Assistance analyzing a duplex in El Cerrito area of San Diego, CA

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Assistance analyzing a duplex in El Cerrito area of San Diego, CA

Ryan R.
Investor · Member since 2015 · 18 posts · 5 votes

Hi All,

In advance, thank you for any and all help/advice you are able to provide. My fiancee and I have an accepted offer on a duplex in San Diego, very close to San Diego State in a great neighborhood. The terms of the deal would be we pay the downpayment (FHA 3.5%), and the sellers pay all closing costs. The purchase price is $615,000. Rents are currently $1,350 and $1,450 per month (with a projection of rents being raised to around $2,000/month each. We would be living in one of the units and renting out the other until we save enough to move on to our next property.

We have been working with our real estate agent, who has been investing in San Diego for quite a long time. His words exactly regarding this property are:

I'm trying to get assistance on whether this is a good deal. I understand that San Diego is not a typical market like much of the rest of the country, and that margins are much tighter here. That said, even though the cash flow is at best break even, there is the debt pay down, tax benefits, and appreciation (understanding of course this is speculation) to consider in our favor. 

With all that in mind, what do you guys think about this deal?

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Michael Swan
Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
10y

I am selling all my rental properties in Santee and Lakeside, due to us approaching the peaks.  I am 1031 exchanging for Apartment complexes in Northeast Ohio.  I began investing in 2011 and had 10 condos in Santee and Lakeside and am currently down to four and own 8 low priced, high cash flowing single family and 4 apartment complexes and counting.  We have 57 front doors and soon to be 78 front doors and this summer will 1031 my remaining Santee and Lakeside condos in for Apartment complexes.  Cash deferred cash flow is now $120,000 after 5 years of investing.  In 8-10 years from now, I expect to have $1,000,000 in tax deferred cash flow.  To think, in 2011 and 2012 we were putting an average of $30,000.00 on each condo here in San Diego at an average of $120,000 purchase price and exchanging $6,000.00 cash flow on each condo and selling those condos for $275,000 each and trading them in for $15-20,000.00 in cash flow per year.  My advice is to buy rental properties in nice cash flowing areas of the country and at low prices and then chunk in our expensive cost of living here in San Diego.  Now if you lived in a high cash flow area of the country, I would say, yes go for it and house hack.  Now if this was 2009-2011 and you could purchase that same duplex for approximately $400,000.00 than I would have said to go for it.  My rental properties pay fo my $2,000 mortgage, my son's college, two cars and all expenses.  If I lost my teaching job today, how long would I survive without getting another W2 earnings job?  Forever!!  If I can do this with a combined family w2 earned income before taxes, then anyone can!!

Swanny

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  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    10y

    I am selling all my rental properties in Santee and Lakeside, due to us approaching the peaks.  I am 1031 exchanging for Apartment complexes in Northeast Ohio.  I began investing in 2011 and had 10 condos in Santee and Lakeside and am currently down to four and own 8 low priced, high cash flowing single family and 4 apartment complexes and counting.  We have 57 front doors and soon to be 78 front doors and this summer will 1031 my remaining Santee and Lakeside condos in for Apartment complexes.  Cash deferred cash flow is now $120,000 after 5 years of investing.  In 8-10 years from now, I expect to have $1,000,000 in tax deferred cash flow.  To think, in 2011 and 2012 we were putting an average of $30,000.00 on each condo here in San Diego at an average of $120,000 purchase price and exchanging $6,000.00 cash flow on each condo and selling those condos for $275,000 each and trading them in for $15-20,000.00 in cash flow per year.  My advice is to buy rental properties in nice cash flowing areas of the country and at low prices and then chunk in our expensive cost of living here in San Diego.  Now if you lived in a high cash flow area of the country, I would say, yes go for it and house hack.  Now if this was 2009-2011 and you could purchase that same duplex for approximately $400,000.00 than I would have said to go for it.  My rental properties pay fo my $2,000 mortgage, my son's college, two cars and all expenses.  If I lost my teaching job today, how long would I survive without getting another W2 earnings job?  Forever!!  If I can do this with a combined family w2 earned income before taxes, then anyone can!!

