Newbie to Realestate (San Diego) Area

[Renaldo Hill]

My name is Renaldo, a Midwestern native, and Active Duty Sailors of (9) years, currently stationed in the San Diego area. I have zero experience in the marketplace, and have recently been introduced to Bigger Pockets, and have been avidly listening to the podcast. As I listen, and begin to do my own research, I am finding that San Diego is a tough area to move in -- given that property values are so high. I am currently looking at a 1,052 sqft 2/2 condo with an attached 1 car garage and two additional (dedicated) parking spaces, priced at 365k with a 235 monthly HOA in Escondido, CA.

This property allows me to utilize my Veteran Affairs (VA) home loan, so I would be able to go in on this with zero down, zero points and a pretty competitive interest rate, and a monthly payment around 2400. Now, this home on the interior looks like an extra from "That 70's Show", so upgrades are needed all around. I have zero experience conducting in home repairs, so more than likely I would be on the hook for paying a contractor to do it for me. The problem that I foresee with this is, not knowing what the ceiling on this place would be. Is tossing a few thousand dollars in upgrades, going to yield a bigger payout when I go to sale the property in the future? If I rent it, will I be able to do so at a cost that would give me positive cash flow in the foreseeable future? Or should I set my sights on nearby Arizona, Nevada, or even back in Ohio, and Michigan (where my funds go a much longer way)? At the moment, I rent a room from a friend, which allows me to be bit riskier in the market place as far as being on the hook for a vacated rental and such.

I know this is a lot to spew out in a first post, but I figured if there were some ears that are willing to listen, offer guidance -- it would be here.

Thanks in advance for any assistance that is sent my way.

[Dan H.]

I am fairly knowledgeable about the Escondido market (and obviously not very modest but you can read my profile to understand my claim).

It would be a very rare SFR purchase of any kind (home or condo) to cash flow upon purchase in Escondido or elsewhere in San Diego. You would need to find a SFR significant below retail (whole sale price) to have positive cash flow upon purchase of an SFR.

In recent years the property values and rent have gone up significantly in Escondido. Redfin has the Escondido property appreciation at 17.5% in the last year (noticeably higher than San Diego as a whole). In the last 5 years the lowest appreciation year for Escondido is 8% and the highest was over 20%. So if you purchased a SFR a few years ago an were renting it today you would have positive cash flow as the rents have increased significantly. My calculations show I can cash flow fairly easily at a rent to cost ratio of >0.75% and maybe at 0.7% (certainly I would not take on the cash flow of 0.7% without other perks associated with the property)

How long will such appreciation continue?  No one knows this.  People have opinions but a safe approach is to not rely on this appreciation to continue.  My own view is that I am confident of increased rental appreciation over the next 3 to 5 years but less confident on the market appreciation.  Here is my case for rent appreciation: 1) supply and demand: The vacancy rate is low 2) Cost of new construction will guarantee that the supply/demand issue cannot be addressed in short time frame.   3) Minimum rage increases.  4) Minimum area to build: even if the cost of new construction was not so high we are constrained on the North, west, and South.  East fairly quickly gets inhospitable.  5) Rents typically lag property prices.  My experience shows this is in both directions.  Property prices have increased significantly more than the significant rent increases.

If I were you I would look at a different option. I would use the VA loan that you have earned to house hack a detached duplex referring to yourself as a PM. duplexes in Escondido that have not been rehabbed either cash flow or come close to having cash flow. I would look for a duplex that had sweat equity opportunity such as that 70s look. Typically the more thrashed the more sweat equity. I would live in the more thrashed unit and rehab it while occupying it. When done I would rent the newly rehabbed unit and move to the other unit and rehab it. I would learn as much as I could about buy n hold. Prior to moving elsewhere I would refinance it (while it is still owner occupied) via non-VA loan. Ideally you get much of your investment out (I typically get all of my purchase investment and part of my rehab investment out). Then I repeat but this time I am better and more experienced and my ROI should reflect this.

If you want to see our most recent detached duplex (3/1/1, 2/1/1) example 619/621 W 7th Ave (Oct 2017).  One unit is on 7th and the other unit is in the alley.  It had a rent to cost ratio of almost 0.75% and therefore my calculations show it will cash flow even with a PM.  Both units have a small front yard.  One unit has a decent size backyard and the other a small side yard.  They both look to the casual eye to be two separate properties except the garages are attached.  On the sweat equity opportunity, the unit on the street is not thrashed enough to provide good sweat equity potential.  I believe the unit in the alley has ~$20K of sweat equity (~$20K rehab should net about $40K of value) that we will leverage if the tenants decide to vacate or if for some reason we want the tenants to vacate (we typically simply raise the rent above market to get tenants to vacate resulting in them giving us notice.  They simply think we do not know the market rent when in reality we want them to leave: trick of the trade).

Good luck