Quote from @Dan H.:
Quote from @Scott Albritton:
Welcome to San Diego!
Near the 56 is a great place to live. As you've mentioned, great schools, area in general is nice and it's centrally located. Other areas nearby that are great include, Cardiff, Encinitas and Del Mar.
As for your scenario, how many bedrooms would be ideal? If you elected to rent, would a house be the only considered option? Would you entertain a condo?
We've seen the rental market soften here in the greater SD area as whole, prices may continue to soften towards the end of the year.
I'd consider renting for a period of time and identify a particular area you'd like to eventually buy. From an investment perspective, I'd look to invest in small multi-family 2-4 units with a larger down payment ~50% or more (only way to produce positive cash flow here at the moment)
Investing in San Diego right now isn't driven by immediate cash flow. If cash flow is the main goal, there are many other markets to consider before San Diego. With that being said, if you're comfortable with a long term hold, San Diego and especially coastal, will always be attractive imo.
Best of luck, San Diego is a great place to be!
>I'd look to invest in small multi-family 2-4 units with a larger down payment ~50% or more (only way to produce positive cash flow here at the moment)
I never understood why one would want to buy cash flow. Here are my thoughts:
- San Diego is an appreciation market implying poor cash flow and the bulk of the return comes from appreciation.
- the difference in rate of return for appreciation of a 80% LTV vs 50% LTV is 2.5x. As an example if a property appreciates 20% at 80% LTV you have made 100% from the appreciation but at 50% LTV you have only made 40% from appreciation.
- Fannie/Freddie (f/f) residential conventional loan is the cheapest money available. Even with the recent rate increase of the last couple of years, f/f is significantly below S&P lifetime return. This implies that rather than buy the cash flow, you are likely to do better putting that money in S&P or you can d far better using it to make a smart RE investment.
- current f/f is around 6%. This implies paying down is saving 6%. I think most of us can agree that we do not invest in RE for 6% return. So why would we buy the cash flow at a rate of 6%?
- 6% rate at 30 year each $100k borrowed adds $600/month. My worst appreciating property has apprecated $2700/month. My best property has appreciated over $10k/month. Point is cash flow (positive or negative) is inconsequential compared to the appreciation assuming you do not need the cash flow to pay the bills.
I put forth effort to keep my RE investment significantly leveraged. To intentionally reduce the leverage more than required is a foreign concept to me especially in the San Diego market.
Best wishes
Thank you for the reply Dan. I appreciate the perspective and insights.
In the current market, it's pretty much impossible to have any positive cash flow in the 2-4 unit space with long term rentals, unless you're putting ~40-50% down, not only focused on the cash flow per se, but rather simply not being in the negative. As you're very aware, appreciation here locally has skyrocketed in the past ~4 years. I don't believe we'll continue to see that trajectory moving forward over the next 4 (you never know though!)...
You've put yourself in a great position to capture both appreciation and increase in rents simultaneously, which is a great place to be. For investors looking to purchase properties here in SD at the moment, 20-25% down will most often leave you with negative monthly cash flow.
With that being said, appreciation is certainly something to always consider here in SD.
Example of current property for sale,
$1,800,000 asking price (25% down) - 4 units
$10,200 total monthly rents (pro forma) - rental market has seen softening as of late
$9,770/month after assuming 5% vacancy rate.
$8,981 mortgage at 7%
$2,918 expenses monthly 33.38% of Gross rental income (Prop mgt, maintenance reserve, utilities, Prop Taxes, Insurance, other)
$6,852 NOI/monthly
($2,129) negative monthly cash flow..
Same scenario with 50% down,
$864 positive monthly cash flow
Not saying it's the best use of capital or the only way to do it, instead providing an example using an available market opportunity to share what the numbers look like.