Military In San Diego. Should I buy or rent??
San Diego, CA · Member since 2019 · 8 posts · 3 votes
My current apartment offered me a new lease for 2,032 and I'm having trouble coming to terms with paying this amount for rent. My income after deductions is 70k and my wife's annual income is a little over 50k. We both are mid 20's and have no debt or kids. My idea in this market would be to buy and sell once we leave or possibly buy and rent (using a agent we personally know to manage the property once we leave). I would probably use the VA loan although we could front about 60k for a down payment if it makes more sense. My other idea would be to continue renting and look to start getting into either turnkeys or general investing out of state. This obviously is a personal decision, but please let me know if there's something I'm missing or forgetting. Thanks a lot.
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Hey man,
Full transparency I'm a real estate agent in SD. Prior Recon Marine. Got into real estate about 4 years ago. I help people use the VA loan to invest, not just buy a temporary home.
With that being said, it depends. You definitely can pay about the same price for owning home. MAYBE a little less. However your principal paydown, appreciation, and potential rental income serve you 1000000000 times better for a 3 year stretch. I’m assuming that’s how long your orders are.
I’m in escrow with a Marine client for a $1.13M triplex, but due to rental income his mortgage is less than $1500. Yet, he’s getting the benefits from owning that property. (Seller is also paying him 15k for closing costs) in the end, it’s doable. Just be careful on your lender and agent you work with. Like most industries, there’s people without a sound moral compass.
Feel free to text or call me (PM me for number). Even if you don't want to use me I'll help how I can. I'm holding a real estate meet up in downtown SD soon as well, come by and chat with other VA investors. Check out "From Military to Millionaire " on Facebook too. David is a good friend of mine and writes for BP occasionally. Hope this helped!
All the best,
Donald Appleberry
@Sebastien Carriere
Hey man,
Full transparency I'm a real estate agent in SD. Prior Recon Marine. Got into real estate about 4 years ago. I help people use the VA loan to invest, not just buy a temporary home.
With that being said, it depends. You definitely can pay about the same price for owning home. MAYBE a little less. However your principal paydown, appreciation, and potential rental income serve you 1000000000 times better for a 3 year stretch. I’m assuming that’s how long your orders are.
I’m in escrow with a Marine client for a $1.13M triplex, but due to rental income his mortgage is less than $1500. Yet, he’s getting the benefits from owning that property. (Seller is also paying him 15k for closing costs) in the end, it’s doable. Just be careful on your lender and agent you work with. Like most industries, there’s people without a sound moral compass.
Feel free to text or call me (PM me for number). Even if you don't want to use me I'll help how I can. I'm holding a real estate meet up in downtown SD soon as well, come by and chat with other VA investors. Check out "From Military to Millionaire " on Facebook too. David is a good friend of mine and writes for BP occasionally. Hope this helped!
All the best,
Donald Appleberry
Sebastian, thanks so much for your service! My father is a Vietnam Vet and I have many friends in the Navy and Marines. I second what Donald said above. With the income levels you described and presumably the housing assistance from the military, you would benefit from buying over renting. Full disclosure I’m also a Realtor in San Diego. I have a couple examples of military friends that have bought in San Diego as investments. One couple own 3 or 4 properties. They’d buy when stationed here, rent it out when they were stationed elsewhere and It snother property when they moved back. Rinse and repeat. Another friend is a Seal - bought a house in IB, house hacked it/rented it out when deployed for long periods of time. He did quite well for himself. feel free to contact me to chat further as well. Cheers!
I agree that house hacking with a multi-family residence and taking advantage of your VA loan is a great option. One thing to just keep in mind is that VA doesn't allow you to use the potential rental income from the other units to qualify without a landlord history, unlike FHA. So you will have to qualify for the entire mortgage payment.
@Donald E Appleberry I’ll reach out to you for sure
@Jerry Padilla Thanks for the info! I'm quickly finding out there's a lot of things I didn't know about the VA loan.
I once again am the contrarian of the other posts which serves me fine. I am not a realtor and am very pro San Diego RE. I have been in this market a long time. I know the market fairly well. We have had rentals here a long time. We have RE in fairly diverse areas in San Diego. We have both LTR and STR rentals.
