No more STR's in San Diego... Investment opportunity or not?

Question

San Diego has voted to end Short term rentals in San Diego starting mid 2019.

As a buy and hold investor and local to San Diego, Im curious what opportunities if any this might provide for my wife and I who would like to purchase more San Diego real estate.

Will out of state investors look to sell? Will values drop? Anyone have any research on how this has affected other coastal markets or destination spots in our country?

Love to connect more with other SD natives/investors/brokers. Reply here or direct message to connect further.

Dan H. · Answer

It is 2 blocks north of the Mission beach roller coaster (Jamaica court).  A few units from the beach front.  Definitely a party street.

We had hoped it would work as an STR all year but did our numbers as LTR during school year and STR during the summer.  We tried all year STR at initial purpose but the off season was slow.  So we converted to our fall back plan for a short while.  We then converted both to year round STR until the Great Recession (GR).  During the GR we converted the less desirable unit back to LTR rental during the school year.  We made liberal use of the vacancies of the year round STR during the GR.

Now both units have virtually no vacancies all year.  The few vacancies that there have been have not worked with our calendar.  So it has been a long time since we have slept at the property.

This ended up being a HR with ~7 digit appreciation that may roll back some if the STR option truly vanishes.  In the last year, it had ~$16k/month rent.  Not bad for a $375k purchase :=).

Dan H. · Answer

@Ellis Hammond

My opinion is most areas have fairly low percentage of STRs and that there will not be a noticeable change city wide.

However, certain STR niche areas such as Mission Beach (where our STR is) may experience some small decline but it is from a price that is partly justified due to the lucrative STRs.   Take away the STR option and the properties are not worth as much.

For example, our duplex STR currently averages $16k/month rent (more in summer but less the other seasons).  Let’s assume I can get $8k/month as LTR (which I suspect is more than reality) the property is not worth as much as it was when it could get $16k/month rent.

Does this mean that I’ll not be looking to buy if prices drop a little?   No!  If the prices fall in a Beach area noticeably I will consider purchasing.  Beach front land in San Diego is a precious item. There is so little supply. The demand is great and should only grow.

However it will not be a market for those than cannot withstand large negative cash flow.   I suspect a price to rent ratio of less than 0.5% ($1m property will have rent of less than $5k). It would be totally an appreciation purchase.

Time will tell if my forecast is accurate.

Good luck.

Dan H. · Answer

I would be willing to share but I no longer know.  The STR and off season LTR were almost even in terms of revenue but the LTR was self-managed and LTRs have less expenses.   Also before the GR our STRs were not as booked as they are today.  Maybe 15% vacancy before the GR (very low vacancy in summer but maybe 25% in off season).  Today the vacancy is less than 5% with a weekend vacancy day being maybe once a year.

Keith Meyer · Answer

@Ellis Hammond @Dan Heuschele @Justin R.

FYI here's an invite to a newly formed local BP Meetup here in SD. I went last month and it was a great event. Enjoy interacting with you on the SD forums and hope to meet you in person at a local event (and hope to see you again soon, Ellis ;))

https://www.biggerpockets.com/forums/521/topics/594308-biggerpockets-san-diego-social

Ellis Hammond · Answer

@Dan Heuschele is this duplex in a coastal market or where? thanks for that example.

as an investor here in San Diego, do either of you pro forma properties based on STR rates or do you start with long term rental rates and go from there? If so, how do you get enough history to be comfortably accurate?

Dan H. · Answer

During the Great Recession 1) we converted one of the two units to LTR during the school year.  So from September to May it was LTR and in the summer it was STR.  2) the unit we kept STR (the other unit) had more vacancies (which is why we converted the other unit to LTR during the school year).  However, the rent did not fall significantly because the LTR rents did not fall.  This made it such that if the STR rates fell, the LTR would be the better option.   So the LTR rates kept the STR rates up.

We have owned the duplex STR since 1999 and our best year has been the last year.  Highest rental rate (almost $1k/month higher than the previous year) and virtually 100% occupancy.  I like a few periods not rented so that we can enjoy the property ourselves occasionally.  It has been quite a while since a vacancy fell on a day in summer that our schedule was free to enjoy the property.

Justin R. · Answer

@Ellis Hammond Agree with @Dan Heuschele that impact is likely to be fairly localized in markets with the most egregious STR rates - that is, Mission Beach, PB, OB.  I don't know about the Downtown market.  When you start getting into Mission Hills, Hillcrest, North Park and such, the density of STRs just isn't as high, and the people buying there not behaving so speculatively on an STR business plan.

Note also that running an STR business means exposure to tourism spending patterns - when less people travel, your business is impacted.  Dan could probably offer data about how much revenue was impacted during 2008-2011.  Combine a pullback in consumer spending and some sort of local issue (water contamination? political problem? crime event?) and maybe you'd see more opportunity.

Mind you, that's all observation, and not backed by any specific data I would point to.

If you and your wife are looking to buy in the beach areas, there may be some opportunity.  But, it's not like this whole STR policy change (A) was a surprise or (B) is final and set in stone yet or (C) necessarily means people will follow the new rules exactly.  I wouldn't expect current STRs to become distressed properties anytime soon.

Justin R. · Answer

@Dan Heuschele I got lost in the details there.  For the property that was an STR, during the GR (say, 2010) what was the total percentage drop in net income?  Up to you if you wanna share actual amounts.

Makes sense to flex it into an LTR during the time ... just wondering what the total downside was.

Justin R. · Answer

I create a base-case proforma for everything based on median LTR in the area.  And, a best case based on what I hope will happen (which includes 3% market-based appreciation and 3% annual market-based rent increases).  In my case, the properties almost always receive major renovation or new construction, so they outperform median rents ... and the market has of course given far more than 3% recently.

Any additional revenue (renting out garages, STR use, whatever) is a bonus.

Keith Meyer · Answer

@Dan Heuschele Those are very impressive numbers on your STR duplex! I have to think that with those income levels achievable, capitalism will figure out a way to satisfy this substantial market demand in San Diego. i.e. Pay up for the right kinds of permits, from which funds are allocated to improving roads, schools, homeless situation, etc.

There is too much of a market demand for STR for the city to artificially deprive this growing customer base. I have to think this is a political play which will reach a compromise within the next 1-2 years.

Again, look at those ROI numbers!!

No more STR's in San Diego... Investment opportunity or not?

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