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Updated about 3 years ago on . Most recent reply

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19
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7
Votes
Tanya Ansari
  • Rental Property Investor
  • San Diego, CA
7
Votes |
19
Posts

Primary Residence or Investments?

Tanya Ansari
  • Rental Property Investor
  • San Diego, CA
Posted

Dear BP members:

I really need to hear some advice. 

Long story short:

-we are full time high income earners with W2 (also pursuing a start-up in biotech on the side) moved from Bay Area to SD (Cali)

-invested in Indy last year (duplex)

-we rented in SD for 5 mos while finding out the best area to live in and now are looking to buy primary residence

-we have about 240K in cash and another 130K coming soon from the sale of another property.

-we do plan to move out from Cali in 5 years (due to high taxes and expenses)

We both work from home, so we need to  have our own place, plus we have a toddler w/nanny in the house. Therefore were looking for 3-4 bdr in good areas of SD (4S, Rancho Penasquitos, Poway, Rancho Bernardo, Carslbad) where good community is. However, people are going all the way to removing all of the contingencies including appraisal and for a house of 900K-1 mil offering 1.2 mil and higher.

I don't feel offering and paying so much cash for something that is not going to bring me any income but actually is a liability. Is it better rent for around $3500, invest in other states rather than pay mortgage of $5500-$6000? However, we would lose appreciation (and it has been around 9% last year). 

Again for us, a community is important, so we don't want to buy duplex in SD as most of them are in not so good areas (of our criteria). 

Please consider that closing costs; moving fees and real estate agent fees are being paid for us.

Please advice.

Thank you!

Tatiana.

Most Popular Reply

User Stats

6,053
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6,987
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Dan H.
#4 General Real Estate Investing Contributor
  • Investor
  • Poway, CA
6,987
Votes |
6,053
Posts
Dan H.
#4 General Real Estate Investing Contributor
  • Investor
  • Poway, CA
Replied
Originally posted by @Tanya Ansari:

Dear BP members:

I really need to hear some advice. 

Long story short:

-we are full time high income earners with W2 (also pursuing a start-up in biotech on the side) moved from Bay Area to SD (Cali)

-invested in Indy last year (duplex)

-we rented in SD for 5 mos while finding out the best area to live in and now are looking to buy primary residence

-we have about 240K in cash and another 130K coming soon from the sale of another property.

-we do plan to move out from Cali in 5 years (due to high taxes and expenses)

We both work from home, so we need to  have our own place, plus we have a toddler w/nanny in the house. Therefore were looking for 3-4 bdr in good areas of SD (4S, Rancho Penasquitos, Poway, Rancho Bernardo, Carslbad) where good community is. However, people are going all the way to removing all of the contingencies including appraisal and for a house of 900K-1 mil offering 1.2 mil and higher.

I don't feel offering and paying so much cash for something that is not going to bring me any income but actually is a liability. Is it better rent for around $3500, invest in other states rather than pay mortgage of $5500-$6000? However, we would lose appreciation (and it has been around 9% last year). 

Again for us, a community is important, so we don't want to buy duplex in SD as most of them are in not so good areas (of our criteria). 

Please consider that closing costs; moving fees and real estate agent fees are being paid for us.

Please advice.

Thank you!

Tatiana.

Some items to correct:

>However, we would lose appreciation (and it has been around 9% last year).

I do not know where you got 9%, but San Diego area appreciation was over 20% according to multiple reliable sources   I have seen no reliable source as low as 9% for last year.

 >for a house of 900K-1 mil offering 1.2 mil and higher.

I do not know what your basing the value on but if it is the listing price you need to recognize that it is a pricing tactic sometimes to list below comp value to create as much frenzy as possible to obtain highest price.  I suspect those removing appraisal contingencies have a good idea what the range the property will appraise in.  Few are believing they will need to bring extra cash to closing in order to obtain financing. 

Now for your question:

I start with where the projections are, nationally projections I have seen range from -2.5% to 9%, but the projections for San Diego are significantly higher. I have seen ranges from 4% to 18%.  I personally will be surprised if with the already announce intention to raise rates that we will get 18% local RE appreciation.  

The fed has an ounces intent to raise rates.  It is a near certainty that rates are going up in 2022.  Buying now is likely to provide the best rates. 

Rent versus buying cash flow: nearly all RE purchases in San Diego are have negative initial cash flow at high LTV financing >=80%). That negative cash flow is even more extreme in the nice areas that you have listed (I live in one of those areas). It will be initially cheaper to rent than to purchase. However, rents are increasing at an incredible rate nation wide, but especially in areas like San Diego. For example rents in Carlsbad rose 18.4%. I expect rents to continue to raise at a fast rate for a few years minimum. Here is my reasoning: 1) houses have appreciated faster than rents for nearly a decade. The rents lag property prices and are going to be in catch up mode for quite a while. This is of course related to the cash flow situation. Rents are at a low compared to property values. Rents need to go up due to the underlying property costing more. 2) those announced interest rates wil, further make homes less affordable. Not a 1% rate increase is a 33% increase in the rates (3% rate goes to 4%, means current rate has gone up by 1/3). This is almost certainly going to affect affordability more than the property appreciation. Less affordable home makes it more difficult on new home buyers which keeps them renting. 3) new identified risk related to covid eviction moratoriums. San Diego county had the most stringent eviction moratorium in the country. The only legal evictions were for health and safety items. The tenant was allowed to stop paying and break every lease term not related to health and safety and you could not evict them. This newly identified risk must be and will be reflected in the rental revenue. in summary rents are going up.

Appreciation forecast for San Diego continue to predict high appreciation.  I tend to be on the conservative side of these forecasts.  I am forecasting the short term (<5 years) to be in line with inflation, but I expect in the long term San Diego appreciation will continue to be far better than inflation (it has for at least 70 years).

Equity pay down, with the rates were they are and the cost of properties (>$1m) where you are looking, the equity pay down is substantial.

My own belief is 5 years is border line now on renting versus owning.  It could take 5 years to where property would be cash neutral if a rental.  Appreciation and equity pay down, versus cost to buy (various closing costs including possibly points) and sell (RE commission and other closing costs).  If you were going to own longer, I would be advocating buying. In the near term appreciation/depreciation risk is real.   I would not rely on a short term appreciation as there are too many things that could occur without adequate time to recover.  

Good luck



  • Dan H.
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