My issues with investing in San Diego for the short term are the following:
I am very pro San Diego RE, but anyone who plans to hold less than 5 years is taking on a lot of risk for what will be negative cash flow over that holding period.
Educate yourself on the 50% rule (which is conservative in high rent markets like San Diego but I want my estimates to be conservative) to get some estimate of the negative cash flow that you will take on at your LTV level. I personally believe this alone may enlighten you to my perspective.
Good luck
@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.
@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.
The issue is the cash flow has never been worse. Retail SFR have rent to cost ratios of approximately 0.5%. A little better for duplex to quad. If you use the 50% rule as a rough cost estimate, it implies that the entire principle and interest is negative cash flow. On high LTV loans, the principle and interest is a significant chunk of change. This implies it is cheaper to rent over the short term as applied to cash flow.
Example $500K home. If it rents at $2.5K (0.5% ratio) then by 50% rule (which admittedly is conservative in the high rent markets like San Diego but I want my forecasts to be conservative) the entire principle and interest payment is the cash flow negative. Do you think my rent is too low for that price RE? It depends on the area but that is close to the ratio I am seeing in quite a few San Diego markets (some a little better and some a little worse but no where do I see the retail ratio significantly better). In this example, at 90% LTV, 30 year, at 4% results in $2148/month. That is the projected negative cash flow if using the 50% rule with those loan terms. Renting would save this $2148/month as your cost would be only the rent amount ($2.5K).
Why would anyone purchase? I am forecasting 8% rent growth for each of the next 2 years so a total rent increase in 2 years of $416 for this example. A very good (for the owner) rent increase but it will take more than 5 years even at 8% annual rent growth (and I am not forecasting more than 2 years at that rate) to get cash flow neutral. Investors purchase for the long hold. We would only purchase if the RE had a value add and/or was below retail but there is a lot of competition for both of those (so we are not just relying on the long hold).
I realize this investment example can be saved by property appreciation but in the short term there have been cycles. In general, there are more up cycles than down cycles and San Diego has outstanding long term appreciation. I would feel comfortable telling someone that San Diego RE prices will be higher 10 years from now than they are today. I would not feel comfortable saying the same thing for 3 years or 5 years from today.
My perspective is the large initial negative cash flow of a high LTV loan is unlikely to be overcome in the short-term even if there is no downward cycle on the property appreciation. Add in costs to purchase (closing costs) and cost to sell or the challenges of an OOS rental and it is a lot of risk to purchase for the short-term. This closing and selling costs are likely to exceed 10% so the first 10% of appreciation is already consumed.
@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.
The issue is the cash flow has never been worse. Retail SFR have rent to cost ratios of approximately 0.5%. A little better for duplex to quad. If you use the 50% rule as a rough cost estimate, it implies that the entire principle and interest is negative cash flow. On high LTV loans, the principle and interest is a significant chunk of change. This implies it is cheaper to rent over the short term as applied to cash flow.
Example $500K home. If it rents at $2.5K (0.5% ratio) then by 50% rule (which admittedly is conservative in the high rent markets like San Diego but I want my forecasts to be conservative) the entire principle and interest payment is the cash flow negative. Do you think my rent is too low for that price RE? It depends on the area but that is close to the ratio I am seeing in quite a few San Diego markets (some a little better and some a little worse but no where do I see the retail ratio significantly better). In this example, at 90% LTV, 30 year, at 4% results in $2148/month. That is the projected negative cash flow if using the 50% rule with those loan terms. Renting would save this $2148/month as your cost would be only the rent amount ($2.5K).
Why would anyone purchase? I am forecasting 8% rent growth for each of the next 2 years so a total rent increase in 2 years of $416 for this example. A very good (for the owner) rent increase but it will take more than 5 years even at 8% annual rent growth (and I am not forecasting more than 2 years at that rate) to get cash flow neutral. Investors purchase for the long hold. We would only purchase if the RE had a value add and/or was below retail but there is a lot of competition for both of those (so we are not just relying on the long hold).
I realize this investment example can be saved by property appreciation but in the short term there have been cycles. In general, there are more up cycles than down cycles and San Diego has outstanding long term appreciation. I would feel comfortable telling someone that San Diego RE prices will be higher 10 years from now than they are today. I would not feel comfortable saying the same thing for 3 years or 5 years from today.