    Swanny

    4Reply
  • Rami W.
    Rental Property Investor · CA · Member since 2011 · 82 posts · 32 votes
    10y

    Hard to say exactly without knowing the NOI on the property, but this is probably a 2-2.5 Cap currently. Even at $4k/mo its probably only a 4 Cap. This could potentially still negatively cash flow even once you move out and have them rented out for 2k/unit.

    Here's an estimate with 4k/mo income. This also doesn't include PMI which you will be paying!

    Purchase Price615,000
    Down Payment %4
    Down Payment21,525.00
    Principal593,475.00
    Interest %4.500%
    Term360
    Mo. Rent4,000.00
    Mo. Vacancy Loss %10.00%
    Mo. Vacancy Loss-400.00
    Effective Gross Income (rent-vacancy)3,600.00
    Effective Gross Annual43,200.00
    Mortgage (PI)-3,007.05
    Operating Expenses
    Prop Taxes 1.11%-568.88
    Insurance -141.45
    Mo. Maintenance -120.00
    Mo. Utilities -120.00
    Mo. Prop Mgmt 9%-360.00
    Mo. Op Ex-1,310.33
    Net Operating Income2,289.68
    Annual NOI27,476.10
    Mo. Cash Flow-717.38
    Cap Rate (NOI/PP)4.47%
    Return on Cash-39.99%
    OE Ratio (OE/Income)36.40%
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  • Ryan R.
    OP
    Investor · Member since 2015 · 18 posts · 5 votes
    10y

    I forgot to add the financials that were provided from our mortgage guy:

    And yes, we would be house hacking this as long as we needed to.

    0Reply
  • Carlton PerkinsPro Member
    Real Estate Investor · Houston, TX · Member since 2016 · 36 posts · 12 votes
    10y
    Ryan R. How did you do your due diligence to breakdown this deal? C. Perkins
    0Reply
  • Account Closed
    Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
    10y

    Ryan. You are gambling on an upward trend in SD! If/when it drops guaranteed to be loosing month after month. This property is negative cash flow big time. Do you have another home? Are you planning on moving in 10 years or less? If you answered yes to those questions it may be hard to carry both and will be a loss when you sell! If we are lucky and get another 1-2 years of neutral gains you will gain 6-10% in equity. Takes 6-10 just to trade real estate! that means your looking to hold for 10 years or more I'm guessing. In that case it will work, and everyone needs a place to live. You may want to crunch numbers on renting for 2-6 years. Don't plan on selling anytime soon! Horrible buy and hold market here in SD. Nows the time to flip it. Can you force appreciation with repairs? Keep in mind 2-4 units always go off comps and not as much the rents NOI and CAP rates like apartments. I wouldn't buy anything right now unless it was a primary in which I'm staying for 10 plus years. best of luck

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Michael Swan:

    I am selling all my rental properties in Santee and Lakeside, due to us approaching the peaks.  I am 1031 exchanging for Apartment complexes in Northeast Ohio.  I began investing in 2011 and had 10 condos in Santee and Lakeside and am currently down to four and own 8 low priced, high cash flowing single family and 4 apartment complexes and counting.  We have 57 front doors and soon to be 78 front doors and this summer will 1031 my remaining Santee and Lakeside condos in for Apartment complexes.  Cash deferred cash flow is now $120,000 after 5 years of investing.  In 8-10 years from now, I expect to have $1,000,000 in tax deferred cash flow.  To think, in 2011 and 2012 we were putting an average of $30,000.00 on each condo here in San Diego at an average of $120,000 purchase price and exchanging $6,000.00 cash flow on each condo and selling those condos for $275,000 each and trading them in for $15-20,000.00 in cash flow per year.  My advice is to buy rental properties in nice cash flowing areas of the country and at low prices and then chunk in our expensive cost of living here in San Diego.  Now if you lived in a high cash flow area of the country, I would say, yes go for it and house hack.  Now if this was 2009-2011 and you could purchase that same duplex for approximately $400,000.00 than I would have said to go for it.  My rental properties pay fo my $2,000 mortgage, my son's college, two cars and all expenses.  If I lost my teaching job today, how long would I survive without getting another W2 earnings job?  Forever!!  If I can do this with a combined family w2 earned income before taxes, then anyone can!!

