Debating on Investing in this market

Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes

9y

@Nick Allen for your second question, it depends on how long you plan on living in the area. If its 5+ years than I'd buy. You will spread the transaction costs out and gives you a chance to get some principal payments in.

The first question is a good one, but I don't think anyone here can give you a 100% answer that will work for you. First you need to define your why and goals for RE Investing. Reading between the lines of your conversation with the other investors, I think they have a different end state than you. They may have more capital than you and need a place to park it in order to hedge against inflation risk. RE in a growing city like San Diego is a way to do that. That could explain their belief that Gross rent should cover PITI. Another explanation is also stupidity. You met them so would know better than us.

It seems like you have the more traditional four wealth builders in mind for your RE investments. If those suit your goals better, maybe it's not time for you to invest in SoCal and you'd get better returns elsewhere. Though just because you scoured the market once and didn't find any deals, doesn't mean there won't be one tomorrow or next week or next month. Keep looking and you may be surprised what you find.

1 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

9y

Originally posted by @Nick Allen:

All,

As part of my continued education, I've been trying to read anything and everything in hopes of being the most knowledgable I can be when I pull the trigger on my first deal, whether thats in CA or in TN.

I also understand part of that is setting goals so I don't get analysis paralysis.

I have been 90% sure that I want to invest back in TN where i'm from since I know the area so well and the cash flow is hands down better. However, I wanted to keep my mind open and talk to a real estate agent about the market here. So, I set up a meeting with a local REA to discuss the numbers and what I could afford etc..Once we started going through MLS and all the "off market" deals, it became obvious that there are no "good deals" IMO and the number of opportunities are at a all time low right now. The pricing is out of control (even for foreclosures) and as a newbie I don't see anyway to justify a purchase especially not with the negative cash flow. There was nothing cheaper than 400k for a SFH and that was the outskirts of the city.

Whenever I mentioned my cash flow requirements to the REA, they quickly dismissed the importance of that and that they were hopeful the rent would "probably" cover the mortgage. This struck me as hope for a strategy and you know what they say about hope. I also know their trying to make a buck so I understand where their coming from.

I have also been warned from mentors and through BP podcasts about using appreciation as the sole justification for a purchase. Didn't brandon turners book talk about appreciation as the icing on the cake and not the whole thing? I've also been encouraged to disregard California entirely due to the cash flow situation. Interested in the communities thoughts on this.

I'm just looking for some guidance on how to think logically about investing in CA or not. I have seen the effect of appreciation because of the major increase in property from 2010 to now and wish we would've bought a condo back then but I didn't have a crystal ball.

My other question is whether to purchase a SFH for our personal home since I feel like i'm throwing away good money on rent every month (3300.00 a month!) which could be going towards a mortgage.

thanks for helping a newbie wrap his head around these issues.

V/r

Nick

Appreciation may be icing on the cake if that location does not historically appreciate otherwise that statement is a pretty ignorant way to look at real estate investing. Here is why, San Diego is #3 nationally for total profits ( cash flow + equity gains) since 2000. LA and SF are number 1 and 2. This is partly due to the higher than average appreciation, which turns out to be the cake in those locations. It goes beyond that. In some of those locations the dirt became so vaulable that condos or other new construction became the next phase. In those cases the returns become lottery like. It is those reasons you pay $3300 rent today and if your landlord owned for awhile I bet represents more cash flow than he would have had in TN. So now the best of both for him perhaps.

Good luck with your search!

4 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

9y

@matt r. Makes a good case for investing in San Diego but the historical high appreciation goes back a lot further than the year 2000. You can go back at least 60 years and find San Diego long term appreciation for financed buy n hold has a better ROI than areas that rely primarily on cash flow.

However along the way there have been some short depreciation cycles so you must be able to with stand a potential depreciation cycle.

As for timing the market and believing it is at a high is similar to trying to time the stock market. Statistics show those that try to time the stock market on average do worse than those that simply ride the market. For my own experience I have purchased twice in San Diego near market highs. In 1992 I purchase a SFR for $167k. It fell to ~$140k. Today it is worth around $550k and has the advantages of prop 13. In 2003 I purchased a SFR for $741k. It fell to ~$640k. Today it is worth ~$940k. The only people to have lost money on financed San Diego buy n hold RE are those that sold when the market was depressed (mostly people over leveraged).

There are people that state cash flow is better than appreciation but I give no credence to this as I care about the total profit and do not care if it came from cash flow, appreciation, or both.