My perspective is the large initial negative cash flow of a high LTV loan is unlikely to be overcome in the short-term even if there is no downward cycle on the property appreciation. Add in costs to purchase (closing costs) and cost to sell or the challenges of an OOS rental and it is a lot of risk to purchase for the short-term. This closing and selling costs are likely to exceed 10% so the first 10% of appreciation is already consumed.
Dan, you are over-analyzing this. The question by Sebastian is Buy or Rent?
San Diego real estate appreciated 55.37% over the last ten years, which is an average annual home appreciation rate of 4.50%, putting San Diego in the top 10% nationally for real estate appreciation. Today's VA rate is 3.00%.
Buying has huge advantages:
@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.
The issue is the cash flow has never been worse. Retail SFR have rent to cost ratios of approximately 0.5%. A little better for duplex to quad. If you use the 50% rule as a rough cost estimate, it implies that the entire principle and interest is negative cash flow. On high LTV loans, the principle and interest is a significant chunk of change. This implies it is cheaper to rent over the short term as applied to cash flow.
Example $500K home. If it rents at $2.5K (0.5% ratio) then by 50% rule (which admittedly is conservative in the high rent markets like San Diego but I want my forecasts to be conservative) the entire principle and interest payment is the cash flow negative. Do you think my rent is too low for that price RE? It depends on the area but that is close to the ratio I am seeing in quite a few San Diego markets (some a little better and some a little worse but no where do I see the retail ratio significantly better). In this example, at 90% LTV, 30 year, at 4% results in $2148/month. That is the projected negative cash flow if using the 50% rule with those loan terms. Renting would save this $2148/month as your cost would be only the rent amount ($2.5K).
Why would anyone purchase? I am forecasting 8% rent growth for each of the next 2 years so a total rent increase in 2 years of $416 for this example. A very good (for the owner) rent increase but it will take more than 5 years even at 8% annual rent growth (and I am not forecasting more than 2 years at that rate) to get cash flow neutral. Investors purchase for the long hold. We would only purchase if the RE had a value add and/or was below retail but there is a lot of competition for both of those (so we are not just relying on the long hold).
I realize this investment example can be saved by property appreciation but in the short term there have been cycles. In general, there are more up cycles than down cycles and San Diego has outstanding long term appreciation. I would feel comfortable telling someone that San Diego RE prices will be higher 10 years from now than they are today. I would not feel comfortable saying the same thing for 3 years or 5 years from today.
My perspective is the large initial negative cash flow of a high LTV loan is unlikely to be overcome in the short-term even if there is no downward cycle on the property appreciation. Add in costs to purchase (closing costs) and cost to sell or the challenges of an OOS rental and it is a lot of risk to purchase for the short-term. This closing and selling costs are likely to exceed 10% so the first 10% of appreciation is already consumed.
Dan, you are over-analyzing this. The question by Sebastian is Buy or Rent?
San Diego real estate appreciated 55.37% over the last ten years, which is an average annual home appreciation rate of 4.50%, putting San Diego in the top 10% nationally for real estate appreciation. Today's VA rate is 3.00%.
Buying has huge advantages:
Hi Guifre,
I think you and Dan are mostly saying the same thing. And please, correct me if I'm wrong: Dan is merely stating the break-even point for San Diego SFH's is about 5 years. That is, if someone were to buy a home using the VA loan- even IF they put 10% down- it would still likely take at least 5 years to break even. So if someone's plan is to hold for any less than 5 years, renting is a more profitable solution. Generally.
My anecdotal experience mirrors what Dan is saying: I bought a median value SFH in 2014. I've watched its property value surge in the last 6 years. That resale value is an unrealized gain so, really, the only measure of value (until I sell) is the rent. It took 5 years before a refinance out of the VA loan and into a conventional loan finally allowed enough market appreciation + debt service to result in positive cash flow.
Anyone interested in using the VA loan to buy a home in San Diego- especially if you're putting $0 or 0% down- it will be years before the house will cash flow positively because the rents will not be high enough to cover the entire monthly liability. However, historically, San Diego is a great freaking bet. So, if you are willing to wait at least more than 5 years, San Diego real estate is (historically) a very profitable investment.
