Rent or Buy in San Diego

[Natalie Bender]

Hello,

I apologize in advance for the long back story....

I'm a stay at home mom and have been following my husbands Oil career around the world for the past 8 years, we have 1 preschooler and 1 one toddler. During this time we have saved money for a downpayment to be used when we returned stateside, bought two rentals and were gearing up to buy our 3rd. With rates so low we pulled cash out of one of the properties and we're going to use those funds to buy the third and keep our savings.

In a huge turn of events, my husband will be transferring to San Diego this spring, and looking at the price of homes is an absolute sticker shock. There are so many unknowns and I am just curious what other people would do in our position.

-We can afford to buy a decent home around $800K with a mortgage of roughly $400-$4500, but that would drain most if not all of our savings including the funds from the cash out. On one income we can't afford 5% down and a lot higher mortgage payment. I will be looking for work but we don't want to count on that money till I have a job. 

-There are no multi families in our budget so house hacking is not an option. 

- We are confined to a certain radius due to schools and commute which is keeping the house price high.

-The homes in our budget are small and out of dated but with all of our savings in the downpayment we couldn't put in the sweat equity for a few years. 

To make matters more complicated we do not want to live in CA and once we are back in the US my husband will be looking around for other opportunities that would take us closer to our family in Texas, but nothing is guaranteed. 

We could rent for a year, figure out the area and buy that 3rd investment property with some cash flow and still have some cash in the bank. However rent prices are fairly close to a mortgage so not a ton of cost savings. It would give us more flexibility to the better schools and time to get on our feet and figure out life back in the US and specifically how to budget in CA. However we run the risk of CA prices continuing to go sky high and rates are already going up and no other job offer that would take us out of CA. And now we're going on year 2 facing a 10% rent hike. 

Everything I read says don't buy at the top, who knows what the top is in CA but a 17% increase in one year is insane!

What would you do?

[Dan H.]

San Diego has been an outstanding buy n hold RE market. How good?   Case Shiller has it as 3rd best in the nation for this century.  Neighborhood scout has it 10/10 for this century.  There is not a single reputable source that does not show that it has been an outstanding market.  

Now to current market, every source is predicting reduced appreciation nation wide for 2022 compared to 2021, but the various predictions on San Diego have it continuing to out perform the national appreciation.  I personally believe with the already announced rate increases that the short term appreciation is not going to far exceed inflation, but no one knows. I believe the long term appreciation is very likely to exceed inflation, but again no one knows.

Your statement about rent prices being close to mortgage does not depict the cash flow situation. When properly allocating for all expenses (cap ex/maintenance, PITI, etc) virtually all high LTV San Diego property has negative cash flow. This is especially true in the nicer, more expensive areas. The reality it is initially cheaper to rent than to own. However rents will go up faster than ownership cost if purchased with a fixed rate loan. The cash flow situation improves with time.

When you go to sell, there are the various selling costs.  This cost is minor over a long hold, but is substantial over a shorter hold.  If you have sellers costs of $60k (likely low on an $800k property) then if you level that across a 5 year hold (60 months), the selling costs come out to $1k/month. 

if you planned on owning 10 years or longer, I recommend purchasing.  If you plan to own less than 5 years, I recommend renting.  If you plan to own between 5 and 10 years, that is in the area where buying will be better when appreciation is high and renting better when appreciation is low or modest.  

Good luck