All Forum Posts by: Joshua J Cawthorn

There's a BiggerPockets meetup that meets at Stone Brewery in Liberty Station every month. I've been a few times and they are fantastic. Great way to network, ask questions, and meet like-minded peers. If you search the forums, you'll see the posts about them.

1 Vote

Theres kind of a lot to unpack here. Are you suggesting you have $400k to invest? Are you suggesting you have $400k/year to invest? Before you step out into the field swinging for the fences, I'd encourage you to specify your goal a bit. No one here (or anywhere) can tell you "______ is the best real estate class to invest in!"

So, the question is, do you want to ingest in condos? SFH? Multi family? Each of those will offer a different opinion on "where is a good part of San Diego to invest."

I understand everyone's fear of the upcoming change in the market cycle. If you are flipping properties, short term cycles are important. If you're a buy and hold person, the current state of the market really isn't AS relevant in the 10-20 year timeframe. As I said earlier, I think you're better served coming up with a specific strategy to execute, rather than asking the internet "hey, what do I do?"

0 Votes

Originally posted by @Guifre Mora:

Originally posted by @Dan H.:

Originally posted by @Guifre Mora:

@Sebastien Carriere my brother started his military career in SD 25 year ago and he always bought a home where he was station, never paid rent. He always walked away with appreciation (equity). I would buy.

The issue is the cash flow has never been worse. Retail SFR have rent to cost ratios of approximately 0.5%. A little better for duplex to quad. If you use the 50% rule as a rough cost estimate, it implies that the entire principle and interest is negative cash flow. On high LTV loans, the principle and interest is a significant chunk of change. This implies it is cheaper to rent over the short term as applied to cash flow.

Example $500K home. If it rents at $2.5K (0.5% ratio) then by 50% rule (which admittedly is conservative in the high rent markets like San Diego but I want my forecasts to be conservative) the entire principle and interest payment is the cash flow negative. Do you think my rent is too low for that price RE? It depends on the area but that is close to the ratio I am seeing in quite a few San Diego markets (some a little better and some a little worse but no where do I see the retail ratio significantly better). In this example, at 90% LTV, 30 year, at 4% results in $2148/month. That is the projected negative cash flow if using the 50% rule with those loan terms. Renting would save this $2148/month as your cost would be only the rent amount ($2.5K).

Why would anyone purchase? I am forecasting 8% rent growth for each of the next 2 years so a total rent increase in 2 years of $416 for this example. A very good (for the owner) rent increase but it will take more than 5 years even at 8% annual rent growth (and I am not forecasting more than 2 years at that rate) to get cash flow neutral. Investors purchase for the long hold. We would only purchase if the RE had a value add and/or was below retail but there is a lot of competition for both of those (so we are not just relying on the long hold).

I realize this investment example can be saved by property appreciation but in the short term there have been cycles. In general, there are more up cycles than down cycles and San Diego has outstanding long term appreciation. I would feel comfortable telling someone that San Diego RE prices will be higher 10 years from now than they are today. I would not feel comfortable saying the same thing for 3 years or 5 years from today.

My perspective is the large initial negative cash flow of a high LTV loan is unlikely to be overcome in the short-term even if there is no downward cycle on the property appreciation. Add in costs to purchase (closing costs) and cost to sell or the challenges of an OOS rental and it is a lot of risk to purchase for the short-term. This closing and selling costs are likely to exceed 10% so the first 10% of appreciation is already consumed.

Negative cash flow over a short holding period. In the short-term, it is cheaper to rent than to purchase.
Cost to purchase and sell will consume approximately the first 10% of any appreciation.
OOS rental is challenging. It will save the selling costs.
Short term there have been many peaks and valleys to San Diego RE prices. It is risky relying on appreciation in the short-term. This may be especially true this long into an appreciation cycle. I personally am not predicting a major correction but it could happen. I also am not predicting the great appreciation that we have experienced over the last 8 years. I expect appreciation will be close to the inflation rate in the near term. If my prediction is accurate, it will take many years of property appreciation to overcome the huge negative cash flow.

Dan, you are over-analyzing this. The question by Sebastian is Buy or Rent?

San Diego real estate appreciated 55.37% over the last ten years, which is an average annual home appreciation rate of 4.50%, putting San Diego in the top 10% nationally for real estate appreciation. Today's VA rate is 3.00%.

Buying has huge advantages:

1.) Stable Monthly Payments.
2.) Opportunity To Build Equity. Appreciation!
3.) Cheaper Than Renting Overtime. Sure, there’s the upfront cost of the down payment and closing. After that, the monthly outlay of owning a home is much less than paying rent.
4.) Owning A Home Provides Tax Advantages.
5.) Freedom To Make Changes. Happy wife happy life.
6.) Build Your Credit.
7.) Solid Investment.
8.) Forced Savings: (Wealth Accumulation)

Hi Guifre,

I think you and Dan are mostly saying the same thing. And please, correct me if I'm wrong: Dan is merely stating the break-even point for San Diego SFH's is about 5 years. That is, if someone were to buy a home using the VA loan- even IF they put 10% down- it would still likely take at least 5 years to break even. So if someone's plan is to hold for any less than 5 years, renting is a more profitable solution. Generally.

