Buying vs renting in San Diego

[Ben Saad]

I have been looking at a ton of places for rent in San Diego and the rent is ridiculous and typically less than just buying a place and paying the mortgage. Any thoughts on if it’s better to buy in San Diego than to rent right now?

[Dan H.]

Originally posted by @Ben Saad:

I have been looking at a ton of places for rent in San Diego and the rent is ridiculous and typically less than just buying a place and paying the mortgage. Any thoughts on if it’s better to buy in San Diego than to rent right now?

Your post makes it clear that you do not have a good understanding of rental expenses. Mortgage is only one expense of rental properties. Rental Properties in San Diego start with negative cash flow. This implies that by the time the owner pays a high LTV mortgage, property taxes, insurance, maintenance, capital expenses, tenant turnover costs, property management and covers vacancy that the owner the first year is unlikely to collect enough rent to cover the expenses. I invite you to research the 50% rule.

A quick analysis that can help determine cash flow is the rent to cost ratio   Nationwide, 1% is the goal.  That would be a dream in San Diego.   I believe in San Diego it is likely cash flow positive with a 0.75% ratio with an 80% LTV investor (not owner occupied) loan.  However, the typical rent to cost ratio on a newly sold property in most areas is below 0.5%.  0.5% rent to purchase ratio will have large negative cash flow.  San Diego has one of the worst rent to cost ratios in the country.  This implies San Diego has bear the worst initial cash flow in the country.

So how do rental owners make money?   Fortunately, San Diego has outstanding historical rent appreciation.   The property that starts with significant negative cash flow, has its cash flow improve each year.  Recently, statewide rent control regulations have been passed.  These rent control rules apply to older multiplex properties and cap the rent increases.   This implies that a large negative cash flow purchase will slowly convert to positive cash flow; the rent cannot be raised quickly to convert negative cash flow properties to positive flow. 

Rent is ridiculous Because property prices are ridiculous. San Diego renters get a good value in comparison to the cost of property compared to almost anywhere else in the country.  

Good luck