    Swanny

    Tax deferred cash flow? 

    0Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y
    Ryan R. As an investment, definitely not. I own property in that area and, while it's true that rents have risen dramatically over the past 3ish years, there's basically no way I see you making money here. The financials your mortgage guy gave you say it all - you'll lose money every month, and that doesn't even include all the expenses that are missing. I could go into details, but I'll leave it at this: if you like the property and want to make it your home, think about it. If it's an investment and a step towards larger things, turn around and go the other direction.
    1Reply
  • Ryan R.
    OP
    Investor · Member since 2015 · 18 posts · 5 votes
    10y

    @Michael Swan @Rami W. @Carlton Perkins @Account Closed Thanks for the responses. I really appreciate you all taking the time to look over this deal with me. I agree with your assessments, it's definitely looking more interesting, in a not so good way, the more I read what you all have to say. 

    Provided we walk away from this then, is the best approach for a newbie investor just to invest away from San Diego? It seems like numbers here are pretty bad, if you don't try and factor in appreciation or having the property act as  your primary residence for quite a number of years. My hope was to get out of my rental and into a property where I could house hack, get a decent investment property education and property itself under my belt, and set myself up for moving on to the next property. Ideally, we were hoping to do at least a property a year each of the next five years.

    0Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    10y

    You could approach 1.5% rule in Northeast Ohio, where I invest.  I don't use turn key providers.  I have a RE agent and a property manager.  If you want to go single family in the area where I invest, you could get loans on great cash flowing areas and the property manager doesn't have to where a flack jacket to collect rent.  You can get solid single family homes in average neighborhoods, at about $45,000-$60,000, of course you would want to get 25% down Fannie May loans.  They would rent for over $900-$1100 a month.  You could cash flow about $400-$450 a month. That would be on a $15,000 investment.  That may even include rehab.  Maybe $20,000 with rehab.  I have 8 single family in Northeast Ohio cash flowing about $3200.00 a month.  However, we paid all cash with no loans.  Soooooo, we invested about $250,000 all in on those 8 sing family.  We have 5 half duplexes and 1 full duplex.  Plus we have one 4br/1bath.

    Swanny

    1Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    @Ryan R. Personally, I think house hacking locally makes a ton of sense.  That gentle introduction to all the experiences of owning property just gives too much invaluable experience (and confidence!) that you won't be able to get in other ways.  IMO the most important thing when you're starting isn't your first 2 or 3 deals ... It's how well those deals set you up for your 4th - 10th deals.

    It's possible to house hack locally and make numbers work.  You may want to ask @Jake Thompson for advice

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    10y

    I agree with both of @Justin R. posts.  I am finding that we typically have similar mindset.

    I will add that your numbers are way worse than what I can find fairly regular where I invest in San Diego county.  Typically I am thinking $1500 rent for each $140K to $165K unit.  For $615K I would be expecting North of $4500 rent.

    I do not consider expecting appreciation from this market (So Cal) long term to be any different than investing in a stock that you are intimate with.  There is a limited supply and a lot of demand.  I believe prices will continue to go up.  My family invests independent of my wife and I and between both we have purchased at highs and lows.  Every So Cal property including those purchased at market highs is worth more today than when purchased.  A home purchased in 1992 at $167K bottomed at maybe $145K is worth ~$500K today.  It was purchased near market peak.  Another property purchased at $641K in 2003 (near market peak) likely was worth ~$540K at the low and is worth about $870K today.

    As Justin pointed out you could learn a lot house hacking.  Can you sustain large negative cash flow?  With vacancy (5%), maintenance (5%), and cap expense (likely $500/month if the units are small and attached - more if detached) the negative flow will be significant.