Also for the price of the properties that your REA is showing you I would consider looking on your own or getting another REA. In the past couple weeks I have seen a duplex for $405k, a quad? at $640k, and a 6 plex at $799k.

Good luck

1 Reply

Nick Allen

OP

San Diego, CA · Member since 2017 · 8 posts · 9 votes

9y

@Bill F.- We're on military orders so it's a minimum of three years but could easily be longer based on other job opportunities down the road. Regardless, There's no doubt we won't be here forever so It would have to be a place that we could use as a personal home and then turn it into a rental afterwards which brings other issues into consideration (distance from work/school for the kids etc..). You're right on the different pathways that each person has and mine is a typical newbie. Not a lot of liquidity and need to focus more on cash flow now to get some momentum going. But i will say I think if it was in the right area for growth then it would be an easier pill to swallow. Great point on continue searching. i was disappointed the other day but i'll keep looking for a better deal. thanks for the help.

@Matt R.- Fantastic point about appreciation. I've never looked at it through that lens before. We're in an interesting situation as a family and it makes purchasing a home in the area we live in (point loma) next to impossible but i am interested in buying a duplex via FHA. Are there certain areas that you would focus on that you see continuing to grow over the next ten years? I can get a great deal in National City but i'm guessing this is not where the future growth is. Thanks for the feedback and putting up with my ignorance ..haha

@Dan H.- copy on the long term ROI. What is the best source to use to find out where the best long term appreciation exist in the city? I think your point about depreciation speaks directly to making your money on the buy side, right? what part of town was that duplex/quad? just curious.

Really appreciate all the help while I work through my own personal strategy.

V/r

Nick

1 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

9y

Originally posted by @Nick Allen:

@Bill F.- We're on military orders so it's a minimum of three years but could easily be longer based on other job opportunities down the road. Regardless, There's no doubt we won't be here forever so It would have to be a place that we could use as a personal home and then turn it into a rental afterwards which brings other issues into consideration (distance from work/school for the kids etc..). You're right on the different pathways that each person has and mine is a typical newbie. Not a lot of liquidity and need to focus more on cash flow now to get some momentum going. But i will say I think if it was in the right area for growth then it would be an easier pill to swallow. Great point on continue searching. i was disappointed the other day but i'll keep looking for a better deal. thanks for the help.

@Matt R.- Fantastic point about appreciation. I've never looked at it through that lens before. We're in an interesting situation as a family and it makes purchasing a home in the area we live in (point loma) next to impossible but i am interested in buying a duplex via FHA. Are there certain areas that you would focus on that you see continuing to grow over the next ten years? I can get a great deal in National City but i'm guessing this is not where the future growth is. Thanks for the feedback and putting up with my ignorance ..haha

@Dan H.- copy on the long term ROI. What is the best source to use to find out where the best long term appreciation exist in the city? I think your point about depreciation speaks directly to making your money on the buy side, right? what part of town was that duplex/quad? just curious.

Really appreciate all the help while I work through my own personal strategy.

V/r

Nick

IDK the specific locations that itimately to advise other than the general SD market location is about as strong as one can find nationally on a historical basis for investment returns. National City I am sure has opportunities just like the rest of SD. Good luck!

0 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

In regards to questions above, historical sales prices are a matter of public record, so you can find historical comps all over the internet. From looking at multiple properties and their historical prices in a neighborhood, you can get a good idea about the long term appreciation. If you want to get more precise, you can put several into a spreadsheet, spanning multiple decades (which cover multiple RE cycles with both peaks and troughs), and compute average long term CAGR. Rents typically follow closely behind price appreciation, but historical rent comps are harder to come by.

With regards to crashing of the local market from time to time ... yes, getting great deals insulates you to some degree from short term market fluctuations. Timing the market is notoriously difficult and inconsistent. Most important, over leveraging and stretching yourself too far financially is what most often leads to selling at the worst possible time or getting foreclosed on. You have to make sure you can make it to the long term before you can see those long term gains. Avoiding the follies that have prevented others from this from happening is half the battle. Those that are willing and able to hold long term in SoCal have been rewarded handsomely, and I don't see those long term trends reversing anytime soon. The weather is still nice. People still want to live here. There are still great jobs. There are still no more building lots near the ocean, and even if there were regulations make it more and more expensive and difficult every year to build, just ask any developer. High demand, persistently limited supply.

2 Reply