Introduction, Looking for San Diego advice

[Stephan Ketterer]

Hello,

my name is Stephan, living in the US for ~3 years and recently moved to San Diego ( my wife and I love it here). Due to tax reasons I will move money from my home country (Germany) to the US  ~200-300k and looking to invest in real estate.  Given the San Diego prices I wonder if its a better idea to look for opportunities in Las Vegas or Phoenix since they are a short flight away. I am not looking to buy a single house (too much concentrated risk).  I am happy about all tips how I could maybe invest in the San Diego area after all given my budget (1-1.5M given 20% down)

Sincerely

Stephan

[Ray Alsaigh]

@Stephan Ketterer Welcome to San Diego and BP. 

Your strategy will depend on your goals. Are you looking to primarily generate cash flow from this investment? Are you looking at it as a long term equity play? little bit of both? 
If you're not looking to buy a single family home, what type of properties are you looking into? 

San Diego is a great market but I know that price points are a little higher here and cash flow is not so easy to find. However, it is an appreciation market so long term it's a great place to invest. 

You also have the option of buying a distressed property and adding value to it so you can build equity from the start. Do keep in mind of course that doing so will require time, effort and education as opposed to buying a turnkey... 

Best thing you can start doing is to start looking at deals and evaluating them to get a feel of what the numbers actually look like here in San Diego and also in the different markets you're looking into. 

Hope that helps. Best of luck and Happy Holidays! 

[Twana Rasoul]

@Stephan Ketterer Start with a 2 to 4 unit multi family in San Diego...San Diego real estate is higher priced for good reason...it is a great quality long term asset.  You'll have great long term appreciation as well as cashflow, contrary to popular belief.   

[Stephan Ketterer]

Originally posted by @Twana Rasoul:

@Stephan Ketterer Start with a 2 to 4 unit multi family in San Diego...San Diego real estate is higher priced for good reason...it is a great quality long term asset.  You'll have great long term appreciation as well as cashflow, contrary to popular belief.   

 I am curious where you think the appreciation will come from. On average, Americans cannot spend more on rent due to having  little savings(on average). So that leaves either people making significantly more money (I have a hard time believing that) or an external group of renters entering the market. Due to the high California taxation I wonder if that is realistic, definitely not people in tech as seen in the Bay Area. 

[Twana Rasoul]

The past 12 months we've had nearly double digit appreciation and we are projected to have nearly the same level of appreciation the next 12 months.  Supply and demand and low interest rates have been giving housing quite the boost.  Since you mentioned the Bay area, I've worked with several bay area clients recently who have purchased and moved down here since their tech jobs have gone to permanently work from home...similar story to others in Los Angeles, Portland and Seattle.  San Diego is a great city and it is much affordable here than other major metropolitan areas along the west coast of CA.  

[Mark Frattini]

@Stephan Ketterer

Find a value ad 2-4 unit property. Ad value, raise rents. As previously mentioned San Diego real estate will continue to appreciate. Let me know what I can do to help.

[Maxwell Ventura]

@Stephan Ketterer

Many reasons to invest in SD: 

• Median sales price increase year over year approximately 10%
• Months supply of inventory down to 1.2 (lowest we've ever had). 
• Very low supply to high demand. 
• SD increases in rent 3-4% a year. An increasing rental market will generally follow a similar trend line w/ an appreciating market. Know that cash flow is actually quite good here, just not INITIAL cash flow generally. 
• Tech Boom is happening now here in SD. Prices started to skyrocket around June when Bay area, Boston, & NY tech related careers started to work remote and came here. 
• Inventory shouldn't change much over the foreseeable future. Running out of room to build and new construction isn't keeping up w/ demand.
• Recommendation is start w/ a 2-4 unit w/ a value add play. Majority of opportunity is in Metro SD, National City, Chula Vista and Oceanside / Carlsbad / Vista up in North County. 

Your total return will should great on a spreadsheet when factoring in compounding interest from appreciation over time, along w/ cashflow, prinicipal paydown, & tax savings.

[Justin R.]

