San Diego, Right time to buy townhome?

[David E.]

Hi guys, I am in San Diego with around 45K Liquid, and a 767 Credit Score. Rates are looking really good right now and there a few townhomes for around 570K near by, do you guys think I should purchase now or wait until winter? My goal is to cut my current rent which is around 2k. 

[Twana Rasoul]

@David Enani hi David, you want your mortgage payments to be lower than 2k, cause it will not be for a 570k home. Or are you saying you want to stop paying rent and rather have a mortgage?

[David E.]

Hi Twana! Yes, exactly I’d like to stop paying almost 2k in rent and use that money towards a mortgage instead. Also, I want to know if now is the right time to buy a townhome in San Diego since we are not in a Buyer’s market yet?

[Donald E Appleberry]

@David Enani

Hey man,

Full transparency I’m an agent in SD but I hope this doesn’t come off as biased. Haha.

With major banks and lenders starting to tighten up lending requirements I think you could be running a risk waiting. Sounds like you’re pretty good credit wise so maybe not a big one.

I personally think rates are going to keep going down until Septemberish, but I don’t have a crystal ball to be sure. Whatever you’re decision I hope it works out well for you! I’ve been looking at a lot of these new construction townhomes for clients so they’re definitely popular at that price point! Not a bad buy.

[Dan H.]

I am not an RE agent …

Research expenses.  Look at and understand the 50% rule.

Virtually all SFR to quad would be cash flow negative with realistic expenses at purchase. This excludes equity paydown. What it means is that it is typically cheaper to rent than when you first purchase a SFR to quad. I find that townhomes and condos are slightly worse on the cash flow than SFH due to their HOA fees, but I do not believe it is as big a difference as many investors believe (in part because I believe maintenance/cap ex is higher than many investors believe and condo/townhome HOA typically covers certain maintenance/cap ex expenses and due to scale can likely get better costs than small unit count owners). So start with this, it will initially cost you more to purchase than it will to continue to rent (excluding equity paydown).

So why would someone buy?  I suspect some are unaware of the full expenses but even if you are people purchase (I purchase).  This is because typically appreciation (rent and property) make the purchase a good long term investment.  Properties that start cash neutral or a little cash negative quickly become cash positive at the first or second rent increase.  10 years down the road, they are very cash positive (assuming no equity extraction).

These are not ordinary times. No one knows what the effects of Corona Virus is but I believe one of 2 things as related to RE: 1) It does not affect RE prices significantly 2) The virus results in a significant depreciation of RE assets. Note the short term rental (STR) market is hurting. I am diversified so STR rent short-comings are offset elsewhere, but I am already down ~$25K in STR rent and this will increase. I will be very surprised if I do not end up at least $50K down in STR rent. Some STR owners are not in a position to handle this. Our long term rental (LTR) rents have not yet been effected, but the longer this goes on, the more likely they will be affected. Combine this with ~20% decline of the stock market. You can see how RE prices could decline. What I do not see happening is that RE prices go up significantly in the near term.

The one item that, more than any other item, has made investing in San Diego RE (appreciation) a smart investment is IMO almost certainly not going to be present in the short term.  This will extend the duration of your negative cash flow.  If there is RE depreciation, it would result in a loss of equity.

My recommendation it to take a wait and see approach.  Wait 3 months or 6 months to see how things look.  It is unlikely to cost you much and can save you a lot.  Long term San Diego is a good RE market.  In the near term, I suspect it may not be.

Good luck

[Donald E Appleberry]

@Jerry Johnson

Based on what facts. Wild.

[David E.]

@Account Closed You seriously think SD RE will hit 250K in a few years?.... being this close the water with 0 development being done on any new homes? @Donald E Appleberry 

@Dan H. I will definitely take your advice on the wait, since there is barely any townhomes or condos currently available in the SD market with a reasonable price tag. 

[Lanny K.]

@David E., lots of good comments so far in this thread.  First and foremost, don't let the market conditions pressure you.

As a 20-year long-term and fix/flip investor, and a two-year real estate agent who puts my client's needs before my own, my initial questions are 1) What's your compelling event?  (i.e why do you want to move and/or buy?)  2) How clear are your financial and lifestyle goals?

Your answers should help you narrow down your decision criteria, which you'll need to know before you can identify an ideal property.  Once you know what you really want, then you can start to qualify your investment options.  As @Dan H. pointed out above, the devil is in the details.  Use BP to get very comfortable with understanding the ins-and-outs of ownership and run your numbers until you're fully confident in your decision.

