BRRRR Strategy Question

[Bryan Contreras]

Question: I have 200K in equity with a home here in San Diego. Cashflow is about $100/month. Do you recommend that I sell and use the money to purchase out of state to begin the BRRRR process with more affordable and better cash flowing homes?

[Dan H.]

According to case shriller (reputable source) the return on San Diego small residential buy n hold is number 3 in nation for this century.  How can this be?

Historically there is a terrible relationship between initial cash flow and long term cash flow.  This is not by accident.  The RE market is efficient.  The price is based on multiple parameters.  Two of the most key parameters are expected risk and expected appreciation.  The market with the higher rent appreciation will always eventually have the better cash flow (assuming no refinance and rent appreciation exceeds expense increase).  It is simple math.  Every one of my San Diego RE purchases exceeds 1% market rent to purchase ratio.  

I suspect much of that $200k equity came via appreciation.  San Diego had ~25% appreciation in the last year.  I have quite a few local properties.  My worst appreciating has appreciated over $1.9k/month over the hold period.  I have multiple properties that have appreciated over $4k/month over the hold period.  These are all non-commercial residential (<5 units).  My worst appreciating property has from appreciation alone provided a better return by far than the high cash flow markets.  Neighborhood scout shows San Diego a 10/10 appreciation nationally for this century.  

Prop 13 is an under appreciated benefit to Ca RE investors.  We have properties that our cash flow would be almost $2k/month less if not for prop 13. That adds up to almost $24k/year for one property.

The Difficulties of out of state investing include minimal market knowledge, difficulty building/maintaining the team, no option to self manage to save money, and harder to do heroics if needed from a far (we once had an OOS duplex get hit by hurricanes 1 year apart.  Both times required us to go there to get work done).  

You live in historically one of the best residential buy n hold markets in the US.  You have accumulated $200k in equity I assume mostly via appreciation.   I suggest you calculate your monthly return from appreciation.  I suspect it will exceed my worse case $1.9k/month. Why would you consider a different market?

Good luck