Should I continue to invest in the San Diego market?

Question

Hi everyone!

My name is Bryce and I am brand new to BiggerPockets!

I feel stuck and am looking for advice and strategy on my next investment, please help! Here is my situation...

I am 28 years old and about 6 years ago I bought a condo in Oceanside for $160,000 and put down 20% to avoid PMI. After living in it for several years with a roommate (I was in college and would not have been able to pay the note without a roommate) I converted it into a rental for $1950 a month and rented a room elsewhere for $650 a month. My net income on the property is $900 a month and I managed to save all the profits to put down on another condo in Vista which is the next town over. I purchased the condo in Vista with a friend for $319,000 two years ago and we put 20% down together to avoid PMI and have a reasonable payment. We each put roughly around $34,000 to close on the property. We both currently live in the property with another roommate. I know I could rent it for $2300 so we would be able to cash flow the property for $400 a month when we are ready to move out.

My rental property in Oceanside has now gone up to about $270,000 and I owe $(115,000) on it so I am sitting on about $150,000 in equity. I don't really want to sell it and would like to hold onto it because of the cash flow and appreciation but more importantly I would like to build my rental property portfolio. I am still saving the income on the rental which I now have $18,000 saved since the purchase of the Vista property to put towards a new down payment. My goal is to rent out the condo I am currently living in and to potentially move into a new house/condo with roommates and repeat the process.

So here are my questions...

1) Do I tap into the equity with a cash out refinance to put towards a down payment on a new property? (Rates are so low right now I need to refinance regardless). Or do I keep the equity in the property and continue to save the $900 a month to eventually put down on a new property. Although at this rate it will take me another 4-5 years to save up enough money for another down payment.

2) What should be my next purchase? Do I continue to buy condos in my area for $250,000 to $350,000 with 20% down? Do I purchase a single family home from $450,000 to $550,000 with 10% down? Or do I try and purchase a duplex or triplex? (By the way these are all C - class properties I am referring too).

3) The other option is to invest out of state or county which is a little outside my comfort zone. I have grown up in North County San Diego my entire life and am very comfortable and knowledgeable about the different neighborhoods and towns so I feel like I should stick to what I know? Is investing in San Diego real estate a good idea or should I be focusing my time elsewhere?

Looking forward to hearing from you all!

Bryce

Jason Graves · Answer

@Bryce Outcault

I started 25 years ago at ago 26 when I bought my first condo here in San Diego as well.   Today I have over 86 units.

One easy quick, no cost option is to goto San Diego credit union and they will do a no cost equity line on your owner occupied condo.  Ask is they will also do the non owner occupied unit.  I would use this option if your plan is to hold for 3-5 yrs and then 1031 into something larger.

If your going to hold these units I would do a cash out refi and lock in the debt for 30 yrs.

I would also be careful buying San Diego at this stage of the market.

Bryce Outcault · Answer

Hi @Christina Labowicz

Thank you for your advice! I am currently working with a lender on my refinance right now. I am refinancing to a 30 year fix and pulling out about 70k. This way I can continue to keep the Oceanside condo as a rental and maintain a monthly cash flow of $500.

For my situation, it looks like purchasing a multi family property in San Diego county will make the most sense. As a new investor, I feel much more comfortable investing in an area I am familiar with. I guess the next step is waiting for the refinance to finish and start looking at properties? Ideally I would like to get something in Vista, Oceanside, or Escondido but I am not opposed to south county cities either! If you or anyone have any advice on purchasing multi family in San Diego feel free to reach out!

Brandon B. · Answer

I agree with @Michael Zau, I would also add - sub markets matter.I like "B" multifamily and "B" creative office in urban core san diego, where you have over a million square feet of A+ office coming online in the next few years. These economics will push office rents up and significantly push demand for housing, especially housing that isn't as expensive as the $3,000+/month apartments currently being developed. I also like industrial development plays - I have seen several perform fantastically recently.

Am I as excited about MF in east county? Even transit oriented development? We will see. Not yet. MF in Escondido or Temecula? Not as excited. Chula? Let's wait two years and see what happens with the Gaylord project. UTC? Gains already priced in. PB? Even value add gains are priced in the current sales prices.

EDUCATION ON URBAN CORE PROJECTSManchester D-town Projecthttps://www.sandiegouniontribune.com/business/growth-development/sd-fi-machester-pacific-gateway-leasing-20181031-story.htmlHorton Plaza Redevelopmenthttps://www.sandiegouniontribune.com/business/growth-development/sd-fi-hortonplaza-sale-20180823-story.htmlSeaport Village Planshttps://www.sandiegouniontribune.com/business/growth-development/sd-fi-seaport-sandiego-20181104-story.html

Michael Zau · Answer

As a Mortgage broker, i'm in the middle of a refinance of two properties and pulling cash out.  WHEN, I see another deal, I can buy  with down payment, joint venture or whatever. I have choices and flexibility.   I'll be buying in San Diego, when I can because I know that over the next 20 years, the values have a good opportunity to increase.    Regardless of current economic conditions, San Diego, has job growth and location is awesome.

Bryce Outcault · Answer

Hi @Jason Graves

I’ve decided to refinance the condo to a 30 year fixed and pull out 70k. That way I can continue to hold the condo as a rental and still receive $500 of monthly cash flow.

For my situation, multi family makes the most sense for me and I would ideally like to purchase in the San Diego market. You mentioned that one should be careful buying in San Diego right now. Why is that?

Christina Labowicz · Answer

@Bryce Outcault

You have a nice situation on your hands!

I would suggest ruling out the option of leaving it as it is, as to capitalize on the real estate game means to continually evolve.

We work with many investors who started with a SFR or 2-4 unit and kept trading up until they owned 50+ units. Its in your best interest to not let your equity get lazy and rather to reinvest the equity into more units or to exchange into more units. It may be advantageous to talk to a lender and weigh the pros and cons about the different options.

Either way, time is leverage so the sooner you can acquire, and the more units the better.

If you look at simple cash flow, if you implement a $100 rent increase every year on your condo, you have one unit that brings in an additional $1200 annually. Whereas if you reinvested into a triplex and issued $100 rent increases, you would have an additional $3600 annually.

As @Jason Graves mentioned he started with condos and now has 87 units (awesome!). Although California is discussing rent control and it looks like it will most likely pass, it just means that we will need to work within the conditions, but there is still money to be made and its still probably best to invest in an area that you're familiar with.

Robert Comstock · Answer

You can always sell the condos and do an exchange and try to upgrade to a multi.....pick up more doors that way so you arent over leveraged.  More multis are comeing on market in vista it seems

Should I continue to invest in the San Diego market?

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