As a long-term buy and hold investor, I personally only buy properties with an HOA if the property is in a very desirable area, well kept, has a monthly fee of less than $300 with no special assessments, and has a nice community pool/rec area, along with good schools like Scripps Ranch Highlands. Otherwise, I'll take care of my own landscaping and external repairs. But that's just my opinion based on my personal experiences. There's likely others reading this thread with experiences using higher priced HOAs and I think we'd all benefit from hearing their perspective, too.

As an agent, I'm seeing home prices slowly declining which is likely due to the current social distancing orders.  Nobody knows for sure what's going to happen next, but previous experience shows the intended benefits from large government stimulus packages are often hijacked by the banks.  If the stimulus money is mostly successful at staving off massive layoffs, then we'll likely see just a slight market correction.  However, if 30% of workers don't have much of an income for an extended period of time then we could see a more dramatic decrease in home prices.  If that occurs, it may take 12+ months before we see what the true impact is on the real estate market.  In the meantime, banks are tightening their lending requirements for loans as their rates continue to go down.  HELOCs are no longer available and current HELOCs are likely to be frozen.

Ultimately, your decision starts and ends with your goals.  Don't let anyone pressure you into anything before you're crystal clear on that, and the rest will follow.  Best of luck and happy investing!

[David E.]

Hey @Lanny K., really appreciate the advice. My compelling goal is to immediately cut overhead costs and to begin investing in myself instead of someone else's back pocket.

 Now as for my lifestyle goals, like everyone else here I am sure, is to live 100% financially free. I want to get into real estate investing, but my current 9-5 job is in San Diego and I am now faced with the facts that with a 2k rent + living costs... being financially free will not be attainable in the near future unless I make a fundamental change to reduce expenditures.  

Thus, moving into a townhome(as an investment) would be my first stepping stone as far as I see towards that. What do you think? @Donald E Appleberry @Dan H. @Twana

[Donald E Appleberry]

@David Enani

The fastest way to get to where you want would be finding a SFR with an ADU you can rent out or as Dan always favors a value add deal. You most likely won't be looking at a 2k monthly though. MAYBE if you find a solid "2 on 1 lot" kind of deal. For townhomes, really your only play is appreciation, but that's a longer play for sure unless you're comfortable renting rooms. A lot of townhomes come 3-4 bedroom (I was touring new builds in North County today) and you can get them for around 480k. You could possibly buy one every 3-5 years (not what I'd prefer for investing strategy but to each their own) and rent the previous one to speed up the process. But even 3 years still might be pushing it a little early.

It comes down to what goal you want more and what’s more realistic in your current situation. 2k monthly or living a bit more frugal to carry a higher than you’d like monthly. I’d consider out of state investing. OOS investing has its own challenges but can be a good way to start. I think that would be your compromise. You could get a townhome that’s very close to 2k monthly and have a cashflowing asset. Though, not enough to cover all expenses but possibly put you at your 2k a month goal.

It’s hard to say since which is best since we don’t know your entire situation or preferences and ultimately it’s what you want of course, but here to bounce ideas off of and give info where I can.

[David E.]

@Donald E Appleberry That is solid advice, thanks. Could you link me to those new builds by chance? I would to take a look, if you don't mind.

[Donald E Appleberry]

@David Enani

Check out “The Collection” at St. Cloud. They’re priced at 495k but they’ll go for 480k. If you go by there, make sure you bring your agent.

When you sign in for a brochure or hard hat you actually sign away the ability to have an agent as well. New Builds are tricky like that. And of course feel free to PM me with any other questions.

[TJ Watson]

@David E. -- Unless I missed it, I am still struggling to understand how going from $2000 rent to a $570k+ property is going to "immediately cut overhead costs and to begin investing in myself instead of someone else's back pocket" and "being financially free will not be attainable in the near future unless I make a fundamental change to reduce expenditures" - can you explain further? This will dramatically increase your overhead costs. A quick scan using a mortgage calc on $570k would be $2700-3000 / mon depending on any HOA if buying condo/townhome, including taxes and insurance. Not including your new costs of ongoing CAPEX (maint, repairs, $100/hr plumbers, furnishing, etc). Yes you will get some savings back at tax time but your monthly "overhead costs" will go up (unless you plan to rent rooms but I didn't see that anywhere). And historically in SD the condo/TH's don't appreciate nearly as much as a SFH, so from an investment standpoint it's not the best, especially if you ever move out and plan to rent it - it will be tough to cashflow a $2700-3000/mo rental (I am assuming it is not very big or near the coast at that cost).

