Local San Diego Investors: Active or Sidelined?

Question

Are local investors waiting on the sideline until some of the uncertainty associated with COVID subsides?

Has anyone seen significant price reductions for properties left on market?  If so, would you be comfortable moving forward with a transaction under the current environment even at a below market price?

Kenneth Donaghy · Answer

@Matthew Hubbell The residential market is hot, still low inventory and still low rates. A property priced accordingly with have 10-20 offers the first weekend on the market. That includes flip investors. I had a couple fixer listings recently. One I price low to attract attention, and I had 21 cash offers in 3 days, selling for 85K above list. The next time I priced higher, and still received 11 offers in 3 days, and is under contract for over 40K above list. But keep in mind, and we discuss this in our masterminds, with inflation prices do not need to go down to see a decrease in values.

Dan H. · Answer

In San Diego home prices have risen since the start of Covid but some higher end properties are not selling.

I believe we will see a price decline, but s far I have been wrong.   I recognize predicting the market is not easy.

We have place 3 offers since the start of Covid, but we have been factoring increased risk into our offers.  One of our offers was accepted, but we pulled out during DD due to a risk associated with our value add (we did not pull out due to Covid).

My belief is many investors are not accounting for the increased risk.  If the risk items do not impact their RE investments, they will be fine.  However, if any of the current risks affect their investment it could greatly impact their returns and could lead to financial crisis if they are extended too far.

I’ve stated for years that virtually the only San Diego RE investments that have not produced good returns are the investments were the investor sold in a depreciated market.  The primary reason to sell in a depreciated market is being over extended and needing to sell.  It is my view that now is not the best time to be over extended.

Good luck

Dan H. · Answer

2 of our units (a single duplex in Mission Beach) are STR units managed with professional management that specializes in STR management.  We have owned a long time and have significant equity and therefore low expenses, but we lost >$60k in lost rents.  We had ~2 months were STRs were banned.  After they have been allowed, our vacancy rate is higher than recent years and our PM has lowered the nightly rates a little.   It adds up to a lot of lost rent.

I have to believe that some STR LL, especially those that purchased recently, are not in a position to handle losing a large amount of rental income.

STRs and the lost rental income is just one reason I am expecting some property depreciation in the not so distant future.

Other reasons include:

• San Diego recently had its highest unemployment ever. Rent forbearance/eviction moratorium has resulted in some tenants not paying rent.   Many of these tenants will never pay the back rent. 
• listings have been down for each of the last 6 months.   This has resulted in reduced supply.   It also implies that there is likely a backlog of supply waiting to hit the market.

These items that point to property depreciation is being countered by virtually free money.  The free money combined with the reduced supply has resulted in prices going up so far.

Predicting the market is not easy.  My prediction could be wrong.  What I do not believe is wrong is that there is more RE risk today than there was a year ago.  My view is that investors should be accounting for this increased risk in their offers.

Good luck

Dan H. · Answer

There is an entire BP thread on STR rents.  If the posts in that thread are a true indicator, then San Diego STRs are doing far worse than many/most other locales.  As you indicated, some posts indicate this is their best year ever.

I was not expecting this to be best year for any STR LL, but I was expecting San Diego to be worse than many markets.  The beaches, zoo, sea world, etc were closed for a long time plus there was the ~2 months that STR rentals were banned.

Account Closed · Answer

@Dan Heuschele, that makes sense about San Diego. I've even communicated with some Big Bear STR operators who are seeing a dramatic surge in occupancy.

Account Closed · Answer

@Dan Heuschele, thanks for the thoughts and sharing what you've experienced with your own STRs. From what I read, it sounds like some markets have seen better occupancy rates than previous years once the restrictions were lifted, but I still suspect there were people that got into it just prior and were not prepared to handle a significant reduction in lost rents.

I am curious too about your point about supply and the effects once more inventory starts to come on the market.

Account Closed · Answer

@Dan Heuschele, any thoughts on STR investors that may have been overextended or not able to weather the COVID shutdown? Besides San Diego, I'd wondered if there would be newer investors who hadn't set aside reserves or just someone who had been aggressive and overextended and who would need to sell after not being able to handle the prolonged vacancy.

Matthew Hubbell · Answer

@Dan Heuschele

Appreciate your insight!  I agree that you must factor the increased risk into offers during these uncertain times.

Local San Diego Investors: Active or Sidelined?

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