I would suggest buying for long term investments in general especially in San Diego. Sebastian is weighing renting vs buying, and we’re just suggesting that buying is better option over renting. Agreed that roughly 5 years is the break even point.
@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.
The issue is the cash flow has never been worse. Retail SFR have rent to cost ratios of approximately 0.5%. A little better for duplex to quad. If you use the 50% rule as a rough cost estimate, it implies that the entire principle and interest is negative cash flow. On high LTV loans, the principle and interest is a significant chunk of change. This implies it is cheaper to rent over the short term as applied to cash flow.
Example $500K home. If it rents at $2.5K (0.5% ratio) then by 50% rule (which admittedly is conservative in the high rent markets like San Diego but I want my forecasts to be conservative) the entire principle and interest payment is the cash flow negative. Do you think my rent is too low for that price RE? It depends on the area but that is close to the ratio I am seeing in quite a few San Diego markets (some a little better and some a little worse but no where do I see the retail ratio significantly better). In this example, at 90% LTV, 30 year, at 4% results in $2148/month. That is the projected negative cash flow if using the 50% rule with those loan terms. Renting would save this $2148/month as your cost would be only the rent amount ($2.5K).
Why would anyone purchase? I am forecasting 8% rent growth for each of the next 2 years so a total rent increase in 2 years of $416 for this example. A very good (for the owner) rent increase but it will take more than 5 years even at 8% annual rent growth (and I am not forecasting more than 2 years at that rate) to get cash flow neutral. Investors purchase for the long hold. We would only purchase if the RE had a value add and/or was below retail but there is a lot of competition for both of those (so we are not just relying on the long hold).
I realize this investment example can be saved by property appreciation but in the short term there have been cycles. In general, there are more up cycles than down cycles and San Diego has outstanding long term appreciation. I would feel comfortable telling someone that San Diego RE prices will be higher 10 years from now than they are today. I would not feel comfortable saying the same thing for 3 years or 5 years from today.
My perspective is the large initial negative cash flow of a high LTV loan is unlikely to be overcome in the short-term even if there is no downward cycle on the property appreciation. Add in costs to purchase (closing costs) and cost to sell or the challenges of an OOS rental and it is a lot of risk to purchase for the short-term. This closing and selling costs are likely to exceed 10% so the first 10% of appreciation is already consumed.
Dan, you are over-analyzing this. The question by Sebastian is Buy or Rent?
San Diego real estate appreciated 55.37% over the last ten years, which is an average annual home appreciation rate of 4.50%, putting San Diego in the top 10% nationally for real estate appreciation. Today's VA rate is 3.00%.
Buying has huge advantages:
Hi Guifre,
I think you and Dan are mostly saying the same thing. And please, correct me if I'm wrong: Dan is merely stating the break-even point for San Diego SFH's is about 5 years. That is, if someone were to buy a home using the VA loan- even IF they put 10% down- it would still likely take at least 5 years to break even. So if someone's plan is to hold for any less than 5 years, renting is a more profitable solution. Generally.
My anecdotal experience mirrors what Dan is saying: I bought a median value SFH in 2014. I've watched its property value surge in the last 6 years. That resale value is an unrealized gain so, really, the only measure of value (until I sell) is the rent. It took 5 years before a refinance out of the VA loan and into a conventional loan finally allowed enough market appreciation + debt service to result in positive cash flow.
Anyone interested in using the VA loan to buy a home in San Diego- especially if you're putting $0 or 0% down- it will be years before the house will cash flow positively because the rents will not be high enough to cover the entire monthly liability. However, historically, San Diego is a great freaking bet. So, if you are willing to wait at least more than 5 years, San Diego real estate is (historically) a very profitable investment.
>Dan is merely stating the break-even point for San Diego SFH's is about 5 years.
With the large negative cash flow of today, I think it is unlikely to project neutral cash flow in anywhere close to 5 years. Use the BP calculator to see how long it will take to be cash neutral at the current prices with realistic rent appreciation. I think a safe hold period is 10 years. similarly any expectation for property appreciation in a shorter interval than 10 years is ignoring the historical depreciation valleys that have occurred many times.
