Will Coastal Properties Hold Their Value?

Question

Hi, Bigger Pockets Family!

First and foremost, I'm brand new to the forum and excited to be here & to get to know you :)

Prior to the coronavirus shutdown, I had been looking for a home to purchase in San Diego (preferably a two-bedroom and get a roommate). I currently live in Pacific Beach.  A few properties I had my eye on did not end up going on the market due to the social distancing.

Agents have been reassuring me this is still a great time to continue my home search considering coastal properties by military bases in SD will hold their value through a potential recession.

Naturally, the media has been discussing a recession which has made me hesitant to move forwards. However, I am not letting this stagnate me :) I do, however, want to make informed decisions considering the circumstances.

Can anybody advise me on the best way to look at historical home values in my area? I'd like to be able to see how prices fluctuated here during 2008/2009 in comparison to areas more inland.

I know there's no crystal ball into what the future holds... but I'm also doing my best to educate myself/seek advice.

I would love to hear from the community about this subject!

Thanks!!

Cindy

Dan H. · Answer

I posted on a different thread much of the following (modified slightly) that is also relevant to this thread.

These are not ordinary times. No one knows what the effects of Corona Virus is but I believe one of 2 things as related to RE: 1) It does not affect RE prices significantly 2) The virus results in a significant depreciation of RE assets. Note the short term rental (STR) market is hurting. I am diversified so STR rent short-comings are offset elsewhere, but I am already down ~$25K in STR rent and this will increase. I will be very surprised if I do not end up at least $50K down in STR rent. Some STR owners are not in a position to handle this. Our long term rental (LTR) rents have not yet been effected, but the longer this goes on, the more likely they will be affected. Combine this with ~20% decline of the stock market. You can see how RE prices could decline. What I do not see happening is that RE prices go up significantly in the near term.

Coastal areas like Pacific Beach have more STRs than most other areas (our STRs are in Mission Beach).  The STRs are being impacted more than LTRs.   I would think that areas with larger than average amount of STRs would be at greater risk of RE depreciation than areas with a smaller percentage of STR properties.

The one item that, more than any other item, has made investing in San Diego RE (appreciation) a smart investment is IMO almost certainly not going to be present in the short term. If there is RE depreciation, it would result in a loss of equity.

My recommendation it to take a wait and see approach.  Wait 3 months or 6 months to see how things look.  It is unlikely to cost you much and can save you a lot.  Long term, San Diego is a good RE market.  In the near term, I suspect it may not be.

Good luck

Tom Kastorff · Answer

@Cindy OBrien welcome neighbor (I am across mission bay)

Dan's replies are always spot on, and I would adhere to what he says. Coastal properties will hold value - God only created so many 70 degree beach towns, period. You can't enjoy a cocktail up top of Shore Club while listening to a DJ staring at the Pacific beach sunset ... from Ohio. Most of the folks that can afford to buy in PB / MB / LJ and so on can probably weather the COVID storm, but that could change if this drags out, folks lose their jobs, and STR owners are dying on the vine and need to get out. If inventory stays low then prices won't drop too much. But it doesn't mean there won't be a desperate seller or three once crap really hits the fan (every 1st of the month that lockdown passes, folks aren't paying rents or mortgages and so on, debts pile up, foreclosures start to become reality). You just have to be ready to jump before someone else does. No property goes unnoticed around here. As a local, I am bullish on RE here for short and long term, my family personally has made tons over the decades, so this is first hand knowledge. I own my residence, but don't invest otherwise here, prefer OOS or CA vacation towns (think ski, pool-desert).

To look at historical home values, or comps, you can use Zillow to do so up to 10 years ago, I believe. A good agent should also be able to do this for you, frankly, that is what you pay them for (their 3% buyers commission). Make them work for you. I am not sure any dataset can bo back to '08 though, might be tougher (>10yrs).

