Hi. I'm new. Is San Diego bad for a beginner?

Question

Dan H. · Answer

@David Faulkner is mostly correct on what I would recommend.

I recommend duplex to quad in working class areas.  I choose Escondido as my area of expertise because of the proximity to where I live (Poway) but I suspect other working class neighborhoods would be similar.  I recommend duplex to quad because they are the only properties that cash flow with what most people think are conservative numbers that I use for cap expense (I believe they are accurate as I suspect few people in San Diego have taken the time to actually calculate expected cap expenses).  Just as an FYI I use $250 to $300 per month for cap expense.  I have seen @Justin R. uses close to the same numbers (everyone else seems to use lower).

So here are my regular suggestions for newbies: 1) make sure you calculate for cap expenses 2) if purchasing duplex to quad do not use list prices as comps, look at only what has sold.  Duplexes to quads are purchased by investors.  Investors often list RE at prices that they do not expect to sell.  Similarly when investors buy the purchase typically makes sense as an investment which is typically not true for people purchasing a home to live in.  3) San Diego historically has always appreciated but it has cycles that include some significant down cycles.  The only people who have lost money in San Diego Buy n hold who financed the property are those that were forced to sell at a down cycle (even people who purchased poor buy n hold properties and over paid have made money if they did not sell in the down cycle).  So make sure you can with stand a down cycle.  Use 2005-2012 as a reference down cycle.  4) Do not over estimate cash flow in San Diego.  I have purchased units that had about even cash flow when purchased (including $250 to $300/month cap expense per unit).  The last such property I purchased was purchased in 2013 (duplex).  Rent have increased on this property at faster than $100/year for each unit.  So this property is now cash flowing at over $600/month.  The point is that rent appreciation typically correlates with property appreciation.  Few RE markets in US have historically appreciated as much as San Diego and this is irrespective of the duration (last 5 years, last 50 years).  Correspondingly few markets in US have experienced the rent appreciation that San Diego has experienced.

BTW I plan on being at the PB open house (I have RSVPed).  I find them educational and motivating.

Good luck

Kevin Fox · Answer

Hey @Blaire Zook

Welcome to BP!

You are absolutely correct in your assessment of SD's stable rental market and high price of entry. Although it can be difficult to enter, there is no better market to be in for those who can swing it financially.

Generally speaking, condos are less attractive rentals than alternative property types due to the HOA fees you have to pay each month. That isn't to say they can't make great investments, but they are certainly harder to make pencil out.

With that said, there's an event this Saturday in Pacific Beach that I think you may find value in attending. We will be visiting a recently aqcuired buy and hold property and walking everyone through the ins and outs of the deal. There will be a pretty good number of other local investors in attendance, so there should be no shortage of people for you to bounce ideas off of. Let me know if you'd like the info!

David Faulkner · Answer

Stay local ... actually, your story sounds similar to how I got started ... my wife and I both owned our own homes ... mine was nicer, remodeled (by me), and more expensive ... my then fiance's (future wife) place still needed work, so we moved into her place to save money and finish the remodel. We then bought "our" place, a modest SFR REO with intent to eventually turn it to a rental, moved in, fixed it up ... bought another, moved in fixed it up ... bought another ... great way to build a nice portfolio. We'd likely still be doing that same strategy today but having kids totally derails the house hacking strategy :)

@Dan Heuschele would likely advise a similar strategy but with 4-plexes in Escondido ... I stay away from condos due to the fees and loss of control due to the HOA. I don't even like to buy SFRs in neighborhoods with HOAs.

You are right on in your assessment of home court advantage and should never underestimate that. It actually extends way beyond benefits of self management ... local market knowledge is key to selecting the best property in the best locations and getting the best deal. Further, you can buy fixers locally to get some forced appreciation sweat equity, not so much out of state. Hands on local is the absolute best and lowest risk way to learn the business and then you are in the driver's seat rather than dependent on the kindness of strangers out of state to make or break your investment and keep your best financial interests at heart. Plus SD is a darn nice RE market to be local in ... perfect weather, great economy, vast & wealthy tenant pool, high housing demand and perpetually limited supply ... you pay for those benefits with an expensive purchase price, but often in life you'll find that you get what you pay for.

