Best Investment Strategy for First Purchase (High Priced Markets)

[Griffin Goudreau]

Hello, 

In a high-priced market (i.e. San Diego) with $100K to invest, which investment strategy (fix/flip, hack, buy an hold) and what property type would be best for a first-time property investment. Obviously "it depends" will be common answer. I want to hear your opinions on what you would do an why. Thank you!

[Dan H.]

Originally posted by @Joshua J Cawthorn:

$100k would be a solid down payment on a SFH house hack opportunity in a median neighborhood in San Diego. It would also be a decent downpayment on a MFH opportunity. Find a broker that specializes in investing, let him know what you're looking for, and take your time analyzing deals.

 I agree with Joshua but will add some details of what I would do and some reality.

I would start by house hacking a detached duplex or a SFH with a detached ADU. I would look for a property with some sweat equity opportunity but qualifies for FHA loan. I would use FHA funding to purchase with a high LTV to leverage my assets and realize it is cash flow negative.

I would live in the unit that is in most need of a rehab and rehab it while occupying it. When this rehab is completed and the other unit's lease is up, I would move to the other unit renting the just rehabbed unit at top of market rent (it is a fresh rehab). I would then rehab the other unit. due to the high LTV you started with, you will be unlikely to be able to refinance this to pull equity but your equity position has increased significantly. Even without any market rent or property apprecitation, your cash flow situation will have improved significantly due to the increased equity (the sweat equity).

The realities are retail purchases in San Diego at high LTV are huge negative cash flow. Even at the end of this rehab, you are likely cash flow negative. However your LTV that started at 95% will be much improved. Hiring work out, we strive for at least a 2 to 1 return on our rehab expense. If we were doing more of the work ourselves we would expect this to be higher. So for us, if we spend $30k/unit on the rehab we expect at least $60k/unit of value increase. Maybe you can increase your equity to a 80% LTV (that may be optimistic and not what I would use in my projections), but it will have increased. In addition to having improved your cash flow, you also now have a buffer against any depreciation and an unrealized return on your investment.

At the end of the rehab, you may still be cash flow negative, but every time you raise rents the cash flow improves. Rent increases in San Diego for SFR have average over $100 Per year for the last 4 years (so over $1200/year increase per unit). I project conservatively and therefore would not use this rate of rent appreciation in my projections, but it shows how quickly the cash flow can improve.

before moving out (when still owner occupied) analyze if a refinance makes sense.  Owner occupied get the best loan terms.  
 
Buy n hold is a long term play.  In San Diego buy n hold historically has provided outstanding return. 

Good luck