You are smart to educate, seek advice, and WAIT. IMO only two logical things can happen over the next 6+ months: things stagnate / move little, or go down (depending on how long this COVID / quarantine lasts, which I think will be 6-18 months in some form of social distancing and reduced group activities). As you said, none of us have a crystal ball, but it is unlikely prices go up anytime soon barring a miracle. Many folks on here preach DONT WAIT INVEST NOW GET YOUR FEET WET, but patience is a virtue. I had some "deals" in front of me in two short term rental markets in Jan/Feb and boy am I glad I did not jump on them! They will be at least 20% cheaper to buy or more in the coming months. (not that coastal SD will go this way, but just an example of waiting). I would also be losing my shorts, like Dan, as all STR's are essentially shut down in CA through May 31, meaning we are bleeding money in that market.

Be patient! It will pay off. Good luck.

Dan H. · Answer

We mostly purchase RE with value adds and get some near term sweat equity.  We also buy properties that start with a better cash flow equation than average (this does not mean it is good by any means compared to other areas - It is not).  But we may be able to get a cash neutral with conservative cost estimates at 80% LTV (but no one invests $100K+ to not make profit so cash neutral is not good).  This also minimizes our investment in the RE.  About half of our RE had all of our investment extracted via refinances.  All of our RE where we have completed the value add/refinance have a fairly low amount of our capital trapped in the RE.  This reduced capital invested probably does more for our return rate than the increase in value achieved helped our return.  The two when combined significantly magnifies the return rate.

So we get the sweat equity and each year the cash flow situation improves.  Lets say I purchase a true cash neutral RE (which mean conservative expense estimates - I typically allocate at least $250/month attached and $300/month detached for maintenance & cap ex of a small 2 BR unit).  This would likely be a residential multiplex.  Lets say I make $30k to $50K on the value add.  The first year cash neutral.  Our first rent increase is typically below market increase if tenant is a desired tenant so for a duplex it will go up $50/unit ($100 total).  Still horrendous cash flow ($1200/year), but possibly good for the investment amount (depending on how much got trapped in the RE after the refi - Note if only 10K is trapped then $1200 cash flow is pretty good (this is only an example, without an assist from appreciation we trap more than $10K)). By the third year our increases are market increases as tenants are typically at least $100 below market rent by then.  Market rent increases in San Diego, on average, have been over $100/month annually going back 7 years.

How good has this worked?  We have a $375K duplex that prior to Corona was doing $16K/month STR.  We have a $775k quad with just short of $16K rent LTR.

I suggest people look at the recently released BP location evaluator spreadsheet.  Look at the long duration it had (2010 to 2018 (2018 was latest year available at the time)).  Look at the cash flow.  San Diego is not yet great over that span, but it produced better cash flow than many of the "good" cash flow markets.  In addition, the spreadsheet has a flaw with regard to its property tax for CA so all CA cities had better cash flow than depicted for the long duration.  Then forecast what that spreadsheet will look like in another 5 or 10 years.  I expect San Diego on a 15 year hold to be very close to top 5% in terms of cash flow for investment amount.  I wish BP had included a 2000 to 2018 duration.  I am confident San Diego would have been near the top on cash flow for investment amount.  You likely know where it would be on appreciation.

Case Shiller lists San Diego as 3rd best US City return for buy n hold residential for this century, but I do not know if there is a way to determine how it would have faired if just evaluating on cash flow.

Without the value add, the investor is at the mercy of rent appreciation to produce the return.  Even on good cash flow RE for the area, it is bad initial cash flow (poor initial return for the investment amount).  It takes time for the return, without a value add, to be decent (the 2010 to 2018 was long enough for decent return) and longer still for it to be good.

Good luck

Rob K. · Answer

@Dan Heuschele,

No question that we are in a time of economic stress and uncertainty and no one really knows the effect it will have on the real estate market. As you say, listings are down, but this could just mean sellers are not going to sell unless they can get their dream price, not necessarily a backlog. Unemployment is up hugely, but probably mostly on the low income end, folks who were not in the market to buy anyway. The market is still awash in capital. How many recent MB/PB STR purchases have there been and is it enough to result in significant discounted inventory coming back onto the market? I don't know the answer, but so far it does not seem like any inventory is coming back on the market at all and we are now about two months in.