    Good luck

    0Reply
  • Joseph Moudni
    Melrose, MA · Member since 2015 · 12 posts · 1 vote
    10y

    Hi Ryan,

    I am just wondering if you have been using the biggerpockets rental calculator.

    Brendon Turner has a tutoral video where he is analyzing a proprety that he was thinking of buying.You should  check it out.It sure help me understand what to aim for as far as numbers.

    0Reply
  • Ryan R.
    OP
    Investor · Member since 2015 · 18 posts · 5 votes
    10y

    @Justin R. Perfect, I'll be sure to reach out to @Jake Thompson. And my fiancee and I both agree. We definitely want to start out house hacking for that invaluable experience you can only gain when doing things yourselves. 

    @Dan H. That's definitely good to hear about your properties you've purchased over time and their current market values. It makes things not appear so bleak here in San Diego. As for the negative cash flow, it depends. Right now I pay $1,500 in rent each month. My fiancee lives at home. By house hacking, we would use the one unit as our primary residence for as long as was needed. Even to the point of living their long term and finding additional deals in places like Ohio, such as suggested by @Michael Swan.

    @Joseph Moudni I have not been using the rental calculator Brendon provides. I've been using a separate calculator I created. However, it certainly doesn't hurt to run numbers through Brendon's calculator as well. Thanks for the idea.

    0Reply
  • Jake ThompsonPro Member
    Rental Property Investor · Albany, OR · Member since 2015 · 312 posts · 136 votes
    10y

    Hi Ryan, I just got into my duplex using a VA loan, with zero down in lemon grove. My wife and I were paying 1500/mo to live in a 1 bed apartment in UTC. Now in our duplex we rent out one unit and a shop for a total of 2200/mo, and our portion of the mortgage is 1100/mo. So including utilities, about 1300-1400. Not a huge difference, but the experience has been HUGE. You can only learn so much from reading books and forum posts. Now, I'm not saying to just jump into the first property you see, still be patient and make sure it's a good deal. I will say however, the deal didn't look that good initially. Rates were higher and I wasn't intending on renting out the shop. So what looked like an okay deal that I was going to be paying slightly more living in the duplex, ended up being a good deal. Of course I had no idea of knowing that ahead of time. I am actually now looking to invest out of state in more cash flow heavy areas (like Ohio). But it really depends on your goals, I personally want to build up a rental income. If it appreciates great, but I'm not going to be upset if it doesn't. Anyways I hope this helps, feel free to PM me with any questions, and good luck!

    1Reply
  • Sarah D.
    San Diego, CA · Member since 2015 · 273 posts · 226 votes
    10y

    @Ryan R. We just started the MFP search to owner occupy; it's tough to find a good deal, even with the house hack benefit!  Are you looking all over SD or in particular areas?

    @Jake ThompsonWhat you're doing is what I'd like to do.  House hack, learn the ropes, maybe invest a bit more in SD but at least have the knowledge to go out of state.

    0Reply
  • Ryan R.
    OP
    Investor · Member since 2015 · 18 posts · 5 votes
    10y

    @Sarah D. Thanks for the input and how it all went down for you. It's always nice to see people on the same journey doing well.

    0Reply
  • Casey Murray
    Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes
    10y

    @Ryan R. it's definitely tough finding multi family property deals in San Diego. You make your profit when buying and this prospective property doesn't appear as a deal. I also would pass. I would work aggressively with your agent to present you more attractive deals (expired listings, etc.). You could also contact FSBO's and use other approaches to land a deal. I like your approach in going more inland; coastal San Diego is a bigger challenge finding properties to cash flow. Best of luck.

