Buying a single-family in SD. Questions about loans, rentals.

[Oliver Fang]

Hi guys!

I posted in here a while ago looking for advice on a buy and hold property in San Diego. After a good deal of looking around, I finally settled on a place in Mira Mesa. The seller has accepted my offer and I'm looking for some advice with the next steps. We have an agent helping us who is a family friend and I trust she will do a good job guiding us through the process but still looking for other opinions and extra advice. 

I spoke to a loan agent and my options are 30 year fixed at ~4%, 15 year fixed at 3.125%, or 30 year with 5Y and 7Y ARM at ~2.875% and ~3.125% respectively. This is assuming I'm taking a less than ~420K loan (there is some cutoff number around there, after which it gets higher). What would you guys do? I don't think I can afford the monthly payments on a 15 year loan and 4% is pretty brutal. So is 5Y/7Y ARM safe at this point? It wouldn't shoot up like crazy right?

I did the math (for 5Y ARM) and the monthly payment comes out to just under 1800 a month. Property tax is around 1.15% and comes out to about 560 a month. No HOA fees and I plan on managing the rental myself. Just based on some very brief research of rental prices, a 4BR should be able to cover the ~2400 costs with leftover cash flow fairly easily.

I plan on renting out at least 3 of the 4 bedrooms, maybe the 4th as well if I decide not to live there long term. Anybody have experience doing rentals in Mira Mesa area? How much would a 4BR single family go for? Or is it worth it to spend some extra effort and rent out the rooms individually? The house is older but the inside has been remodeled and is well maintained. Yard and exterior looks nice as well. Where do you guys post rental listings? Craigslist? Any other advice for someone who is just starting to rent their first unit? 

Let me know if you have any questions for me, and I would greatly appreciate any feedback regarding my situation!

Thank you!

[Dan H.]

@Oliver Fang research cap expenses. I suspect you need a rent of greater than $3k to have real projected cash flow going with the 5 ARM which also carries the highest risk. If you rent for $3000 to $3200 your projected actual cash flow would be no greater than $200/month assuming my cap expense numbers are somewhat accurate. I project cap expense on that size unit at >$400/month. Then add vacancies and maintenance. I think if you self manage maybe $250/month (5% vacancy at $3k rent=$150 then $100/month maintenance).

I am also surprised at the rent numbers being as high as those indicated in this post but Mira Mesa is not my area of expertise.  In Escondido that size rental would not be getting as high rent as $3k/month.  Maybe Mira Mesa has higher rents but make sure you do your rent research to know what market rent is.  

If you purchase this property your profit will likely have to be in appreciation.  By your description there is very little opportunity for forced appreciation (replacing carpets with wood floors is not going to result in much, if any, forced appreciation).  So your appreciation will be based on market property and rent appreciation. 

I am a bit surprised that experienced investors have not posted on the numbers. I would not choose the 5 ARM (like all the other posters I would go fixed 30) which means this property would result in negative projected cash flow at my financing choice.

I do not want to discourage you but are you sure this is the RE investment you are looking for?   The numbers seem not good when using the safe financing options.

One final item is to look at composite flooring when considering the wood flooring.  Some look very nice and are very low maintenance and hold up great. A lot of rentals are going to this flooring because of its low maintenance, the low cost of installation, and it looks good to great.  

Good luck