In order to get anything approaching a 20% fall in coastal real estate, something would have to trigger a pretty massive leap in inventory coming back onto the market. A spike in interest rates coupled with renewed foreclosures could do it, but I think we can count on government to intervene all the way to negative interest rate policy to stop that from occurring.

The mistake I made in the 2008-2009 recession was assuming things were going to get a lot worse, passing on what would have been incredible deals, and not anticipating the effect of the government bailout. This time it looks like the government bailout will be even bigger. Who a few months ago would ever have predicted that the Fed reserve would be buying junk bonds? This time around, I am going to try not to underestimate the effect of government intervention. Will keep a close watch on the level of inventory, but I would be surprised to see a significant change anytime soon.

Dan H. · Answer

This is why I think we could see a 5% to 20% depreciation:

• We are already down around $45k on our Mission Beach STR rent. We will exceed $50k in lost rents and probably $60k in lost rents. I went to our units to use the parking space to see the bioluminescent waves. Virtually all the STR units in the area were empty on a weekend day. These are units that approach 100% occupancy.
• 
• Recent Mission Beach/Pacific Beach purchases would be very negative if rented as an LTR.  So converting to LTR is not an option for all of these owners. In the Great Recession we converted one of our units to LTR for the school year.  We rented to students because this allowed the unit to be empty for the peak summer season.   SDSU (all CSUs) has already announced they will not be starting on campus teaching.   The UC System (UCSD) is still working to determine their approach to opening, but I am suspecting something like Freshmen only.  My point is the easy option to rent to students in the off season may not be an option.  
• 
• LTR rent collections are down.  The exact percent varies depending on the source. Unemployment is around 25% in San Diego.   This is much higher than the national unemployment rate. 
• RE Listings are down around 30% in my market from a year ago.  With the higher unemployment and lower rents there should be more listings than a year ago. This is indicating a backlog of listings. 
• Evictions are currently not allowed in much of the nation.  Evictions are painful for the LL and result in lost revenue.  This can be enough to convince some LL to sell.
• Forbearance helps with the mortgage payment, but other rental expenses approach 50% of the rent.   This implies even if mortgage is moved to the end of the loan, the rental owner is still losing a lot of money every month that rent is not paid.  
• 
• Prices were at all time high.  There may have been a correction even without the virus.We appeared to be recession bound prior to the virus.

No one knows for sure what the RE market impact of the virus will be, but I think there is definitely a risk of a significant decline in RE value.

Tom Kastorff · Answer

@Cindy OBrien

PB is expensive, I don't see how anything would cash flow there for years, again, you'd have to read all of Dan's posts to see how he does it with his beach rentals. Most are CF negative for the first few years while gaining appreciation/principal paydown and waiting for the rent to rise up to meet costs. A house hack would help pay your mortgage but most definitely not get close to letting you live rent free unless you were stacking bunk beds in every corner. I started investing "OOT" (out of town) - places like ski towns or palm springs, where you can get cheap condos or million dollar party pads that are super popular getaways year round and can really crush it during Stagecoach / Coachella / festival weekends. And I can drive to and use them myself. Basically this model: https://www.biggerpockets.com/...I look at these types of investments first and foremost, because I know the markets, can use the STR myself for personal value, and they tend to be in appreciation-friendly areas. They also dip harder in bad economic markets because of the vacation home aspect, so you have to be able to weather the storms (like right now), but there are better deals as well. I am paying extra close attention, and making calls weekly, on a couple vacation rental towns just waiting for some deals to hit, and I know they are coming, just unsure if in 30 days or 6 mos. I have started looking OOS by reading a lot of threads here, Brandon Turner's webinars and books, and determining my own investment statement / thesis as to what I want to do, where, how much, etc. Personally I would prefer properties I can drive to if needed - like the above OOT locations. Or that I can fly to easily, preferably a direct flight within a couple hours, especially if within my business travel domain so I can get to a rental location for free on a work trip. Thus from Socal that puts me to about TX as about as far as I want to go. So I have made connections in Austin TX, Bozeman MT, Vegas, and several CA vacation towns. Many on BP talk about 100k duplexes in Ohio or KC or FL but that is just not a model I prefer to explore at this time, despite "getting a lot more for your money" in theory. I don't want to have to spend days flying across the country if I don't have to, and there will be times you need to, especially up front to go out and understand the market you are investing in, which is always recommended. I hit Austin with regularity for work, so I know the market a bit and see the upside. I have no reason to go to Cincinnati OH however. Columbus Ohio is intriguing with OSU and tech employers, but I haven't explored the potential further, but there are tons of BP threads on c-bus. I have not pulled the trigger yet on an OOS investment, but have been trying hard during this pandemic to find deals and stay ready, hoarding cash. That's my methodology, there are many you will find on this site that can work.