Originally posted by @Stephan Ketterer:

Hello,

my name is Stephan, living in the US for ~3 years and recently moved to San Diego ( my wife and I love it here). Due to tax reasons I will move money from my home country (Germany) to the US  ~200-300k and looking to invest in real estate.  Given the San Diego prices I wonder if its a better idea to look for opportunities in Las Vegas or Phoenix since they are a short flight away. I am not looking to buy a single house (too much concentrated risk).  I am happy about all tips how I could maybe invest in the San Diego area after all given my budget (1-1.5M given 20% down)

Sincerely

Stephan

If you're planning to just buy a property, have someone manage it, and rent it out right away and right now, look elsewhere (unless you've got a really long time horizon).  If you're planning to apply your energy or creativity to the property after you buy it, buy local.

Strip away all the details and it boils down to this: CAP rates are lower in San Diego BECAUSE the market values a dollar earned in San Diego more than it values a dollar earned in most other places. Consider this thought experiment:

1. You have a choice between a $1M property in San Diego and another somewhere else - let's call it Happyville.

2. The San Diego property throws off $40k per year in operating income.

3. The Happyville property throws off $60k per year in operating income.

4. You're planning to spend 100 hours of your time and effort improving the property.  That's going to increase monthly income by $1000/m.

5. The value of your San Diego property just increased to $1,300,000.

6. The value of your Happyville property just increased to $1,200,000.

7. It's going to take 5 years for the Happyville property just to catch up to where your San Diego one started.

Arguing about markets is one of my least favorite parts of BP, but I'm posting this just to be sure you understand the forces behind this. The issue is that many people talk about CAP rates as a measure of how much they'll make, while they are primarily a measure of how much a property is worth. If you're going to *create* value, you benefit from being in a low CAP market.

Layer on top of the above baseline any market-based appreciation, rental rate changes, and contextual benefits or headwinds of any market to make your decision.  There's a thousand of them.

The market is telling you that it values every dollar of income from rental real estate in San Diego MORE than it values a rental dollar elsewhere.  If you're going to go against the market, you should be able to explain to yourself why.  There certainly may be fantastic reasons - real estate is a completely inefficient industry - but you should still go into whatever you're doing with a thesis that answers that why question.

[Dan H.]

Originally posted by @Account Closed:

Hi Stephan,

My name is Larry Burr. I’m a real estate investment broker. Lots of really sharp people on BP giving advice. I would respectfully disagree that San Diego or really anywhere in California is a good investment environment. Half of our current clients are investors who are fleeing California. Cap rates in the 2’s and 3’s, cash on cash returns in the 1% to even negative. Not to mention that CA is a very “tenant friendly” state and there is continued talk about rent control !! Here in AZ, investors are seeing cap rates in the upper 5’s and cash on cash returns in the 7% to 8%...once stabilized ! Total equity returns in the 11% to 12% range. I’d be happy to share our thoughts and expertise on investing here in AZ with you if you’re interested. Once again, no disrespect intended to other opinions. Best of luck !

 The historical stats indicate Ca has been a great place for buy n hold.  How good?   Case Shiller’s top 3 cities for return this century (at least last I looked which is probably over a year ago now) are each CA cities (San Fran, LA, San Diego).

Phoenix has experienced significant growth.  I suspect it could possibly have been in the top 10.   However, I suspect OC and San Jose are also in the top 10.  That would place 5 CA cities in the top 10.  

Not bad for a state that is not a good investment environment 😀.  

I believe there are likely good opportunities to invest in most RE markets.  I also believe most new RE investors should start local.  I believe that you would need to have made some horrendous decisions to be currently invested in the San Diego RE market for at least 3 years and have not achieved a good return (I suspect the same is true of Phoenix).  

For the OP, I have not followed Los Vegas prices but if they are depressed due to impact to hospitality business from Covid, it may have the best short term upside.  

Phoenix has experienced exceptional growth and I see no indication that will change soon.  

I think all 3 cities you named are likely to be good investment locations.  However, investing local typically has less risk than investing from afar.  If you lived in Phoenix my recommendation would be Phoenix.   If you lived in Los Vegas, then Vegas would be my recommendation.  Because you live in San Diego, my recommendation would be San Diego. 

Good luck

[Dan H.]

Originally posted by @Account Closed:

True that Cali has “historically” been a great place to invest. I wish I had purchased properties there 20 years ago. But markets change !!

There are reason why the majority of new clients are fleeing California and buying MF here in the Valley.