    0Reply
  • Steve Gunasingh
    Military(Navy) · Olympia, WA · Member since 2016 · 16 posts · 6 votes
    10y
    Originally posted by @Jake Thompson:

    Hi Ryan, I just got into my duplex using a VA loan, with zero down in lemon grove. My wife and I were paying 1500/mo to live in a 1 bed apartment in UTC. Now in our duplex we rent out one unit and a shop for a total of 2200/mo, and our portion of the mortgage is 1100/mo. So including utilities, about 1300-1400. Not a huge difference, but the experience has been HUGE. You can only learn so much from reading books and forum posts. Now, I'm not saying to just jump into the first property you see, still be patient and make sure it's a good deal. I will say however, the deal didn't look that good initially. Rates were higher and I wasn't intending on renting out the shop. So what looked like an okay deal that I was going to be paying slightly more living in the duplex, ended up being a good deal. Of course I had no idea of knowing that ahead of time. I am actually now looking to invest out of state in more cash flow heavy areas (like Ohio). But it really depends on your goals, I personally want to build up a rental income. If it appreciates great, but I'm not going to be upset if it doesn't. Anyways I hope this helps, feel free to PM me with any questions, and good luck!

    When you rented out the house did you use a property management company or do you manage it yourself?

    0Reply
  • Andrew Fielder
    Non-Performing Note Investor · Newport Beach, CA · Member since 2015 · 184 posts · 57 votes
    10y

    @Ryan R. Ryan I purchased a condo in OC in 2013 when the market was starting to recover pretty well. I bought the condo before I had discovered BP and all the good info it provides. Unfortunately I made a big noobie mistake thinking that speculating appreciation into my deal was a good idea. While it has risen significantly in value in just the last 3 years, I would definitely not do the same thing again knowing what I know now. Especially this early on in your investing career, cash is king. You'll find mostly the older and more experienced investors can play the appreciation game because they have multiple cash flow sources. 

    I will say this. The entire experience of buying the property, doing the property management etc. was a great learning experience and it has definitely paid for itself. My condo has been slightly cash flow negative each month and has become a burden. Also right now you're not seeing the appreciation we saw from 2012-2014 so that's an indication that the market is reaching a peak. This is all enough to convince me it's a good time to get out of my noobie first "deal" (aka not-a-deal). Luckily I do have my brokers license so I will sell it myself this summer. I stand to make around $30k net profit when it's all said and done but would be about half that if I had a to pay a realtor.

    After educating myself more through BP and through reading real estate books I believe that in hot markets like SD/OC/LA/SF you need to be very creative. 

    I'll probably look to put my equity and profits into a commercial deal going forward which could mean a partnership with another investor. On BP there is a lot of focus on SFR and multi-family but don't be afraid to look outside that. Investing isn't an emotional decision, if cash flow isn't positive, appreciation not what it was, market possibly reaching a peak... all good signs to that you could be in some real trouble down the road. Ultimately up to you, there's an unlimited amount of deals but only a limited amount of capital, invest your money wisely.

    Good luck!

    0Reply
  • Jake ThompsonPro Member
    Rental Property Investor · Albany, OR · Member since 2015 · 312 posts · 136 votes
    10y
    Originally posted by @Steve Gunasingh:
    Originally posted by @Jake Thompson:

    Hi Ryan, I just got into my duplex using a VA loan, with zero down in lemon grove. My wife and I were paying 1500/mo to live in a 1 bed apartment in UTC. Now in our duplex we rent out one unit and a shop for a total of 2200/mo, and our portion of the mortgage is 1100/mo. So including utilities, about 1300-1400. Not a huge difference, but the experience has been HUGE. You can only learn so much from reading books and forum posts. Now, I'm not saying to just jump into the first property you see, still be patient and make sure it's a good deal. I will say however, the deal didn't look that good initially. Rates were higher and I wasn't intending on renting out the shop. So what looked like an okay deal that I was going to be paying slightly more living in the duplex, ended up being a good deal. Of course I had no idea of knowing that ahead of time. I am actually now looking to invest out of state in more cash flow heavy areas (like Ohio). But it really depends on your goals, I personally want to build up a rental income. If it appreciates great, but I'm not going to be upset if it doesn't. Anyways I hope this helps, feel free to PM me with any questions, and good luck!

    When you rented out the house did you use a property management company or do you manage it yourself?

     I am managing myself since I live in one unit. Plus I personally know my tenants. In the future when I move I'll hire a property manager. 

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