New to San Diego, should I buy or rent?

Question

Hello BP,

My family is moving to San Diego temporarily (say one year) with a prospect for us to permanently reside in Southern California. I have a descent cash-flowing rental portfolio in Minneapolis that I self manage, along with my primary and a full time but flexible job that allows me to travel back and forth. We need a place to live in San Diego and my question is:

Should I sell (one or two) rental property in Minneapolis and use the equity to buy a primary in San Diego or should I just rent in San Diego? Some +/- arguments:

+ diversification over cash flowing and appreciating assets

+ building sweat equity in my next primary in San Diego

+ tax advantages on a larger primary

+ taking advantage of the cool market, that’s selling low and buying low  (please comment on this)

+ having fewer properties to manage (yeah managing duplexes is not my favorite)

- high interest rates

- high price to rent ratio in San Diego

- giving up cash flowing assets

- unnecessary transactions costs

Other arguments are welcome.

Neighborhood suggestions are welcome for descent but not super expensive houses (say A- quality) with good access to downtown.

Thanks for your comments!

Dan H. · Answer

Historically long holds have always done well. However, initial positive cash flow properties when properly allocating for all expenses is a challenge. The cash flow typically results from rent increases.

If you are going to do a value add such as combining house hack with BRRRR, I would not hesitate to buy if you have confidence you can perform on the value add. Warning, refi appraisals in San Diego are very conservative.

However if you were intending to purchase a property without a value add I would rent if your hold was less than 5 years, buy if your hold was more than 10 years. 5 to 10 years in recent times would have done great as a purchase but there are times in the past where it would have been better to rent. You have the buying and selling costs, the typically initial negative cash flow (that takes time to turn positive), and the cost of money (finances put in the house are unavailable for other investments).

Everyone has different items they value in neighborhoods.

Some of my favorite neighborhoods: Encinitas: beach with casual flair and without heavy party action. Poway (where I live): great community and schools. Community has quite a few events. Carlsbad: I do not like it as much as Encinitas but it is similar. Rancho Bernardo: like poway but not quite.

My recommendation for areas that I believe are most likely to have appreciation better than other San Diego areas (these are not A- areas, probably b to c areas): West Chula Vista: one of few areas where close to water is cheaper than east. Has approved large redevelopment project at the bay. Imperial Beach: cheapest beach area in the US for many hundreds of miles. Has had recurring sewage issues with Mexico that have never been closer to being resolved (but still has a ways to go).

Other areas to mention for having certain vibe

Party action: mission beach, pacific beach, lesser oceanside, down town area especially near the ball field (Petco park)

Liberal (think Berkeley): ocean beach

More high society: Rancho Santa Fe, La Jolla, Del Mar, Coronado, pt Loma

Rural/country: Julian, Ramona, lakeside, jamultouristy: Julian, La Jolla

City action: hillcrest, golden hill, bankers hill, north park, South Park

Military: oceanside, imperial beachgay scene: hillcrestbest schools are usually consider Carmel valley, poway, north county beach areas

Twana Rasoul · Answer

@Ali K. Depends on quite a few factors but San Diego is always a good option for a long term buy and hold...if only holding for a few years, better to rent.  Also, how much equity you have in the out of state properties, how much in capital gains liability would you have? Is there enough capital gains to warrant a 1031 tax deferred exchange?  Of course 1031s are done from one investment property into another, not owner occupied.

I personally sold off mid-west cash flowing investments in the past year or so and purchased more multi-family properties in the San Diego market.  Depending on your specific factors, it may or may not be right for you.

Eliott Elias · Answer

Buy, now is the time. The ball is in your court, you can make offers that were acceptable 2 years ago

Jordan Graham · Answer

I agree, no one knows how long this will last but I think it's safe to say it will continue through the rest of the year and the beginning of 2023... depending on what the Fed does.

