Single Buy & Hold in San Diego or Multiple Properties Elsewhere?

Question

Hi BP Family, I've been reading through the forums for over 4 months before posting for the first time. I am originally from Chicago, and have been living in sunny San Diego since 2007. The wife and I have been fortunate to purchase our first SFH in 2010, and needless to say its appreciated to ridiculous levels.

Based on reading countless posts and BP podcasts, I've decided on the BRRRR strategy as the best approach moving forward with RE investing. I wanted to ask the experts here on BP (yeah I'm talking to you!) on your opinion with buying a multifamily property (2-4units) in San Diego, vs buying several multifamily properties in a less expensive area. The initial goal would be to maximize cash flow, with a target of $500 per door. Since I'm familiar with the Midwest area, my first thoughts would be to consider that as the less expensive option, but im always open to suggestions.

San Diego

PROS: High cash flow and very high appreciation. Population growth. Low vacancy. Rapid rent increases. Local, and can rehab and self manage initially.

CONS: Difficult to scale and will postpone purchasing additional properties for a few years. Neighborhood would be C/C-. Likely tenant issues associated with neighborhood. 2% rule would be between .8 to 1%.

Less Expensive Area (example Midwest)

PROS: High Cash Flow. Easier to scale with multiple properties. Neighborhood B-/C+. Presumed more dependable tenants. Contractor network already in place. On paper, 2% rule looks possible.

CONS: Low to no appreciation. Population flat or declining. Slow rent increases. Higher vacancy rates. Need to remotely manage or hire property manager.

Would love to hear your thoughts, and what YOU would choose.

Thanks,

Eric

Kevin Fox · Answer

Hey @Eric K.

I think investing locally in San Diego is the wiser strategy, especially to begin with.

The thing to keep in mind when asking this question is the final "R" of  the BRRRR acronym - REPEAT.

While the lower cost of entry does allow you to have a larger number of properties, "scaling" is all about growing your total returns.

Although the total unit count might be lower, your total returns and the control you have over the project/process will be far greater.

Another thing to keep in mind is that the tenant quality in San Diego is unquestionably better than just about anywhere else in the country. Even in our "lesser" neighborhoods, the current rental demand allows for owners who keep top market units to pluck top tier tenants.

Either way, I wish you the best of luck. Let me know if I can ever be of service to you!

Account Closed · Answer

@Eric K. All eggs in one basket makes for scrambled eggs if market tanks.

I invest in several states for various reasons, one of which is market fluctuations. Another reason is volume - I can do one "Subject To" cash flow transaction in California (maybe ;-) or do 4 in Arizona for roughly the same risk with better cash flow in Arizona. I do Subject To equity  in Austin and Subject To cash flow in a couple of places in the midwest. If the market turns in California, or heaven forbid taxes go up in California, and of course we all **know** that real estate **never** goes down. Lol - then I can weather that through with my properties elsewhere. But, personally I wouldn't do biz in Illinois, it's too close to bankruptcy, so I stick to the surrounding states.

Eric K. · Answer

Account Closed I'm on the same page! I can pull off one multifamily in a rough neighborhood here in SD, but that would wipe out all my liquid finances for a few years (which still may not be a bad option to have a first rental locally). Also not naive enough to believe that the market will keep this pace. I've been a day trader in a previous life, and there are plenty of examples of stock charts that go vertical, but they all come crashing down just as fast as they went up, usually over-correcting, before going back up again. The case-schiller looked no different during the last runup.

Also agree about Illinois. Love Chicago, but just the taxes alone would deter me. Would you be willing to share some of the other locations that have treated you well in the midwest? Is AZ currently overpriced for the rent?

Kirky Galt · Answer

He's the man of integrity and reason.

Affordability is a problem that has limited demand in many markets, along with the tightness in the money markets; however, there's plenty of money here in San Diego, strong population growth, and credit restrictions have eased.

Eric K. · Answer

@Kirky Galt, No doubt on the exit strategy! Im almost itching to sell my own property as inventory is flying off the shelves. The demand is there, but how is the affordability for the average joe? Im trying to understand how much longer this can keep going. Evidently longer than i thought.

Who is John Galt? :)

Eric K. · Answer

@Kevin Fox, I am currently helping a buddy of mine who has introduced me to the numbers of RE investing and really opened my eyes. He currently has 9 units in the lesser neighborhoods. Although the cash flow and appreciation is great, we still have had to evict on numerous occasions. Margins are getting very tight as the competition is getting absurd.  I'd love to hear more about some of the deals that have come across you desk. Still would like to have investing in SD work out. As you pointed out, its always best to have it local, and have much more control over the rehab and management.

Eric K. · Answer

@Ken Vingua, The deals that I was going after would allow me to pull a good chunk of funds back out during refi, but never getting close to 100%. This is why I would have to wait a few years to "repeat". 4 years of cashflow would be what is needed to get all the funds back into the account.

I'll be very curious to know how your 4 properties will unfold. If you come down the 5 occasionally, give me a shout and we can grab a beer. I live just on the other side of la jolla. Best of luck!

Ken Vingua · Answer

It is going to depends on a lot of factors but you said that you were planning on focusing on the BRRRR strategy.  If you can find a true BRRRR in San Diego then you would have negotiated a price and forced enough equity in the seasoning period to refinance your invested capital back out of the deal.  Then you would be ready for that final "R", repeat.  Finding deals like that in San Diego is far more difficult to do than in other parts of the country but are out there somewhere.  If you plan to focus on other areas then you will need a strong team of professionals protecting your interests.  It will take a great deal of trust to go through the rehab process and renting the units when you are not geographically located around the properties.

I currently live in Oceanside, CA and grew up in Chicago.  I did not choose to tie up all of my capital in a single CA home and since January of this year I chose to purchase 4 properties in other states.  Two of which are rehabs that I have project managers/partners overseeing all of the local work.  I believe more in the diversified portfolio in markets that are more stable.  I personally never plan to sell so while the appreciation gains would be nice, I was focused on finding a better cash on cash return.  Time will tell if the cash on cash return and the challenges of investing at a distance was the right choice.

Single Buy & Hold in San Diego or Multiple Properties Elsewhere?

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