1st rental ever - San Diego - calculations?

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I retract some of my previous feedback for a unit in OB. 1) It will cash flow as a STR at least until regulations restrict them. 2) OB has already turned from the OB of 10 years ago but for what it offers is still a bargain. I ate at Hodads 2 weeks ago and walked the peer. Last time I was in downtown OB (Newport Ave area) was probably at least 10 years ago (I used to go to OB a lot). I could barely recognize OB. Depending on perspective it may not all be for the better but for the investor it means gentrification and profit. Gone is the stinky movie theater, the bead shops, the cheap T-shirt shops, the used music store. Replaced by higher end clothing retailers, antique shops, nicer restaurants (Hodads being a hangover because of the quality of their burgers), etc. OB no longer has the feel of the liberal, cheap, small surf town (which I loved). It now has the feel of an up and coming trendy beach community (which is great for investors and I appreciate elsewhere but would prefer the old OB). Beach property is so finite. I would be leery of selling any. Consider STR it until regulations eliminate the opportunity. By that time maybe rents have appreciated enough that you now have an investment that has some positive return. Good luck

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San Diego county is our primary market. I include this because it is a very different market than the low appreciation markets. The 50% rule is a decent rule of thumb but IMO too conservative in the high rent markets and too aggressive in the low rent markets and this is because cap expense is not primarily a function of the rent price. In addition, in CA the prop tax is basically fixed. This is a large expense that in many locations is not a fixed cost. The 50% rule alocates for professional PM which you are planning to do yourself and will save ~10%. However, while 50% may be too conservative in high rent markets, it is not totally absurd neither. A lot of factors go into an accurate cap ex but I would choose to not use less than 40% even in the high rent markets. Your vacancy is quite high. San Diego vacancy rates are ~4% but I use 10% to be conservative. I combine repairs and cap expenses because there is a fine line distinction between the two on some items. I suspect I would allocate ~$400/month. Many think this is very conservative but I think my main/cap expense calculations are more extensive than those who believe this is very conservative. My cap ex worksheet indicates a little kitchen is ~$50/month main/cap ex. San Diego is traditionally a high appreciation market but we are at ~2 years with market appreciation at about the inflation rate. No one has a crystal ball, but I an expecting a flatfish market for the next few years. People do not invest in an investment that is not passive (such as RE acting as their own PM) for no return. It may be quite a few years before this unit generates any profit. I have little doubt that eventually this property will appreciate and be cash flow positive assuming no money is taken out (it has always occurred in San Diego) but how long will it take Final item... we have an ex home in our rental units. It is and always has been our worst return per its equity. It had no value add. Its rent to value is the worse of all of our properties. This is because it was purchased to be a good home to our family and not with the criteria to be a good buy n hold property. We could easily have sold it and invested it in another property and produced a better return. Until recently we thought we would give it to our child after college but now he indicates he does not want to live in San Diego. So we had a lame reason we kept it that had nothing to do with the return it was providing. Good luck

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@Dan Heuschele There's lots to love about OB, but it is changing hence part of the reason we are looking to move. Thanks for the advice! Lots of insight and knowledge from everyone here in general to bring back to the table, very much appreciated.

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@Joseph Stewart Thanks for those considerations. Our situation allows us to hold/owner occupy if the market timing is not yet ripe for renting out or selling. Might be better considering possible significant cap ex potentially in next few years. Some equity but honestly not feeling savvy enough about REI in general to take it out and leverage elsewhere right now. STR numbers (Airbnb's estimate) looking the same as if we were to rent to long term tenants but that could be wrong.thanks!

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@Matt DevincenzoThanks for the insight, had I the foresight a decade ago, would have held out for a property with development potential. Our current home was already been built out by the previous seller/developer, it's technically a condo on paper but a separate stand alone SFR in the physical sense (seller split property into 2 separate homes as new condo community). Seeing lots of development and multiple unit zoning here, with may properties sold for outright cash... given our situation sounds like the general advice is to hold!

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@Andrea Mandler Yeah there's definitely some risks with the short-term rentals laws being in a state of flux right now in San Diego. We haven't had issues in El Cajon that I'm aware of (obviously it's nowhere near as common out here). I'd be really surprised if they actually banned them, but you never know. Worst case you could obviously revert it to a traditional rental...it sounds like your numbers work out ok for that. Airbnb aside, I'd look at a few things: 1. How much equity you have presently and whether that could be leveraged more effectively elsewhere. For example if you sell it and pocket $200k after costs, could you invest that $200k in a different property/opportunity and make better cash flow? I think this is the biggest question to answer with regard to your situation.2. What kind of repairs are on the horizon? Sounds like you're already looking at that...if you know you're going to need a new roof or some major repair, then that's important to consider, especially if your cash flow is going to be minimal. 3. If you don't have much equity in the property and the likely future expenses are minimal, then I'd say go the rental route...cash flowing $400 a month isn't all that exciting, but rents will likely continue to climb and the property value will go up, so what may seem like a bit unexciting deal today will look a lot more enticing 10 or 15 years down the road. If your time frame for holding the property isn't long term, though, it might not be worth dealing with. But in general I say if your situation allows you to hold onto the property, and your return relative to your equity makes it attractive compared to other options, then keep it. Landlording is pretty easy if you're careful about who you rent to and craft a good lease (I've self-managed my rental in Denver for 10+ years with minimal hassles). Good luck!

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@Andrea Mandler I would also advise holding this if at all possible. OB and many other 'old' parts of town have had significant zoning in order to increase densities....While your property may be a SFR it could very feasibly be zoned for multiple units. While you may not want to be a developer (I actually advise most homeowner call ins that they should sell not try to develop themselves), you could position your property to be enticing to a developer, or possibly to partner with a contractor/developer to build out the project for a long term hold. That's just some food for thought in evaluating this for it's long(er) term potential.

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@Joseph Stewart Hi Joseph,Thanks for the reply, that's a great model you have going there.Airbnb would be great in the income generation and in some ways the people aspect depending on personality. We're in Ocean Beach, so although there are many short term rentals here, the neighbors/long term residents don't take too well to them. Also the San Diego city council had voted to limit them last year but it was retracted, not sure how regulations will be in the next few years if any? Not sure if you have the same issues in El Cajon.Thanks again!

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@Dan HeuscheleThanks so much, Dan for the thoughtful reply -- much food for thought! Especially your comment that "people do not invest in investments that are not passive for no return", we may be naive in convincing ourselves that just being able to break even is ok. I'm finding cap ex to be so difficult to estimate, but a very important point, will consider the high expense items/high wear items around the house and determine their lifespan. Appreciate the story regarding your family home turned rental as well. We hadn't thought about selling but perhaps it would still get us to our ultimate goal, if it's viable alternative option in this current market. thank you again!

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Hi Andrea! You might look into putting the house on Airbnb...we've been able to consistently get probably 50% more rental revenue here in San Diego with Airbnb versus a regular rental. It's definitely more work...mainly the cleaning, but you can hire that out. The management honestly is pretty straightforward and requires minimal time and we automate our check-in process so we don't have to be physically present. If you're near the coast I think you'll do very well (we get $3500-$4500 a month with a 1400sq ft guest house in El Cajon, so coastal area should be even better).