San Diego Real Estate 2018 - What is your 5 year plan?

Question

Hi All,

Like all of us trying to wrap our heads around how to get involved in the San Diego residential real estate market in 2018, I am trying to weigh the pro's and con's of where I see the market currently and where I see it headed in the next few years. I am hearing more consensus recently that San Diego is much more likely to experience a cooling off than a crash in the next 5 years, even with record high median home prices. Much of this is attributed to some unique aspects of our market, namely the "landlocked" nature of the county. We've also seen the economy grow and diversify in the past decade, and foreign investment is very strong here. There doesn't seem to be a glaring weak spot which would throw the supply/demand situation into a radically different state than it is now.

We seen for years now that supply is not keeping up with demand here, and I've not yet heard a solid proposal to solve this issue. I can't blame developers for focusing on high-end new construction, given the risk and unbelievable headaches they must go through to get anything accomplished. It's been interesting to watch our Median Sale Price / Median Monthly Rent ratio slowly creep up to ~20. Many San Diego investors I've talked to have also taken note of this metric, fearing the ROI on rental properties does, not justify current prices. Some investors, such as myself, are choosing to rent their primary residence in San Diego and invest their capital in other markets, due to the low cash flow returns in SD, and the relatively low rent prices for a primary residence.

That said, I am huge fan of the lifestyle in San Diego, and I'm still looking for ways to put down roots in this city that I love while not completely sabotaging my investment ability for the next 10 years. Fortunately I have access to some solid databases for finding good off-market properties to target, and have ramped up my yellow letter efforts in the past month.

I'm sure many of us have heard that the typical investment rules don't apply to San Diego/California markets. I've heard from multiple brokers/lenders recently that we could expect current home values to double in the next 15 years, then re-double again in the following 15 years given anticipated appreciation rates. Theoretically that could be right (though inflation and accessing that equity need to be taken into account), and I hate betting on appreciation anyway.

Since my strategy involves looking to be an owner-occupant, I'm willing to bend the investment rules a little bit and get creative with my strategy. I have a partner lined up to go in with me on a small MFH for us to occupy and rent the remaining units, if we can find one which makes sense. I would love to get the opinions of those who are looking to actively invest in SD on how they are planning to approach the market in the coming years. Are you taking a "wait and see" approach, and are you really confident that we'll see any solid devaluations coming within the next 5 years? If you're renting your primary residence currently, do you think it's still worth throwing that money away for the next couple of years to see where the market heads?

This is a very important topic to me, so I'm happy to get on a phone call with anyone who has strong opinions one way or the other. The more inputs I get the merrier in my opinion. Thanks in advance for your contributions.

Ben Biggs · Answer

@Keith Meyer

I understand where you’re coming from, it’s a lot of data to sift through! As an investor, former househacker, and full time Agent here in San Diego I’m going to give you a sense of where I see things going and why I think it is a good time to invest. I myself am looking to purchase another property within the next 12 months.

-Rubber Band Effect. We are just now getting back to pre-recession price levels. Do prices just come back to where we were and crash again? Not without the systemic causes that triggered it in the first place. Which we have fixed.

-No funny money. Before the crash it was incredibly easy to get financing. Not anymore, loans are real now.

- Low Inventory, High demand. The market is VERY competitive with 5-10 offers on most properties under $1M and even the jumbo market is getting more competitive. They are also not even keeping up with the birth rate for new properties being built, let alone the influx of people moving here.

- LA and San Fran. People are priced out. Costs just go up dramatically the farther you go up the coast so frankly I’m not sure why everyone is screaming about San Diego. You can still get a 3 bed / 2 bath for $500k.

Be careful to not get priced out, San Diego is a hidden gem with a massive surplus of mid-century modern bungalows that are dying to be flipped. There’s huge surpluses of investor capital waiting in the wings. (I work at one and we are ITCHING to grab more flips) which will all just drive prices higher. It’s going to be six - figure earners and up who will be buying soon and everyone else will be renting!