If some folks think a cap rate in the 2’s and 3’s with little to no cash flow is a good deal....invest away !   I prefer a high 5 / low 6 cap rate, C on C in the 8% range, with stable appreciation and NO talk about governmental rent control.

But I will be the first to admit that I am not an expert when it comes to the California RE market.  If BP folks in CA are doing well in that market...awesome ! Nothing but respect for them !

My opinion is based on comparing Cap Rate, C on C, total equity return and that Phoenix is the fastest growing market in the country with the number one year over year rent growth.

Best of luck to everyone....no matter what market works best for them.

Happy New Year !

 Your view of cap rate is missing that cap rate is set by an efficient market.  The cap rate reflects perceived return/risk. 

The highest cap rates are in historical zero appreciation high risk areas.  Using your rationale that higher cap rate is the more desirable market would lead investors to the cheap, zero appreciation markets of the midwest.

The lowest cap rates are in markets with long track records of producing outstanding returns with zero/low risk.   

Using your rationale, the worse neighborhoods in Cleveland would be a better investment area than Phoenix.  I suspect you do not believe this.   

You indicate there are many investors leaving CA, but most Coastal So Cal markets have continued RE appreciation.  San Diego in 2020 had ~10% appreciation (I suspect Phoenix had even greater rate of appreciation).  In addition, San Diego has a housing shortage with limited options of producing more housing (unlike Phoenix which can expand on the edges).  

I believe all 3 markets the op listed are likely to be good RE markets.  I personally believe Las Vegas is more cyclic than phoenix or San Diego, but it could be a good time to enter the market.  I am aware of Phoenix’s population growth.   It would not be possible for San Diego to have such growth because there is so limited areas to place additional housing.  That Phoenix growth has resulted in Phoenix having great recent appreciation.  

The reason, I recommend San Diego for the op is that it is local and he has the means to invest in the San Diego market.  It is not an indication that the other markets the op indicated are not fine markets (I believe they are both fine markets and will produce returns better than the higher cap rate, zero appreciation mid west markets).   

[Ari Hadar]

Originally posted by @Dan H.:

Originally posted by @Account Closed:

True that Cali has “historically” been a great place to invest. I wish I had purchased properties there 20 years ago. But markets change !!

There are reason why the majority of new clients are fleeing California and buying MF here in the Valley.

If some folks think a cap rate in the 2’s and 3’s with little to no cash flow is a good deal....invest away !   I prefer a high 5 / low 6 cap rate, C on C in the 8% range, with stable appreciation and NO talk about governmental rent control.

But I will be the first to admit that I am not an expert when it comes to the California RE market.  If BP folks in CA are doing well in that market...awesome ! Nothing but respect for them !

My opinion is based on comparing Cap Rate, C on C, total equity return and that Phoenix is the fastest growing market in the country with the number one year over year rent growth.

Best of luck to everyone....no matter what market works best for them.

Happy New Year !

 Your view of cap rate is missing that cap rate is set by an efficient market.  The cap rate reflects perceived return/risk. 

The highest cap rates are in historical zero appreciation high risk areas.  Using your rationale that higher cap rate is the more desirable market would lead investors to the cheap, zero appreciation markets of the midwest.

The lowest cap rates are in markets with long track records of producing outstanding returns with zero/low risk.   

Using your rationale, the worse neighborhoods in Cleveland would be a better investment area than Phoenix.  I suspect you do not believe this.   

You indicate there are many investors leaving CA, but most Coastal So Cal markets have continued RE appreciation.  San Diego in 2020 had ~10% appreciation (I suspect Phoenix had even greater rate of appreciation).  In addition, San Diego has a housing shortage with limited options of producing more housing (unlike Phoenix which can expand on the edges).  

I believe all 3 markets the op listed are likely to be good RE markets.  I personally believe Las Vegas is more cyclic than phoenix or San Diego, but it could be a good time to enter the market.  I am aware of Phoenix’s population growth.   It would not be possible for San Diego to have such growth because there is so limited areas to place additional housing.  That Phoenix growth has resulted in Phoenix having great recent appreciation.  

The reason, I recommend San Diego for the op is that it is local and he has the means to invest in the San Diego market.  It is not an indication that the other markets the op indicated are not fine markets (I believe they are both fine markets and will produce returns better than the higher cap rate, zero appreciation mid west markets).   

