Hello,

I am a new member and fairly new to BP. I live in San Diego, California and am wondering the following:

Should I try to get a duplex now (live in one unit and rent the other) using an FHA with 3.5% down , or should I wait until home prices go down? People keep telling me to wait until the recession, that it is coming soon and that I will find a multi unit for a cheaper price. However, while there are indicators, what guarantees that home prices will be lower and that there won't be cash investors taking up all these properties?

I am looking for a 2 unit property, with at least a 2/1 and 1/1. I have seen some in my area for about $540,000 to $585,000. I am not a home owner, this would be my first attempt to owning a place and would like to use the FHA loan.

Any advice is greatly appreciated. Also if anyone from San Diego is interested in meeting up to share info, I would be happy to meet.  I am eager to learn. 

What indicators tell you that there is going to be a recession...I always look at 2 things. The Shillers PE and the Stress Index.

http://www.multpl.com/shiller-pe/table

The shiller PE is definitely high right now but the stress index is negative. Check the stress index in 2007 timeframe.

https://fred.stlouisfed.org/series/STLFSI

Trying to time the RE market is like trying to time the stock market.   Very few people are able to do it well.  The last RE crash was predicted by very few people.  Maybe the people who tell you a recession is coming are correct but maybe they are not.

One thing that is certain is that standing on the sidelines will not get you in the game.

I have purchased twice in San Diego near market highs. Both of these market high purchases were purchased at full retail. I no longer purchase at full retail unless it has a nice value add. In 1993, I purchased a SFR for $167k. It fell in price to around $140K. Today it is approaching $600K. In 2004, I purchased a SFR at $741K. It fell to ~$620K. Trulia has its current value north of $1M.

Sure both purchases could have made more if I had purchased at the market bottom rather than near the top of the market but both have produced good ROI. It is important not to be over leverage so that you do not need to sell when the market is depressed.

Now lets take the opposite stance and the market continues to appreciate another couple/few years like it has.  In 3 years the market would be on the order of 30% higher than today.  Even if there is a decline similar to the late 1990s or the GR (2005?) the reduced price would still be higher than today's price. 

There are many investors that have predicted San Diego RE would depreciate for a couple/few years.  There is one that was sure enough that he exchanged his San Diego condos for Midwest multiplexes.  According to Trulia the market where most of my rentals are increased 17% last year.  The year before was not quite as high but still a very significant appreciation.  It would be a shame to sit on the sidelines and miss further appreciation.  

Am I indicating there is no risk?  No, we could at the top of the market.  however, I claim that no one knows.  A broken clock is correct twice a day.  Eventually those forecasting a recession will be correct but will it be in one year or more than 10 years?

Also most indicators point to continued economic growth.  However, this was also true just prior to the GR.  What I personally am expecting is continued rent appreciation (I have a lot of confidence of this) and reduced property appreciation (something more like 2% per year but I am not real confident).

BTW there is a San Diego BP RE happy hour in July:

https://www.facebook.com/groups/796969117164798/.   I will not be able to attend, wish I could.

Good luck

Seeing as, on a national level at least, prices have only gone down twice since world war 2 (1991 &the housing collapse), why do you think prices will go down during a recession? Further even if they did, we are in a rising interest rate enviorment.

What is your goal with that house-hack? Is it cash flow? Because you won't get cash flow on that property. Is it just in order to buy something for yourself and have a little bit of the expense mitigated by having a tenant in it? I really encourage you to work the numbers on one of those properties. I think you'll see that you're going to be extremely cash flow negative every month. It'd be bad enough with a convention mortgage with 20% down, but with 3.5% your payment is going to be astronomical and you'll have PMI in addition to it.

I absolutely think no one should buy in San Diego (or LA, where I am) right now because the numbers don't work. That doesn't mean, however, I think people should wait to buy investments until a crash happens. We have no way of knowing a crash is coming. So then the question is...how do you invest right now? There are answers to that, but it won't be with a SD house-hack unfortunately.

@Miss Liz Everyone who is telling you there will be a recession is right.  Eventually.  Unless they can accurately tell you WHEN and WHY, they're not giving you any valuable information.  And unless they/you can why that event will impact re prices, there's no information to act on.

Fight recency bias.

Personal suggestion (from someone who's putting plenty of new $$ in play locally, FWIW): Very broad brush, but if you're going to house hack one of those duplexes in that price range right now, make sure it could generate at least $3800/m in income ... total.  If it doesn't, you'll need help from markets you can't control to make it a good eventual investment.

Originally posted by @Justin R. :

@Miss Liz

 FWIW): Very broad brush, but if you're going to house hack one of those duplexes in that price range right now, make sure it could generate at least $3800/m in income ... total.  If it doesn't, you'll need help from markets you can't control to make it a good eventual investment.

Justin, would you mind explaining that last sentence in more detail? I just want to make sure I follow.

@Brandon Goris If the OP can generate that sort of income, they can likely drive a solid 8% ish return on invested capital purely from operations.  In this case, short term market fluctuations don’t matter much.

If they can’t get that sort of income, they’ll need to rely on general market appreciation - whether through inflation or real price increases - to drive a solid return on invested capital.  It’s a more vulnerable place to be.

@Justin R. thanks for the reply!

With the example above of 3.5% down and 20k ish invested capital, would that low down payment make the ROIC more worthwhile? Even if total rents from both units generate sub $3800/m?

Just trying to understand your 8% general rule of thumb and how you’re getting there because I’m in a similar boat as the poster.