHA has sustainability rules which pretty much eliminates it as an option in the local market for anything with higher unit count than a duplex.
So why invest in San Diego?
- Historically there is a poor relationship between initial cash flow and actual cash flow achieved over the hold. This is not happenstance. It is free market at play. The market that forecasts the higher appreciation, including the higher rent appreciation, will be more expensive and have poor initial cash flow. however this market is expected to have higher rent increases. The cash flow situation is expected to improve more substantially than the lower cost market.
- The higher initial cash flow market is typically the lower cost markets (or higher risk markets). This lower costs show that the property appreciation has not historically been substantial (sometimes below the rate of inflation). Again it is free market at work. Higher cost markets, in general, have expected higher property appreciation.
- Prop 13 is a hidden gem for CA RE investors that other states do not have. In Ca property tax is almost a fixed cost.
Do you know what passes for good cash flow in Cleveland or Detroit? Do you know what the average monthly appreciation has been for the average SFH in San Diego over the last 5 years? 10 years? 20 years? 30 years? 50 years? I leave this as an exercise but will say my worst appreciating San Diego property has appreciated over $2k/month over its hold period. My best appreciating San Diego properties have appreciated over $6k/month over the hold period. So the appreciation has been great (and remember due to prop 13 this appreciation is mostly not reflected in the property tax), but what about the cash flow? Every one of our properties have rent to purchase ratio over 1%. I have one LTR that is over 2% ratio. I have one STR that is over 4% (2019). The cash flow has been great.
Do not mistake initial cash flow with cash flow over a long hold period. Do not discount the benefit of appreciation. Do not miss that San Diego's appreciation is far greater than the high cash flow market's cash flow.
Most investors over value the initial cash flow and fail to fully evaluate the other sources of RE profits.
Good luck
7 Replies
- 4yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
FHA (FHA implies Owner occupied) will finance at up to 96.5% LTV, but there is an inverse relationship between LTV and cash flow (higher LTV = lower cash flow, lower LTV equals higher cash flow).
With $150K and reserving $15K for closing and reserves would give $135K. At 96.5%would permit a purchase of over $3.8M. The point is if you have $150K you have enough accumulated to invest in San Diego. Next question is what would you really qualify for. One of your early steps should be to find a good lender and get prequalified. A good lender for a newbie should know the loan options including FHA, be a good communicator, be willing to guide you through the process and be organized.
Initial cash flow will be real bad (real large negative) at 96.5% LTV. In San Diego average purchases have bad initial cash flow (large negative) at 90% LTV. In San Diego average purchases with realistic expense allocation have poor initial cash flow (negative cash flow) at 80% LTV. It is the reality of the market. This implies you need to find good investment properties that produce better initial cash flow than the average purchase. For this you want a great investor realtor. I do not know if it is possible to be a great investor realtor without the realtor being an RE investor. One of your early steps is to find that great investor realtor. Even with such a realtor, you will be challenged to find local RE that is positive cash flow at 80% LTV.
Typically higher unit counts produce better cash flow. However, FHA has sustainability rules which pretty much eliminates it as an option in the local market for anything with higher unit count than a duplex.
So why invest in San Diego?
- Historically there is a poor relationship between initial cash flow and actual cash flow achieved over the hold. This is not happenstance. It is free market at play. The market that forecasts the higher appreciation, including the higher rent appreciation, will be more expensive and have poor initial cash flow. however this market is expected to have higher rent increases. The cash flow situation is expected to improve more substantially than the lower cost market.
- The higher initial cash flow market is typically the lower cost markets (or higher risk markets). This lower costs show that the property appreciation has not historically been substantial (sometimes below the rate of inflation). Again it is free market at work. Higher cost markets, in general, have expected higher property appreciation.
- Prop 13 is a hidden gem for CA RE investors that other states do not have. In Ca property tax is almost a fixed cost.
