1st rental ever - San Diego - calculations?

[Andrea M.]

Hi BP community!

There is so much knowledge and passion for real estate on this site! We are hoping you may be willing to share your thoughts and experience about our situation.

We plan to rent our current home and would be landlords for the 1st time.  Have tried several calculators and would like to be conservative. Our eventual goal is to get some cash flow but we are hoping to just "break even" to cover the current mortgage, property taxes and repairs/costs of operating including vacancy periods.  

Some calculators use a 50% expenses rule, is that a reasonable estimate? If so, we would not be able to rent at current market rates.  As this is our 1st venture, we plan to do tenant screening, marketing etc ourselves to keep costs down.

Alternative calculations: vacancy 15% (about 2 months per year), repairs 5%.  We are in the San Diego area, coastal community. Rents are about $2300-$2800 for comparable properties. Mortgage including property taxes are ~ $2200/month.  

Would it even make sense to take the leap? What else might we might have not considered?   (To make it more complex, we would be purchasing our next home with a standard mortgage).

Thank you for your thoughts!

[Dan H.]

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