North Park used to be pretty sketchy 10-20 years ago but it has undergone a major facelift and it is very desirable to a lot of people now. If you go a little bit farther east (past the 805) it becomes less desirable pretty quickly.

What would be your reason for bigger lots? Are you looking to build something like an ADU or do you just like the idea of more space for you and your family? Poway is beautiful and more family oriented but is definitely not urban at all.

I think Mission Hills/ Banker Hill sounds like a perfect fit for you and what you're looking for based on safety and still getting the urban vibe.

Ali K. · Answer

@Twana Rasoul

Thank you for your reply and the great points about equity and tax implications. I bought my rentals in the last 2 years or so and their equity is descent but not great. I was thinking if buying in San Diego is a good option would it be better to do it now by selling my rentals or wait for a couple more years and rent until then.

Jordan Graham · Answer

Like others said, it depends on how long you intend to live here. San Diego is a very desirable city that has very little land left for development unless you go east, which creates a promising future for investors and owners.

That being said, I think it's important to diversify in to multiple markets over the long term. You are also moving here at a very ideal time and think that it's a great opportunity to pick up some great deals. I work with many flippers and we are negotiating crazy price reductions already and I think the next year will continue in this direction. I say get your cash ready to scoop up some discounted properties!

If considering the multi-family route, I like North Park/ Normal Heights. They are not in the Class A quality, but North Park is one of the most desirable parts of town.

Peter Mckernan · Answer

If your willing to not have cashflow, but buy as a primary and hold it for appreciation for a bit it would be great to grow your net worth and build money in the form of appreciation to move that to more properties!

Mark Frattini · Answer

Hi @Ali K.

Let me address a few of the negative points. Since you already own property and have a investment portfolio this should make sense.

- high interest rate - most believe these higher rates are temporary and will come back down after inflation is under control. You have still have MANY options that I would consider low risk and would give you low rates today or in the near future.

- high price to rent ratio in San Diego- Since this is your primary I wouldn't be too concerned. Also, rents in San Diego will continue to increase should you need to rent it out in the future.

- giving up cash flowing assets - This would be a way to diversify and move into a more appreciating market.

- unnecessary transactions costs - Do you have to sell in order to buy? You could save on the selling transaction side if you could hold your properties in Minneapolis.

I would need more info to give you the best information on neighborhoods. Details like kids, commute, parks, transit needs etc. would be helpful to get you more dialed in. Without knowing any of this info check into the neighborhoods around Balboa Park. This area is very close to downtown.

If you're interested I put together a list of resources on the different cities and neighborhoods in San Diego that I give to anyone who is looking into moving here.

Matt May · Answer

Hi Ali,

Congrats on your current portfolio of properties in MN. Thank you for posting such a great question. I love the input people have provided so far.

Here is my opinion. As a rule of thumb, I would not sell an investment property to purchase a primary residence. One idea you might consider instead of renting would be (and someone else may have mentioned this, idk) sell a MN investment property and purchase a duplex in San Diego that allows you to live in one unit and rent the other. That way you are both trading one investment property for another and providing for yourself a temporary primary residence.

You mentioned you have a primary residence in MN. Why not sell that and buy a primary residence in San Diego?

Otherwise renting in SD for a year or two is really not a bad option in your case.

Dan H. · Answer

The fact that it would have negative cash flow if rented implies that it is initially cheaper to rent than to buy.  However, many of the expenses of owning of fixed while rent historically increases.  This implies the longer you live there, the more likely it is that owning was a better financial decision than buying.  If you are going to own the home less than 5 years, it is likely that renting is the better financial decision. Similar if you are going to own more than 10 years, it is likely owning will be the better financial decision.  For owning 5 to 10 years is where the financial uncertainty resides.  In recent times you would have been better financially to own.  However, the last few months have been the first price decline in San Diego RE in a decade.  It could be that a purchase today may take close to 10 years to be the financially better decision.  People have opinions, but no one knows.

Good luck

New to San Diego, should I buy or rent?

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