Just my two cents ;)

All the best

Dan H. · Answer

A few years ago I was very confident of continued rent and property appreciation. Today I only claim to be confident of continued rent appreciation. The OP hit on a lot of the reasons I expect on-going near term rent appreciation but one implied, but not out right stated, is that the rent to value ratio is not where it traditionally is at. This is because in times of high property appreciation, the rent appreciation, while very significant, lags the property appreciation. Some other items, in addition to those pointed out by the OP, that point to continued rent appreciation include increasing minimum wage, increased interest rates making it harder for first time home purchasers, near best climate. So I am confident of continued rent appreciation.

The RE prices I could make a case for any of the 3 scenarios (depreciate, appreciate, or stagnate) but the one I think is most likely is mild appreciation (much less than the last 6 or 7 years). If I am correct then the property appreciation, in the short term, will not provide a good return on the investment.

Does this imply that I am not looking for purchases in San Diego? No, I am still looking but I would like a property that is at least close to cash neutral and has a decent and low risk value add. If it does not have the value add I want it to have better cash flow at purchase that I would expect to increase via the rent appreciation. I am not expecting much property appreciation but it would be bonus if there is.

Assuming no state-wide rent control ... Long term, I would expect the San Diego RE to have property and rent appreciation far in excess of appreciation and close to the top in the US. It has been this way for over 50 years and I see nothing fundamentally to change this. In addition, with Prop 13, the property tax remains relatively fixed. The interest rates, even with their recent increase, still are historically low. Long term San Diego RE investors have done exceptional and I see nothing that changes this other than the possibility of a state-wide rent control.

James Hill III · Answer

@Danny Grey Thank you much for the clarification.

Should be interesting to see how it all unfolds. I'll be following along.

Best of luck!

James Hill III · Answer

@Danny Grey What exactly are "SVR Restrictions"?

Thanks in advance

Danny Grey · Answer

Leaving. With rent control and increased taxation seemingly inevitable for San Diego landlords (considering local and state government LOVES framing us as the greedy bad guys) I think the writing is on the wall, and now/soon is a good time to sell.

We were originally going to put our PB duplex on the market next spring but with the new SVR restrictions set to take place next July (barring court challenges and delays) we don't want to be on the market if/when a ton of investors start dumping their multifamily properties, so we'll be testing the waters and possibly listing it in October or November.

We shall see.

Casey Murray · Answer

@Keith Meyer Responding a little late but figured to chime in. I saw Alan Nevin speak at a local REIA back in 2017. His conclusion was that even though the San Diego housing market was hot, he didn't see it as a threat. Reason being we live in a local economy where we have high paying jobs in several different sectors. So even though the median house price is whatever high amount it is (and keeps creeping up), San Diego locals will continue to pay to live in a beautiful city with all the perks. Some locals may reach the tipping point where enough is enough, but most people don't like change so they'll stay put.

I agree price appreciation will calm down but with increasing interest rates and a hot housing market, market rents will continue to increase. No one can tell the future but at this point I'm still actively looking for deals. I don't see any red flags indicating a massive shift in our housing market in the near future so "waiting for the next market correction" is not my play.

Although all of this makes finding deals harder, finding a property to cosmetically rehab and drive rents to market value is still very appealing.

Danny Grey · Answer

That's my bad James, I meant "STR" as in Short Term Rentals

Antonio Lulli · Answer

@Keith Meyer never heard of someone mentioning water supply as a potential issue, but I think that's a fair point. Southern California is known for its droughts and water supply constraints. However with modern technology there are alternative ways of solving the issue including desalinization. Other cities with similar conditions and far fewer resources have managed to implement these technologies to solve water supply issues (including Lima, Peru where I'm originally from).

Keith Meyer · Answer

@Dan Heuschele @Ben Biggs

Great insights and comments by both of you. Can't say I disagree with any of your points.

One factor which could have a big impact on California real estate prices, but I don't hear discussed very often still, is the chronic drought conditions in this part of the country. After another bust of a winter for snow pack, this will likely remain an issue for the foreseeable future. Have you come across any analysis on how this could impact residential real estate in the years to come? It's interesting that the drought could both drives prices higher due to limiting the new supply of permitted homes, while also potentially lowering prices due to fear of a sustainable water supply for the existing population.

San Diego Real Estate 2018 - What is your 5 year plan?

San Diego Real Estate 2018 - What is your 5 year plan?

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