Buying in San Diego w/ VA Loan

[Nico C.]

Hello BP!

I have my VA Loan available and I am ready to do a Multi-Family house hack in San Diego, CA where I am stationed. Only problem is: these numbers are brutal. The best projects I can find I will barely break even (in terms of cash flow) until years 3-5. As investors we don't bank on appreciation (even though in San Diego it's pretty safe), so what are good metrics for a hot market? Am I looking at these deals the wrong way? Should I be thinking in terms of how little I will be paying out of pocket for my living expense instead of whether or not the property "cash flows"? What is the best strategy here? Put little to no money down, add value, raise rents, lower expenses, etc.? If I have no money down, and can find a way to break even each month, seems like that should be good enough, right? Sanity check requested.

Thanks,

Nico

[Bjorn Ahlblad]

@Nico C.I lived in Ca for 30 years. Our properties made huge gains because we held them for the entire time. I have friends and co workers who were forced to sell at a couple of different points and took severe beatings as a result, some never recovered. Nothing is a sure thing in REI. If you always have money or access to money you should be safer than if you don't. The next ten years are likely not a reflection of the last ten. Property values going forward are pretty much a guessing game. Places come and places go; Detroit was at one time the center of the entire universe.

[Dan H.]

Originally posted by @Nico C.:

Hello BP!

I have my VA Loan available and I am ready to do a Multi-Family house hack in San Diego, CA where I am stationed. Only problem is: these numbers are brutal. The best projects I can find I will barely break even (in terms of cash flow) until years 3-5. As investors we don't bank on appreciation (even though in San Diego it's pretty safe), so what are good metrics for a hot market? Am I looking at these deals the wrong way? Should I be thinking in terms of how little I will be paying out of pocket for my living expense instead of whether or not the property "cash flows"? What is the best strategy here? Put little to no money down, add value, raise rents, lower expenses, etc.? If I have no money down, and can find a way to break even each month, seems like that should be good enough, right? Sanity check requested.

Thanks,

Nico

>As investors we don't bank on appreciation (even though in San Diego it's pretty safe), so what are good metrics for a hot market? 

I have seen this a lot but do not believe it holds any truth for large or successful coastal So Cal investors.  I have seen pro forma by dozens of investors in So Cal.  This ranges from small to moderately large investors and I have never seen a pro forma on So Cal RE that did not include appreciation.  I would say the best investors use conservative appreciation and realize over the short term it could be optimistic, but they all believe over the long term it will be hit.

Another way to look at it.  Are the only people purchasing properties in San Diego ignorant purchasers that do not have a decent understanding of the cash flow?  I believe we have plenty of these; people that have no clue to the costs of owning and have no clue that expenses will approach 50% of income when including PM costs.  However, there are plenty of sophisticated investors who are buying in San Diego.  I suspect many of them, me included, realize that initial cash flow is one part of the projected return and really a very minor part for larger investors (ones that can handle large negative cash flow).  They are more concerned about (no particular order) cash flow over the entire hold period, appreciation, value adds, equity gain at purchase, exit strategies, tax consequences, etc.

Simple truth is San Diego historically has produced outstanding cash flow over hold periods when equity has not been extracted.  How good?  We have a 4% property (monthly rent is over 4% of purchase cost).  We have multiple 2% properties (I suspect most of our propertie).  All of our properties have positive cash using the 50% rule.  One of these we purchased at cash neutral position with self management (it would have been projected negative cash flow it using professional PM).  The rents have doubled so it no longer is cash neutral (but even though this property has done great, it is one of our worst on-going producers (we did extract over $100K but I am including the $100K in the equation for one of our worse producers)).

Your issue, and the issue of many newbies, is that you likely are going to need to purchase near retail at a high LTV. This property will bleed cash which you recognize. As you indicated it will likely take years to be cash neutral. You need to be sure you can handle this cash bleed not only for as long as you think it could take to be cash neutral but you need to use some worse case numbers (maybe double the length of time you expect). Ideally it will cash flow positive sooner than you expect, but in the event it takes twice as long you are prepared.

BTW I expect this year and next year to have 8% rent growth in San Diego. I would not use such high numbers in any pro forma, but it is what I expect and 2 rent increases we are sending out this month depict this 8% rent growth. My projected rent growth is not primarily due to the housing shortage, but is due to increased risk placed on LLs due to rent control and the desire by under market rent properties to attain market rent as soon as the rent control regulations permit (5% plus local inflation for multi-family, SFR no limit).

Good luck

[Donald E Appleberry]

@Nico C.

Hey man,

I'm an agent/investor in SD. My primary focus is VA, investing and a combination of the two. I love that your looking to utilize the Va loan for investing!

Right now I'm in escrow with a VA client for a $1.1M triplex that's cashflow positive day one. It's possible, but you have to navigate the deal right. IE pull wins where they matter for the investment but keep expectations realistic for the seller.

House hacking is the way you have to go with the VA loan, but it doesn't mean you need a duplex or up. A lot of places are listed as SFRs but have granny flats/ADU. The agent just listed it differently. You could also rent out rooms to trusted buddies or in some areas AirBnb works VERY well.

Me and David Pere are doing a real estate meet up the 7th in downtown. He’s the founder of “Military To Millionaire” Check it out if you haven’t and feel free to pm me for any more info. I can give you my number as well through pm if you want to talk a bit since there’s A LOT of info that’s difficult to convey via BP post.

All the best,

Donald Appleberry

[Dan H.]

Originally posted by @Donald E Appleberry:

@Nico C.

Hey man,

I'm an agent/investor in SD. My primary focus is VA, investing and a combination of the two. I love that your looking to utilize the Va loan for investing!

Right now I'm in escrow with a VA client for a $1.1M triplex that's cashflow positive day one. It's possible, but you have to navigate the deal right. IE pull wins where they matter for the investment but keep expectations realistic for the seller.

House hacking is the way you have to go with the VA loan, but it doesn't mean you need a duplex or up. A lot of places are listed as SFRs but have granny flats/ADU. The agent just listed it differently. You could also rent out rooms to trusted buddies or in some areas AirBnb works VERY well.

Me and David Pere are doing a real estate meet up the 7th in downtown. He’s the founder of “Military To Millionaire” Check it out if you haven’t and feel free to pm me for any more info. I can give you my number as well through pm if you want to talk a bit since there’s A LOT of info that’s difficult to convey via BP post.

All the best,

Donald Appleberry

I am interested in the current rent and their LTV on this cash flow positive RE to determine how aggressive they were with their Pro forma numbers. VA (great benefit) is typically super high LTV but the high LTV is countered a little by good rates.

It has been a while since I have seen an RE on the MLS that using current rents and high LTV projects cash flow positive with my conservative numbers.

I do not use projected rents for initial cash flow. There are multiple reasons for this including various lease end points, risk of tenant turnover upon rent increase, and that the rent control limits how much I can raise the rent. I also do all projections as though I am paying a PM 10% for LTR and 20% for STR.

[Donald E Appleberry]

@Dan Heuschele

For sure. It was hard to line it up. I’m doing an interview with the buyer once we close on my Facebook and Instagram. I inboxed you my number if you want to call as I’m driving to a home inspection right now

[Nico C.]

Great stuff - appreciate all of the feedback!