My anecdotal experience mirrors what Dan is saying: I bought a median value SFH in 2014. I've watched its property value surge in the last 6 years. That resale value is an unrealized gain so, really, the only measure of value (until I sell) is the rent. It took 5 years before a refinance out of the VA loan and into a conventional loan finally allowed enough market appreciation + debt service to result in positive cash flow.

Anyone interested in using the VA loan to buy a home in San Diego- especially if you're putting $0 or 0% down- it will be years before the house will cash flow positively because the rents will not be high enough to cover the entire monthly liability. However, historically, San Diego is a great freaking bet. So, if you are willing to wait at least more than 5 years, San Diego real estate is (historically) a very profitable investment.

0 Votes

Originally posted by @Chris Mason:

General contractors rule the roost in California. There's no point in asking this question until you own a property, or are willing to pay a GC $750 for a basic one hour consultation, and you're driving to them, unless the property you own is next door to a job they are doing.

GC I know, Sacramento: "I charged $1250 for something that took 10 minutes. Not otherwise worth my time. I told them that they should just do it themselves, but they insisted that I do it..."

Also GC I know, San Diego: "I pay $50/hr for someone that shovels dirt, immigration status be damned."

Also GC that I know: "I've been raising my rates 20% per year for the last 5 years, and the market has not even blinked." He is in his 70s.

Also GC I know, Oakland, mortgage applicant of mine: "Working with real estate 'investors' who do not even own real estate is stupid, my income went up 40% when I stopped working with them, I don't bother returning the call. If you don't have 30 units under management or ownership and/or aren't in the commercial space, you're a waste of my time."

(GCs get mortgages too, so I see their tax returns, etc.)

Thanks for the grim outlook, Chris! :D

I'm currently trying to get a single unit rehabbed. For those that are interested, it took me almost a month to book a contractor (that I'd never used before) and the bid came in at $3400 for:

interior paint (~1000 sq ft)
patch drywall holes
replace outlet covers
washing machine and dryer hookup

So, that's what $3400 will get you here in San Diego.

2 Votes

The ADU market is definitely pretty hot in San Diego right now. It's a great way to drive revenue on a SFH, assuming you have the space for it. The recent bills passing have indeed made it easier. However, as a result of the aforementioned, the demand for contractors has gone through the roof. If you don't already have a solid contractor crew in mind with a timeline established, I'd encourage you to work that angle of the plan. It's a pretty long process from design to completed construction, with the appraisal being at least a year away.

Best of luck!

0 Votes

Originally posted by @Wyatt Franta:

It seems you have a 5-7 buy-hold plan.

What's a 5-7 buy-hold plan?

1 Vote

San Diego, California

I am also interested in hiring a CPA this year! I would personally think the BP forum would be a great place for various services (CPA, attorneys, prop managers, general contractors, etc) to look for business. But I suppose the "best" ones aren't really looking for additional business...

1 Vote

San Diego, California

$100k would be a solid down payment on a SFH house hack opportunity in a median neighborhood in San Diego. It would also be a decent downpayment on a MFH opportunity. Find a broker that specializes in investing, let him know what you're looking for, and take your time analyzing deals.

2 Votes

Originally posted by @Yonah Weiss:

@Ben Sellers I'm also an SDSU grad, but have been out of SD for close to 20 years. Try connecting with @Erin Wicomb who has been successful with small MF properties in SD, and @Ellis Hammond a fellow Aztec, who has a monthly meetup for RE investors.

Fellow SDSU alum here as well!

1 Vote

Originally posted by @Ben Sellers:

Wow thank you for all this good information Dan.

I hadn't even considered appreciating rents in this area as a strategy and taking on negative cashflow for a period of time. I believe that I can take this on for a period of time but I will definitely have to make sure to be careful about it.

Hey Ben, I only have two properties so I'm bringing a lot less experience to the table than some. But i can tell you that I've now successfully house hacked both properties here in San Diego.

My first was a single family home and I rented out the master bedroom of my two bedroom house. It supplemented the mortgage so I could afford the payment until, years later, I moved out. Now I rent that property under a single lease agreement (that is, one tenant) for a very meager profit. I'm really just banking on the market appreciation.

My most recent purchase is a duplex and I'm renting out one of the units while I share the other way smaller unit with my girlfriend. Eventually, I'll move out and rent out both units. It will likely be years before the rent appreciates enough to more than break even. However, I'm really just banking on the market appreciation.

Over the course of the next 10-, 20-, 30 years, theres no way these holdings wont appreciate and profit. as Dan pointed out, it just requires riding out these rocky waves at first.

2 Votes

All Forum Posts by: Joshua J Cawthorn

Joshua J Cawthorn has started 7 posts and replied 79 times.

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