What would you do?

[Jimmy Tracks]

So I’m new here. I’ve been in a dilema for about one year. I sold my property a few years ago and have about $300,000 from that sale. I’m currently staying with family but I need to find my own place. And, I’ve always wanted to buy a property to rent out and have some cash flow. Also in the long term maybe have 3-4 rentals. Being here in San Diego it’s a tough market. Should I put all that down to find my primary then later maybe search for a rental property? Or is now the time to find that rental and put some of the cash down while also being able to find my primary residence? Is it doable?

I can’t afford too much. I’m looking for about $2500 mortgage (p&i, prop tax, hoa) for my primary. 
Should I just rent for now while I leverage that cash to set up my rental prop then find a primary? Or just go find a primary and put all that money down? Not sure what to do. 

Sincerely,

Confused

[Dan H.]

When you exit a market for a duration (in your case 3 years), you are taking a gamble that market does not get far worse for purchases.  The gamble did not work for you as the rates have doubled and prices have increased significantly. 

In San Diego, highly leveraged property purchased at retail without value adds have large negative cash flow.  This implies in the near term renting is cheaper than retail purchase. 

However, no one knows the future.  What will be the appreciation and rent growth?   Since the rates started going up significantly, I have been conservative in my near term appreciation outlook reflected in my underwriting.  I a currently using -4% near term appreciation as I am expecting near term appreciation to be between -4% and 4%.  In my underwriting, I use the conservative numbers.  I expect rent growth to be lower than in recent years.  These two together, point to a slow increase of cash flow and not much appreciation.

Historically, San Diego has had outstanding appreciation.  I expect in the long term the appreciation will exceed the CPI. 

Now to the answer to your questions.  I suspect if your hold period is less than 5 years, you will be better renting (for the crazy RE of the last decade, it took less than 5 years but this was not normal).  For holds between 5 or 10 years, this can go either way on which will be better.  For holds longer than 10 years, buying will virtually always be better than renting.  I suspect this to hold true going forward. 

As indicated, I am being cautious.  I have put in some offers in the last 2 years, but my last purchases were Dec 2021 (almost exactly 2 years ago and before the rates went up significantly - I purchased $4m that month).  I expect my RE purchases to be positive much sooner than 10 years and my underwriting is showing the properties to not meet my buy criteria.  

Good luck