Clairemont / MesaCollege Short Term Rental?

Question

Hi San Diego Investors,

I inherited a couple of 3/2 single family homes in East Clairemont free and clear a couple of years ago within very easy walking distance of Mesa College. I have them stabilized now and producing income, but the ROE is just not good even when appreciation is taken into account. I've taken out a 50% LTV 30 year on one of the homes to fund some projects in my home state of Vermont, but there is still so much non working capital that I am strongly considering selling one or both homes. I am reluctant to give up my Prop 13 tax breaks, and dreams of retiring to a home in San Diego with a low tax burden, but  the returns just aren't making sense at market rents. My question to the group is would any of you advocate converting to short term rentals in this location? Have you done it? Do the numbers work? Is the regulatory environment manageable/sustainable? And if not, I'm looking for a realtor who specializes in advising on cosmetic rehabs and has a proven track record of maximizing seller profits. Any opinions and trustworthy referrals for either strategy would be greatly appreciated.

Thanks,

Matt

Robert Comstock · Answer

So....my 2 cents on what i think your considering

Seems like you want to rent the place to students during the school year and then vbro it or something during the summer.

If thats accurate i dont think that will work well in your location.

1. your near a junior college, most of those are local students....there not going home for the summer.  That area can pull ucsd students but they usually want to be closer to campus or nightlife areas.

2. Your not in a summer rental area per say....people come to sd for the beach....your not walking distance to water or near easy transportation....dont know that it will work.

3. This kind of thing has worked in beach areas....i saw it when i was at sdsu....but you had to manage it to find the right students. But even near ucsd the students usually rent for the year and will sublet the room to other students if they go home for the summer.

Bryce Baker · Answer

I can't recommend enough holding on to those properties. Clairemont in general is one of the most reliable rental neighborhoods in the county and you can bank on great appreciation over the long term. As mentioned the legislation regulating STRs in San Diego is up in the air still. You won't have any issue renting them out as STRs currently and, even as a Property Manager myself for long-term rentals, I think you'll cash flow very nicely as STRs. Just be wary of making this your long-term plan for the property.

Our PM company is based in Clairemont and we also have a full service realty division with a veteran listing agent so DM me if you want to chat some more.

Matthew Ware · Answer

To Bryce's point. These places haven't done terribly given my low tax basis. Looking at my  2017 and 2018 numbers and using the imperfect data of Zillow Zestimates. (garbage in garbage out I know, but it at least helps me compare apples to apples) The combined value of the two properties were worth about 1.1m as of January of 2017 and appreciated to roughly 1.25 in January of 2019. My net income after taxes, insurance, Property Mgmt, 2 move outs, deferred maintenance etc. was 95K so around 250k after two years counting appreciation. That's over 20% by my math. Thoughts?

Dan H. · Answer

Slightly less than half that for per year return.  Why less than half?  Due to compounding.  Slightly less than 10% is not bad and with use of a PM you have it probably close to optimal on the active/passive investment.  From your earlier response, you realize that the return on equity would have been significantly higher if you had got a 70% LTV.

Another concern is that a lot of that return is based on appreciation.  San Diego has a great history of appreciation but it has come in phases.  We are on a long duration of high appreciation phase (7 or 8 years).  At some point there will be a lull or some depreciation.  Without the appreciation your return is $95K on $625K equity for the 2 years.  So around 7% annual.  Not bad but could be a lot better but likely better requires more effort than what you have exerted for the 7% return.

You could keep the property with virtually no effort and do OK.  Or you could search out a better investment committing the time and resources to find and acquire and probably do a little better.  Not a bad position where the worse case is pretty good.

I think your biggest risks are 1) some sort of loss of Prop 13 protection could significantly impact your return.  2) a depreciation cycle in the short term could hurt your return but the prices have always bounced back.

Good luck

Matthew Ware · Answer

Thanks for the input so far. Dan, I agree on the loan. It was taken out before I even had any idea what ROE was when I was in my infancy as an investor. Robert you make a great point about not needing to cling to Clairemont as my portfolio grows. As far as the STR  goes I wasn't thinking vacation, but rather throwing out the idea of corporate/academic housing. Probably too much to bother with unless someone is doing it successfully in a similar area and wants to chime in.

Robert Comstock · Answer

Couple points

1. If you want to retire in san diego and you have money you wont retire in east clairmont....just saying.  Perhaps you can find the property you want to retire in and do an exchange....then rent that out till you retire.

2. Some properties in clairmont have small houses on large lots...i think theres less of that in east clairmont but if your lots have space you might consider building adu's to increase your rental income

Dan H. · Answer

Mesa college is a convenient location but it is not beach or downtown.  I suspect that STR will not provide a significant increase to you cash flow after adding the higher management fees.

You indicate your ROE is not what you desire but you then indicate you took out a 50% LTV loan.  That action does not correspond with someone trying to increase ROE.  For highest ROE, especially in high appreciation markets, you should have maximized your LTV.  Your approach is to be safe and have better cash flow than a more leveraged position.  That is a fine decision but you should realize your role in the low ROE.

Good luck

Kenneth Donaghy · Answer

Hi Matt,

At this point in that area long term I would be cautious of STRs, San Diego will continue to try to regulate STRs. Unless it's in a vacation rental zone, we will see more regulation soon. As far as helping you prepare and sell you properties, I am more than happy to help, and will send you a PM.

Clairemont / MesaCollege Short Term Rental?

Most Popular Reply