Two Rentals and a Dream Home in San Diego. Now what?

Question

Hello all!

I'm seeking advice on my next steps to help grow my RE empire here in San Diego. My girlfriend and I bought our dream home on Mt. Helix last October, and we each have a rental property.

Unfortunately, my girlfriend bought her home in a nice part of Chula Vista at near the top of the market and has just recently gotten right-side-up after many years underwater. Her mortgage is $2500/mo. and we are renting her place out to a dream tenant (Navy officer and his wife) that we rarely hear from, but they keep the place emaculate and the check is in the mail early every month! Their rent is $2800/mo. As you can see, that doesn't leave us much wiggle room, and it doesn't cash flow, but at least equity is being built.

My little place in the neighborhood of City Heights close to downtown San Diego has been our cash cow. I bought it at the bottom of the market and the mortgage is only $790 and it is renting to another great military tenant and his wife at $1500/mo. They have even helped restore the 1926 home because they have a similar home, built in 1928, back in Indiana. I pay for materials and knock a bit off the rent when they do help out. I bought that house in 2011 for $159k and I'm sure it would appraise for at least $240k now.

We bought the new primary in October with a 5/1 ARM that we pay $600/mo. PMI on. Relax...we did so with the plan of refinancing it in 6 months, which we are in the middle of right now. That refi will pay off the City Heights home and get my VA loan back for the primary - a 30-year fixed w/o the PMI, saving us $800/mo. total.

So that's our situation. My question is this: with my goal of building a REI empire using a buy-and-hold strategy, should I take money out of the City heights home to purchase another?

It seems pretty difficult here in San Diego to find a home that will fit within BP formulas for cash flow, as a $250k 2-bedroom may only get you $1500/mo. rent.

Can people in very high-priced markets like San Diego settle for less cash flow and still be wise investors?

Please advise.

Elizabeth Colegrove · Answer

Everyone has their own "plan" when they can't make the number around their area work. My husband is also active duty. When we started out we bought houses in Charleston because they were the magically 1.25 or higher. The one thing I can tell you is I found that being long distance landlord even self-landlording cost more money than managing closer to home.

I also found appreciation also to be important. If buy in an cash flow only area, than you numbers have to be great because the rent or house value will not increase. That means that inflation and maintenance eats into your profit margin.

We personally don't look at 1 or 2%. We look at cap rates and how much our leverage money makes. We look at cap rates because it evens out all the numbers. Mostly we focus on the leverage.

We buy class A properties because our tenants allow us to keep our vacancy rates, maintenance low. Exactly what you describe above. Are goal is to have the houses cash flow and a source of income when my husband can retire in 15 years. So we are long term investors.

Two Rentals and a Dream Home in San Diego. Now what?

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