San Diego Multifamily 2-4 unit- Price help?

[Brittany Bailey]

Hi there, I am new to Bigger Pockets and am so excited to find this resource! I have a question regarding the prices of multifamily in San Diego. My husband and I are ready to buy our first home and would like to do an owner occupied 2-4 unit property. We have $40k that we are comfortable putting down plus ~$10k for closing costs. We have FHA financing. Our lender has told us that for both FHA and Conventional, only 75% of the current rents or potential rents (the lowest number is used) is considered for underwriting, and given max FHA loan amounts, for a 3-4 unit, the purchase price would need to be $900k and generate a gross of $8000 in rents. For a duplex of $700k, it would need $3k in gross rents. My question is this: so far in looking at deals (limiting search to center city area- no further east than Normal Heights), it seems most of the duplexes I've seen are listed in the $800-900k range (outside of FHA guidelines) and the 3-4 units are in the $900-1.2 million+ range and don't come anywhere near $8k in gross rents needed to finance. Everything I've looked at it points toward prices hundreds of thousands of dollars over what the rents would suggest, and negative cash flow. How are these properties getting sold? Is it larger downpayment that makes the numbers make sense, or are buyers taking a hit in cash flow for the potential appreciation?

[Dan H.]

I specialize in small multis (duplex to quad) in a city in San Diego County. In my market, not sure if it is the same where you are looking to purchase, looking at the list price on duplex to quad provides a very misleading picture. Get a list of recently sold duplex to quad in your area of interest and then drive by at least a half dozen of them. This will provide you a better idea of actual purchase price of the various units. In my market what you would find is the price of the units that have sold is significantly lower than the price that may seem to be indicated by the MLS list prices.

As for rent compared to purchase price San Diego county is a tough market.  There are not a lot of duplex to quad that have clear cash flow upon purchase.  In addition, many of the ones that have clear cash flow the experienced buy n hold investor will realize provides some sort of headache to manage.  A big item is sufficient parking.

Now lets say you find a duplex to quad that has clear cash flow and no significant red flags to manage then is there a huge deferred cap expense?

If a duplex to quad makes it through the above checks then you need to realize there is competition for these type of purchases including some with some pretty deep pockets.  In my market if I identify such a property I typically make a competitive offer.  All cash offers are not extremely rare.

BTW I have run the numbers in my market on an investor conventional loan (not FHA: at least 20% down for investor conventional loan) buy n hold and have determine that in my market you need at least 70% rent to purchase price (including any immediate repairs) to have clear cash flow. Note with less money down your mortgage payment increases so you will need a higher rent to purchase ratio.

There is risk purchasing cash neutral properties but I have done it once and it worked out real well.  My purchased had some forced appreciation opportunity and the market was rising fast.  I purchased it, rehabbed it, refinanced it with a value of ~$200k above purchase, raised both units' rents (it is a duplex) and it now cash flows pretty good. 

If you purchase a cash neutral RE where do you believe the rents will be next year, 2 years, 3 years?  I have a lot of confidence of continuing rent appreciation (less confidence of continuing property appreciation).  There was a recent USC study that predicted San Diego apartment rents would go up $129 by 2019.  But I mostly hold my belief on continued rent appreciation because in my market the rents have always lagged the property value movement.  RE values has gone up a lot in the last few years.  Rent has also gone up a lot but not in comparison to the RE values (i.e. rents lag RE value).  If I am correct on the rent appreciation, a cash neutral purchase will have positive cash flow in a year or two.

Good luck