Buying a home and having a mortgage and various expenses does not make you financially free. Having enough cashflowing assets (rentals, stock, other investments) can make you financially free once you accumulate enough income against expenses. In fact some finance gurus (JL Collins, excellent $12 book on Amazon called "A simple path to wealth") believe in not owning RE at all as a primary residence (as one strategy), you can be more liquid and free to move anywhere and rent anywhere at any cost you want, let landlords finance your living with minimal CAPEX cost (landlord pays for landscaping and plumber etc.)

Just things to think about. I am always weary for folks that come on here (or in personal life) stating they only have "$45k liquid" and "want to cut current rent" yet buying a property will require far more than $45k and not cut your overhead. Also the fallacy that rent is throwing money down the toilet. Everyone needs a place to live, it is a cost that every human has to pay in some form. Sure, it is often better to own than rent, but not always. Just watch the news over the next 6+ mos as many fringe homeowners (folks that went all in with their last $45k to buy with no savings net) lose their homes while unemployed during this pandemic and the ensuing shakeout. That is why you want to wait and watch and dial in your needs vs. wants vs. affordability and so forth. Wait for deals to happen (although as noted by others, SD retains values much better than most of the nation). Good luck.

[TJ Watson]

^^^ The mortgage calc numbers I posted also included 20% down of $114k, so unless you have a VA for much less, you will either not nearly afford anything in this price range, or have a much larger payment which includes PMI, and further makes "cutting your overhead costs" less feasible. I think we need more clarity on your goals and plans and thinking.

[David E.]

@TJ Watson Thanks for the insightful note! 

So to clarify, I intend to house hack one or two bedrooms of a 3 or 4 bed room property where I would like either offset my monthly mortgage in half or in part for the next 3-5 years. Which is an investment into myself per say that would allow me to first, build equity into a home and second, allow me to utilize the first floor of the home as an office to flip cars to create initial revenue since I am a car dealer on top of my 9-5. 

Now I know this is a huge huge gamble, and it is a negative investment initially but I am bound to my clients here in SD for at least the next 3-5 years and doing the math if I continue to rent at SD prices, I can see clearly how I am not paving the path to any kind of financial freedom and I am not taking advantage of San Diego's tremendous appreciating market. 

And as for your calc numbers, I am going in at 5% and incurring a PMI of 150 if I were to follow through with a not so sound investment, however, I am purely in the questioning phase and any guidance from you guys is of true value for me at this point.

[Davis Doan]

Since you are in the questioning phase, consider changing up your current living cost?
$2k per month if you are single sounds really expensive, even in San Diego.

If you are young and single, just rent in a 1 bed in a shared house for $700-1000 per month. That cuts your living cost in half. 
If you are renting with a significant other + kids, ignore this advice haha.

Then take that extra $1k per month and your current cash and buy out of state properties that cashflow.
You can probably turn that 45k cash into two properties in the Mid-west for $180-$300 per month.

Now you went from $2k in rent per month to $700-1000 per month in rent and around $360-$600 in cash flow, a complete reversal of cash flow.

Good luck!

[David E.]

@Davis Doan Thanks for that great advice, where exactly in the mid-west would you recommend? Also, how would someone out of state be able to guarantee the property gets rented out in a reasonable time frame? And if you are not familiar with the area that you are investing in, how would you recommend finding the right property management companies other than yelp? And last, are you currently invested in the mid-west yourself currently? 

[Davis Doan]

@David E. . Read The book written by Bigger Pocket's own @David Green called Long Distance Real Estate Investing, it will answer all your questions.

I am at the beginning stages of trying to land my first rental property in the Mid-west. There are numerous threads on which markets to invest in.

You hire a property management company to guarantee the place is rented. If you are not familiar with the area, then you would get boots on the ground and find an investor friendly agent/broker to help you. I am currently asking around for property management.

Good luck, you have a lot of options and sounds like you are in a great financial situation having saved up $45k.

[Alberto Marin]

@David E. If you're thinking about house hacking why not just go after a SFH at that price point? appreciation will be much better opposed to a condo. HOAs are extremely high in most condo neighborhoods which will add to your bottom line and make it harder to meet your financial goals.