The reality of today’s San Diego RE market is huge initial negative cash flow that will take years of rent increases to make cash neutral.
The purchase and selling cost (~10%) will consume a couple/few years of the appreciation if we use historical averages for appreciation.
Renting starts off being cheaper than owning and remains so for quite a few years (likely more than 5 years).
Eventually owning will be financially better than renting, but it is likely to take more than 5 years.
@Sebastien Carriere I am also Active Duty and was stationed in San Diego for only one year in 2012. It happened to be the only place I haven't purchased a home (but wish I had). Everybody here has made some fantastic points, the only thing to keep in mind is that the VA loan has a cap which I believe is now at $510,400. In most parts of the country that will take you far, but not necessarily in San Diego. Also keep in mind that it isn't $510,400 for each home but total VA loan usage. If you purchase a home there for $500K you will no loner have an option to use a VA loan at your next location. Best of luck and Bravo Zulu for taking the plunge into real estate early. If you ever move to Pensacola, China Lake, or Great Lakes let me know! I have studied their markets pretty extensively.
@Rochelle Thea Fabrizio - The lending limits just went up as of Jan 1, 2020. I just attended a VA seminar to review changes to the VA program put on by a local lender (Aligned Mortgage). The changes are encapsulated in the "Blue Water Navy Vietnam Veterans Act of 2019". With this new law, you can get a loan up to $2M with a credit score above 720. Here are the new caps:
580 Credit Score: $750K
620 Credit Score: $1M
680 Credit Score: $1.5M
720 Credit Score: $2M
@Curtis Chism AWESOME! That is great news! I have been dragging my feet on fully assuming a property from my ex-husband because it would have put me over my cap and knowing this I now have over 1M of wiggle room. Thank you!
@Rochelle Thea Fabrizio you're welcome! Also, if a Vet has any disability (I think it has to be 10% or more), the fees are waived by the VA as well.
@Donald E Appleberry
I’m also in the San Diego area, prior military. When and where will your meet up be? I’d like to meet new people.
@Stefano Sosa I just used the VA loan and closed on my first house here in SD in December after being a renter out here for about 10yrs (with a stint in NC and some time in Newport, RI). I knew going in that I wouldn't be able to cashflow it any time soon and that I would likely only be here for 3yrs. I am going to do all I can to stay here until retirement. They are going to have to drag me out of SD this time!
I may not ever be able to use the house as a cashflowing rental but there are two intangibles that really sold me:
1. After living in 17 different places in the last 20yrs I wanted a place of my own. Somewhere that I felt at home and not like a visitor in someone else's place.
2. The education and experience of going through the process opened my eyes. It was the catalyst that got me interested in the benefits (and challenges) of REI.
Not necessarily great reasons to throw down $500,000+ - but it helps me sleep at night. Actually, it's what keeps me up at night reading about real estate.
Good luck - I too would love to jump in on one of these meetups all the kids are talking about!
- Raffaele
@Sebastien Carriere Buy if you’ll be here longer than five years, rent if less.
@Raffaele Giarnella
That’s awesome dude, congrats!! Have to start somewhere. It made sense for me back in 2010. I’m sure it’s going to be worth a whole heck of a lot more in the long run. San Diego is a beautiful place. That’s why I stayed after the military. I was listening to a BP podcast today and it mentioned if you want to find a meetup, go to biggerpockets.com/events (if you don’t know already, I didn’t).
I can only go Friday evenings and the weekend. Hope to meet soon. Or we’ll have to start our own.
Hey Sebastien,
I am also AD Navy here in San Diego and I just closed on a triplex using my VA loan. I have lived here for 4 years and wish I would have bought something sooner than spending my money on rent vs something that I own. I had the same mindset about possibly using cash but the more I searched and learned, I realized if I am afforded the ability to do little or nothing down, then why wouldn't I? My triplex needs some updates and that's what I will be doing with some of the cash I saved, forcibly appreciating the property. I also have a dynamite realtor with a lender who understands the VA loan well so feel free to message me if you have questions or want their contact info.
Taylor
Congratulations @Taylor Eilers and @Account Closed for closing on your properties!
Thank you to everyone for your replies and insight to this market!!! Can’t reply to everyone individually but definitely taking everyone’s word into account!