Shawn Couch · Answer

@Blaire Zook San Diego is a great market for real estate, even for investing, it just can take longer to get the returns, since there is usually small excess cash flow, but good long term appreciation.  The supply is limited by geography on all sides, so most growth in infill which is generally an expensive process.

I would say the downside to a condo would be the HOA dues, but the HOA responsibilities of maintenance make self management a lot easier.  HOA dues can take a big bite out of your cash flow though.

Some out of state markets will provide rents 2 to 3 times greater than the amount you would receive in SD on a $230K purchase, some will be less.  The greater rents would come through multiple properties, at a lower purchase price in my example.

I have a rental condo here, and some SFR and multi-fam out of state.

Good luck and let me know if you want any additional info.

Rod F. Hatefi · Answer

Condos are great in higher-priced coastal markets. The rent is usually less than SFR and you tend to get a higher pool of applicants, which can keep down your turn-over costs if you screen well.

Be sure to check the tenant to homeowner ratio as this has a big bearing on your buy-in financing. You want it to be 50% or better for homeowner occupied.

You also have to do your due diligence on the HOA to make sure they are financially sound and have reserves.  Walk the common areas to check for signs of deferred maintenance. And peruse the HOA meeting minutes to see if there are recurring board problems.

Feel free to contact me if you have a particular community, neighborhood or HOA in mind and I'll be happy to help!

David Faulkner · Answer

This is a good point ... I get a similar effect by buying the smallest, most run down (which I fix) SFR on a block of much bigger, nicer SFRs, and I still don't have to worry about HOAs. I'm not sure, but would bet that Dan may do something similar by buying 4-plexes in neighborhoods dominated by SFRs, and he doesn't have to deal with HOAs either. Or Bob does the same thing with condos, but knows how to carefully assess and deal with HOAs, and buys properties that have unique and desirable qualities that could not be duplicated with new construction today, which is also great advice ... but there is a common thread to spend the money to buy in a quality neighborhood a property that is situated to grow in value and rents.

Mark Nolan · Answer

@Blaire Zook

Welcome to Bigger Pockets. Make sure to listen to the podcasts. They are very informative.

Bill Leonard · Answer

Blaire, welcome aboard.

My company is not fazed by investing out of our local areas in Chicago and Silicon Valley as long as the numbers work, the deal secure, and we are not looking at a war zone.  If it's your first deal, I would suggest you stay closer to home and perhaps work with a partner to create a win-win.

As a side note, my company is both a buyer and private lender on lower $ ARV SFR properties throughout the U.S.  We will also entertain wholesale assignments.

Wishing you continued success.

Account Closed · Answer

No matter where you invest don't invest cheap just because it is cheap.  I like condos because they can get me into a neighborhood where I could not buy a SFR.  I have a building two parcels away from my first condo that sold for $25,000,000.  Do you think my condo brings his value up or the opposite?

Your $230,000 condo sounds like an area that might not be in the best of areas.  I would look for a property that is not easily duplicated.

As far as HOA's and maintenance fees you need to look at what they are paying for and if it is being reflected in increasing rents.  My condos are in THE location with minimal amenities.  Newer condos are being built with crazy amenities that will continue to cost to be maintained but the use will be minimal and the rents won't reflect the additional costs.

HOA's need to be managed and I have had some issues.  I have also had some issues with my SFR neighbors.  I find it is easier to deal with a HOA when there is also a professional property management company that oversees them than to deal with some asshole SFR homeowner that does not have a calm professional overseer.

You want to make sure the HOA is financially solvent and if they are renter friendly.  Most battles happen when an investor comes into a project that is mostly owner occupied with stringent rules and plops any renter into their unit.  I always make sure everyone knows how to contact me and make sure I get them a good neighbor.

Be sure to get 6-12 months of HOA meeting minutes to see if there are problems and how they are handled.

James Wise · Answer

Welcome aboard @Blaire Zook

Hi. I'm new. Is San Diego bad for a beginner?

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