Cleveland b, c areas are appreciating too maybe not asmuch as the coasts

[Cody L.]

Originally posted by @Dan H.:

Originally posted by @Account Closed:

True that Cali has “historically” been a great place to invest. I wish I had purchased properties there 20 years ago. But markets change !!

There are reason why the majority of new clients are fleeing California and buying MF here in the Valley.

If some folks think a cap rate in the 2’s and 3’s with little to no cash flow is a good deal....invest away !   I prefer a high 5 / low 6 cap rate, C on C in the 8% range, with stable appreciation and NO talk about governmental rent control.

But I will be the first to admit that I am not an expert when it comes to the California RE market.  If BP folks in CA are doing well in that market...awesome ! Nothing but respect for them !

My opinion is based on comparing Cap Rate, C on C, total equity return and that Phoenix is the fastest growing market in the country with the number one year over year rent growth.

Best of luck to everyone....no matter what market works best for them.

Happy New Year !

 Your view of cap rate is missing that cap rate is set by an efficient market.  The cap rate reflects perceived return/risk. 

The highest cap rates are in historical zero appreciation high risk areas.  Using your rationale that higher cap rate is the more desirable market would lead investors to the cheap, zero appreciation markets of the midwest.

The lowest cap rates are in markets with long track records of producing outstanding returns with zero/low risk.   

Using your rationale, the worse neighborhoods in Cleveland would be a better investment area than Phoenix.  I suspect you do not believe this.   

You indicate there are many investors leaving CA, but most Coastal So Cal markets have continued RE appreciation.  San Diego in 2020 had ~10% appreciation (I suspect Phoenix had even greater rate of appreciation).  In addition, San Diego has a housing shortage with limited options of producing more housing (unlike Phoenix which can expand on the edges).  

I believe all 3 markets the op listed are likely to be good RE markets.  I personally believe Las Vegas is more cyclic than phoenix or San Diego, but it could be a good time to enter the market.  I am aware of Phoenix’s population growth.   It would not be possible for San Diego to have such growth because there is so limited areas to place additional housing.  That Phoenix growth has resulted in Phoenix having great recent appreciation.  

The reason, I recommend San Diego for the op is that it is local and he has the means to invest in the San Diego market.  It is not an indication that the other markets the op indicated are not fine markets (I believe they are both fine markets and will produce returns better than the higher cap rate, zero appreciation mid west markets).   

I agree with Dan. The only thing I'd add is you have to apply your own opinions to the risk adjusted returns. For example, I've bought in areas deemed "risky" that I felt the CAP rate was higher than it should be. And I was rewarded by strong cash flow, and, when the market realized the CAP rate should be lower I was rewarded with appreciation.

Likewise I've felt some areas were too low.  For example, for me PERSONALLY, the government risk is too high in Ca to warrant the low CAP rate.  I'd need a higher CAP to buy in my home town of San Diego.   (no San Diego investors attack me please, if you can make it work, or have enjoyed appreciation that's great.  I'll also note that all my stuff in Houston has doubled in the last 5 or so years so I'm not doing so bad over there.  In fact, I just refinanced a property that appraised for $6.4m that I bought for $860k 5 years back.  So my new loan is about 5x what I paid)

Or there have been D areas that offer a high CAP that still isn't high enough for me to justify.

But Dan's point is spot on.  A low CAP is the market (or more accurately the collection of all buyers/sellers)  saying "We view this area as safe with appreciation upside".   And a high CAP as the market saying "all you're going to get is cash flow, and hope you don't get shot trying to get it"


tl;dr: "low cap" doesn't mean a good deal, or a bad deal. "high cap" doesn't mean a good deal, or a bad deal. Ask yourself "is this a good CAP relative to what the area should be?

[Kevin W.]

Welcome to Sun Diego, the most beautiful city in America! 
I’m also looking to invest 1-300k in San Diego, local resident for 10+ years. I would not look elsewhere, there may be higher cap rates in AZ, but appreciation in 5 years is a totally different story. 

[Ahmed Megahed]

Did you find anything? 

[Stephen Bernard]

@Stephan Ketterer Just saw your post! Interesting situation, did you end up buying?