Do you know what passes for good cash flow in Cleveland or Detroit? Do you know what the average monthly appreciation has been for the average SFH in San Diego over the last 5 years? 10 years? 20 years? 30 years? 50 years? I leave this as an exercise but will say my worst appreciating San Diego property has appreciated over $2k/month over its hold period. My best appreciating San Diego properties have appreciated over $6k/month over the hold period. So the appreciation has been great (and remember due to prop 13 this appreciation is mostly not reflected in the property tax), but what about the cash flow? Every one of our properties have rent to purchase ratio over 1%. I have one LTR that is over 2% ratio. I have one STR that is over 4% (2019). The cash flow has been great.
Do not mistake initial cash flow with cash flow over a long hold period. Do not discount the benefit of appreciation. Do not miss that San Diego's appreciation is far greater than the high cash flow market's cash flow.
Most investors over value the initial cash flow and fail to fully evaluate the other sources of RE profits.
Good luck
- 4yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
Everything @Dan Heuschele is true.
You still need to decide if it works for you though.
Some investors want cashflow NOW, instead of waiting or even dealing with negative cashflow.
Logical Property Management4.9451 Reviews - 4yAndrew FreedBusiness MemberInvestor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
@Alex Cutler - @Dan H. could not be more right in his analysis. What I will say is everyone trashes the expensive markets. They claim they are unaffordable, provide no cash flow, too tenant friendly, however true wealth is real estate is built through mortgage paydown, the tax benefits, and appreciation. Cash flow is pennies on the dollar compared to the cost of the asset, it is more of a defensive measure to ensure you have liquid assets to maintain the property.
Either way, I'm all for house hacking highly appreciating markets. You can most likely live for free or live for half of what it would cost for rent all while your tenants are paying down your mortgage, you are getting fat tax returns, and you have an asset that appreciates dramatically, especially when levered. For instance, I own 1.5 mil of real estate in higher appreciating markets. If the market appreciates 10% in 2 years, that's $150K added to my networth. Yeah, its in the property and not liquid, but I can access it via lines of credit and refinancing. I personally would love to house hack in the San Diego market, its a great place to live and has long term appreciation likelihood.
- Member since 2021 · 2 posts · 2 votes4y
@Dan H. thanks so much for all of the good info- lots to look into. It seems like purchasing a small multi family in a less expensive market in conjunction with one in San Diego might be a good deal- get cash flow from the out of state to contribute to the high San Diego mortgage payments.
- 4yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Alex Cutler:
@Dan H. thanks so much for all of the good info- lots to look into. It seems like purchasing a small multi family in a less expensive market in conjunction with one in San Diego might be a good deal- get cash flow from the out of state to contribute to the high San Diego mortgage payments.
My own belief is that newbies should not be looking OOS. When we went out of state we had some experience and it was good until it was not. I do wish we had kept those properties largely for sentimental reasons, but our return from the local market was better in every way.
I will say our OOS properties were not primarily cheap properties (2 units were on the beach in Gulf Shores Alabama and one on a lake). Still when things did not go right, they were similar to cheaper OOS properties where things go wrong. Issues are hard to deal with from afar. Building and maintaining a good team is harder OOS. When things go wrong, you want the good team.
All of our properties are in currently in San Diego county.
Good luck
- 4yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Alex Cutler why is cash flow important...I guess the point is if you do not need it to meet your standard of living, defer it for an equity play...buy smart, buy slow and steady and build a portfolio you can bank on in the future.
- 4yTwana RasoulBusiness MemberReal Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
@Alex Cutler House hacking here is San Diego is the best way to start. Assuming you don't have access to the VA loan... You can use 3.5% FHA loan to purchase up to a $1M duplex. If you want to minimize mortgage insurance, you can do a 15% down payment conventional loan on a 2 unit, at $1M purchase, that would be your $150,000. Finally I've done several house hack deals recently utilizing a 5% down conventional ARM loan to purchase a 3 unit as well as a 4 unit property.
Starting locally by house hacking is a safer investment than going out of state.
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