Rob K. · Answer

The 2008-2009 situation was based on large increases in inventory driven by spikes in foreclosures. In the great recession, government policy to extend and pretend was a bit late in coming but it was an important factor in the foreclosures subsiding and inventory receding.

Today, government intervention mandating forbearance and discouraging if not prohibiting foreclosures outright has been massive and early. Foreclosures have not increased and are not likely to in the near future if at all. In order for there to be a repeat of the 2008 situation, there needs to be something that drives a large increase in available inventory beyond current demand. It is hard to envision what would drive an increase in inventory, especially in coastal markets such as Pacific Beach. Coronavirus? It will certainly cause economic stress for a while, but will it motivate anyone to dump coastal real estate? True, there may be some stress in vacation rentals, but enough to change the inventory equation? Vacation rentals can always become long term rentals. I don't see any sort of mass liquidation of vacation rentals.

Instead, everyone appears to be in wait and see mode and sales transactions are diminishing. This might be the new normal for a while. I would not assume a 2008 repeat. If you are in the market for a long term buy and hold, keep looking and make a decision based on the fundamentals, not fear of what the market may do. As you say, these interest rates are very tempting. History of San Diego is that if you can get into a buy and hold coastal property that comes close to break even, you will do just fine.

Maxwell Ventura · Answer

@Cindy OBrien

Tj & Dan gave some great advice & insight between their comments back and forth. I'd go back and RE-read them again. 😀Valuable information. 👍🏻

And it may turn out that waiting for a little bit is the best move. I have a client right now that's fixed on a 2BR condo in PB between $500-$700K and there's next to nothing available (Just Checked BTW... There's 5 👇🏼). And as soon as something hits, it doesn't stay active for long? So what does that tell you? 🧐

And Out of the 5, 4 listings have been active for 4 weeks. The remaining -> 2 days.

Supply is very low, and demand is still high... part in fact due to the low interest rates too. I saw a slight dip in the market about 6-8 weeks ago when the lockdown was initiated but it wasn't much. Now, I'm seeing multiple offers and prices coming in above list price. Now, every market is different and it'll vary across the county of course.

For PB, my client has a similar goal as you. Purchase a 2 BR condo/townhome, and his buddy will help subsidize part of his mortgage.

There are a couple of unknowns... When this CoVID / Pandemic quiets down, how much influx of inventory will we see back on the market? We sure could use it. What will the rates do at that time? A $500K property @ 3.5% will yield approximately the same mortgage payment as a $450K property @ 4.5%

Cheers, 👊🏻

Alex Olson · Answer

I think they will hold their value for the most part. There is so much density there that it is hard for it to drop much. The economy will pick back up and and it will appreciate like never before again. Might not be until next year or two years but it will happen. Look at growing population markets - that is where value will continue to rise the fastest.

Cindy OBrien · Answer

@TJ Watson hey neighbor! It's great to meet others in the area (virtually of course).

I've also been now learning that the PB area is best for buy and hold, not LTR.  My original plan was to house hack my first place here by getting a roomie and eventually move and rent it out... looks like it wouldn't be cash flowing regardless with where home prices/ average rent are now! My thoughts now are income property elsewhere.

How did you decide where you wanted to invest OOS? What was your experience with that?

Will Coastal Properties Hold Their Value?

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