NO CASH FLOW IS SAN DIEGO

[Christina Rodrigues]

I RAN THE NUMBER FOR A DUPLEX IN SAN DIEGO AND OF COURSE IT DOES NOT CASH FLOW, WHEN IT DOES NOT CASH FLOW DO YOU GUYS PURCHASE FOR APPRECIATION? DO YOU WAIT FOR THE MARKET TO GO DOWN? I WANT TO INVEST BUT THINK I MISSED THE BUS IN SAN DIEGO :-)

[Dan H.]

I agree most properties in San Diego do not have positive initial cash flow.  

Having stated this, I have never purchased a negative cash flow property and I use what most people believe are very conservative expense projections. However I would not be adverse to a initially negative cash flow property if it was either noticeably below market value or had a decent/good value add. All of our purchases in the last decade were either below market or had a decent/good value add (a couple/few had both). I would not purchase a investment property with negative initial cash flow, at market value without a value add. Why would I? I can find a better investment property. The property you describe is a dime a dozen (nothing special and available on the MLS virtually every day). By the way our last purchase had a market rent to purchase ratio over 1%. I recognize it was a rare find, but it shows they do exist in San Diego area.

Higher unit count (quads) typically have better initial cash flow than smaller unit counts.  Value adds usually have better initial cash flow than turn key properties.  Off market properties usually are value add properties or have some risk item (very rare to see turn key property with no risk items available off market) and can present opportunities. 

Note I consistently use initial cash flow.  This is because actual cash flow over a long hold has a poor correlation with initial cash flow.  This is because the RE market is efficient.  Many factors go into price.  One of the biggest factors is expected appreciation (both property and rent).  My primary San Diego metro market had average rent increase last year over 20% average according to apartmentlist.com. A non-owner occupied duplex will fall under state rent control so the rent increase would be capped at 10% for this year for existing tenants.

Would I wait for the market to decline?   Not if the decline is a result of rising rates which is what we are currently experiencing.  Assuming you plan to finance the property, the cash flow will not improve if price goes down but due to rising rates your payment has increased.  I personally do not expect declines beyond impact from rising rates in San Diego because 1) there is a housing shortage (supply/demand) 2) the area is geographically constrained by ocean, Mexico, Camp Pendleton, and quick harsh environment going east 3) climate is near best in nation 4) diverse good employment. . A long way to state I would not recommend you wait.  

Good luck