For those Buy and Hold San Diego Investors!!!!!!!

[Patrick Senas]

Hello BP,

Before I go into the deal specifics I feel like I have to justify WHY I am choosing to invest in San Diego. Essentially it all boils down to my current situation. I am a first time buyer, Navy veteran currently working full-time at a tech company and a student full-time. I think it would be wise if I use my VA loan to purchase a multi-family unit, "live" in it for a year and make it a full rental while I move back in with my girlfriend (for very little money). Currently I have a pre-approval for $600k with $50k down but am shopping around with other lenders. Some lenders won't use rental income to qualify if I don't have at least 1-yr experience as a landlord; but that's another topic of discussion.

Now on to the good stuff. After running the numbers on various deals, investing in San Diego still makes no sense to me! But there are those that still do, so my question to them is... WHY? What am I missing? Is everything based on speculation, betting on appreciation, annual increase in market rent and principal pay down? So instead of immediate cash flow I should be focused on building equity?

BASIC

Here is a basic analysis of a random property in the Chollas View area of San Diego. 

Questions

• CAP rates in San Diego are very small. Usually higher CAP rates are in the not so great areas. What should be my target CAP rate?
• I've seen GRMs in the 9-12 range. What should be my target?

INVESTMENT MODEL

Comments

In my calculations, I included both units. Though in Year 1 I would technically be the other tenant. 

From what I am seeing, 6% PM fee and 5% Reserves included, I would be in the RED for 8+ years. When I calculate it without the PM, my Leveraged CF would go green after Year 5. The only upside to this is my Total IRR which is insane since I will be putting $0 down, but for maths sake I put $4 down.

TO ALL INVESTORS

For those of you currently investing in Multi-family properties in San Diego, is this something to consider? Is the trade off for being negative for a few years worth it to have such a high IRR? What should I be looking for?

Thanks!

Patrick 

[Kevin Fox]

Hey @Patrick Senas

Great post with a lot of solid questions.

The first thing I will say is that you can't just pluck a random deal off the MLS and expect your analysis of said property to be a reflection of the entire market. My team and I specialize in the 2-4 unit space in San Diego and we have to go through 10-15 just to find a deal that MIGHT make sense on the MLS.

I don't think you are missing anything in particular, just that you haven't put your eyes on the right property yet.

As far as what your focus should be on, my suggestion would be to set your sights on total return (equity increase through mortgage pay down, equity increase due to forced and market appreciation, & cash flow). 

For cashflow, I would suggest setting a target of around 5-9% COC, which should be relatively easy to attain with such little cash outlay.

In regard to GRM, typically around 11-12 is where the numbers can begin to start making sense.

I hope that I was able to answer most of your questions.

Having said all that, please let me know if you'd like any assistance with your search. My team and I would be more than happy to sit down and help you understand the "Why" question pertaining to the SD REI market.

Either way, best of luck!