Which route to go for SD rental

Question

Hello,

I just want to get some opinions from other people on my investment adventure. I currently do not live in San Diego, I'm about a 7-hour drive away. I plan on moving to SD in a few years and know that the market is growing over there. My plan at first was to buy a SFH around 650k and renting it out, but after talking to a few people I've been told that isn't exactly the best route. Simply because I don't live in the area and cannot really manage the property. So I will probably have to hire a property manager to do so, which will take the little amount of my cash flow I'd have. So maybe start with something simple a 1 bedroom condo in a great location, such as Downtown, little Italy, etc.. I kinda was interested in a two-bedroom if I go that route, but not sure how easy a two-bedroom would rent, rather than a one-bedroom. I think I'm just a little worried about finding renters for a two-bedroom, rather than a one. I also thought about a townhouse, simply because I like the feel a little more and the HOA's on Townhomes are a lot cheaper, so I don't feel like I'm wasting my money. I'm just stuck in limbo here..

Jordan Graham · Answer

I’m in a similar position as you and live out of state in Denver but am moving back to SD in a few months. I’m getting all of my ducks in a row before I purchase my first rental and have been evaluating a few options. In my opinion the best strategy is to try to find a SFH in a more affordable area (Clairemont, North Park, Kearney Mesa, College Area) with a minimum of 4+ bedrooms that also has a value add opportunity for forced equity (converting garage into ADU for example). House Hack the unit with a 3.5% down loan, live in one of the bedrooms and rent out the rest. I have found some places that cash flow a good amount with 5 bedrooms. It isn’t the most ideal living situation but a couple years of living frugally and sacrificing can set you up for financial freedom.

I highly recommend listening to BP episode 392 that just came out. The investor is from Seattle (high priced market) and has created a massive net worth by only owning rent-by-the-room rentals to greatly increase cash flow.

Daniel Frye · Answer

Hi @Ray Alvarez, you're thinking about this correctly. I would add that no matter what you decide to invest in, go higher on your expenses than any broker is going to tell you. The real world operating expenses are always higher than pro forma, and costs are increasing now, especially insurance.

I would look at submarkets outside of downtown as well, given the lack of people working in offices downtown for the forseeable future, restaurants and bars essentially closed, the appeal of downtown is not there right now. Especially when you consider the rent you can save by moving to North Park/South Park/Golden Hill. Then if you go a little further out, La Mesa, Lemon Grove etc.

The other thing to consider is the eviction moratorium. You need to be very careful in buying a single unit because if the tenant becomes impaired, or just decides to not pay then you are out of luck. For that reason, multi units provide much more resiliency. They still have the risk of multiple tenants not paying though. But if you don't have the cash to buy a multi unit (even duplex or 4plex, doesnt have to be a 10 unit deal) then you should try to reach out to people to co-invest with you. You achieve economies of scale with multi unit acquisitions. You have one roof to replace on an apartment building, but 4 renters paying you. Rather than 1 roof to replace on a townhome but only 1 renter paying you. Same thing for landscaping etc. Granted sometimes HOAs pay for roofing and landscaping but you get my drift.

Maxwell Ventura · Answer

@Anthony Horner

Bankers Hill & North Park are somewhat similar neighborhoods but very different than Mira Mesa. I live in Bankers Hill myself.

What is your price point?

And are you set on SFR vs a Duplex? Different tax savings implications.

Regarding the CoVID lanscape, it's a mixed bag. You've got your percentage of people that are "over it" and walk around freely w/o a mask and the polar opposite on the other end of the spectrum. Finding a tenant will not be an issue w/ the low inventory and surplus of people here.

Just be careful w/ your screening. SD is continuing to lean more towards tenants rights vs landlords.

Account Closed · Answer

Just a heads up for those looking in San Diego, specifically the College Area. There is a cap of 4 Bedrooms per primary dwelling unit. You can go more but it will need to be called a game room, office, den, etc. Mind you this is if you are putting in an ADU to get 4 more bedrooms. This is something that will come up when you permit anything through the city.

You can add more than 4 bedrooms but depending on the area you will need to provide parking within the setbacks for each additional room.

When you convert a garage you must have on site parking meaning it needs to be within the setbacks of the property.

If the garage conversion is an ADU then you do not need to maintain the parking which you will take up with the conversion.

Hope this helps!

Anthony Horner · Answer

@Jordan Graham

I’m considering making a move similar to the strategy you reference re: BP episode on rent by room. Thinking about Mira Mesa, Bankers

Hill, North Park areas.

What’s your sense for viability of strategy considering the current COVID landscape? Concerns about finding tenants comfortable renting rooms in same home as strangers?

Thanks!

Ray Alvarez · Answer

@Daniel Frye Thanks for the great input Daniel! I was also looking in all the areas you've listed below and it seems like there are some great deals in North Park/ South Park/ Golden Hill and even Mission Valley. My wife stayed in Mission valley for two years while she worked in San Diego and I loved it. She was close to the malls, only a 10-12 min drive from downtown and next to all the freeways. I know La Mesa has much more house for the money I have and great points about the bars and downtown environment being closed off for a while. I also think that people are going to start working from home and the convenience of living close to "work" will not be a factor for a lot of people.

I like the thought of a multifamily home and will most likely have to look into someone to co-invest with me. I think my budget was at max 700k. Thanks, Daniel!

Mark Frattini · Answer

@Ray Alvarez

Added Tag...

Mark Frattini · Answer

Ray,Whether you choose a SFH, Townhome or a Condo you would still need a Property Manager. I wouldn't worry too much about not being able to find renters for a 1 vs 2 bedroom. Some investors like more bedrooms as they tend to attract families who may or may not plant roots and stay longer. My properties with two bedrooms always seem to have tenants that stay longer. So it works for me. One bedrooms and studios typically attract more of a transient tenant.  Call up several property managers in the area and ask them what are the current rental trends in the area. If you need the names of a few local Property Managers let me know I'd be glad to help. I work with property investors to try and help them with their investing goals. Let me know if there is anything I can do for you.

Anthony Horner · Answer

@Jordan Graham

I like the approach of targeting people with essential status. Certainly will not discriminate during the tenant process, but wouldn’t hurt to have the tidbit of info used in my head while reviewing apps.

Regarding price, agree it will be higher prices in those locations.  My goal with this method is to make those higher price points cash flow so the investment pays for itself while I get all the long term appreciation upside.

Thanks for the reply! Much appreciated!

Jordan Graham · Answer

@Anthony Horner

I think that's a great idea. Bankers Hill and North Park would definitely be most ideal but prices will definitely be higher... but also potential for charging more per bedroom?

I would assume that if you are looking to rent to an older population, then Covid might be an issue, but for young professionals I don't think it is too much of a concern. If everyone is working from home though I could see how it would not be a fun living environment at all. Looking for tenants who work at some time of essential workplace where they are gone the majority of the day would be best situation IMO.

Which route to go for SD rental

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