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Updated about 1 month ago on . Most recent reply
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Making Sense of San Diego Real Estate (Renting and Investing vs Buying)
I'm moving to San Diego next year from Denver, CO and am looking to make the right personal finance decision in the process. I have the funds available today for the purchase of a rental property as well as a primary residence, but I also want to set myself and my wife up to reach financial freedom. I've noticed some really extreme discrepancies between renting and potential mortgage payments which make me hesitant to buy a primary residence.
My wife wants to move around 56 (not too far from the ocean), which I don't mind because it seems they have great school districts and we have young kids. We have managed to build a solid liquid nest egg, but I'm hesitant to lock the majority of it up in a low LTV mortgage on a really expensive primary residence. I'd like to put as much as I can to work in order to reach financial independence sooner. When I started to run the numbers of what it would be like renting and investing vs buying, the difference was staggering.
I'm looking for advice on what I should choose. Also, let me know if these numbers seem correct. Here are the numbers:
$30k - avg monthly income
3 options for rent vs buying
$12.5k - avg monthly payment (20% down) on $2mil home
$6.25k - avg monthly rent on $2mil home
$6.25k - avg monthly payment (71.5% down) on $2mil home
3 options for return on capital:
7% - avg yearly return on 71.5% down payment (assuming 5% avg yearly appreciation in SD)
10% - avg yearly return on from S&P 500
>10% - avg yearly return on investment property (just an assumption, but I think you are all here because you beat the stock market)
First, the $12.5k monthly is very intimidating and beyond what I should be spending on shelter (a no-go for me). $6.25k feels manageable, so I compared the rent vs purchase numbers. I understand that rents will go up over time and my mortgage payment will pay down the principal, but it seems like investing the $1.43mil into rental properties and/or a low fee US stock market fund may work out better for me. The discrepancy between the monthly payment with 20% down and the monthly rents was mind boggling for me.
Let me know what you would do to maximize wealth under these circumstances. Also, let me know if I'm missing something here.
Most Popular Reply
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- Investor
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I think your PITI estimate in both cases is low. Note rent minus piti does not equate to cash flow. Vacancy, maintenance/cap ex, PM, Misc. This implies your return numbers are inflated.
Our (San Diego's) rent to RE price is terrible especially for on market purchases. This implies renting is initially cheaper than buying and at high LTV, rentals are initially cash flow negative. In general, the cash flow negative is everywhere (nationwide) for LTR purchased off the MLS. However, San Diego is an extreme case.
However rents increase fast in San Diego. Especially on SFR which currently are not rent controlled (see prop 33). The cash flow improves quickly, but the cash flow is so negative on retail purchases that it will take years to reach cash neutral.
This means that if you do not want something as active as value adds, you need to be patient. I would not purchase MLS RE in San Diego as this time without value adds unless I was going to hold it at least 10 years.
There are a lot of investment options. Many more passive than residential RE. However with a long hold I do expect San Diego RE to have outstanding ROI.
The appreciation is great and the leverage amplifies the return from appreciation. My worst appreciating property has appreciated $2700/month. This was a poorly timed purchase at full retail so it likely is worse than virtually every other San Diego RE investor’s monthly appreciation. My best has done better than $10k/month of appreciation (well timed purchase purchased below retail so this has done better than most San Diego RE investors).
My last San Diego RE purchase was Dec 2021. It had a value add. I was going to brrrr it but when rates rose so much I decided to not refi it. It was purchased off market below retail. The rents at purchase were not even 2/3 of my PITI (so crazy negative cash flow but one reason acquired below retail). I rehabbed and current value is over $600k greater than purchase and rehab costs. There is now some positive cash flow (not much considering the value of the asset, but a lot considering where the initial cash flow was). However, if I purchased at today's rates (or cash out refinanced it at high LTV), it would still be negative cash flow.
For the mostly passive San Diego RE investor, you will need to be patient to achieve worthy return.
Good luck