Investment property in downtown San Diego

Member since 2020 · 8 posts · 1 vote

Hi. Im trying to buy my first investment property in downtown San Diego . Does anyone have any advice. Is that a good location?

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Jared Espindola

Rental Property Investor · Boston, MA · Member since 2019 · 8 posts · 3 votes

Hi all, hoping to piggyback on this conversation a little - hope that's okay.

I'm planning to move with my sister to the San Diego area at the end of the summer. We still have a lot of family in Boston, so are only planning on being out west for a year or two before moving back. I've been considering the option of a long-term/live-in flip while we are out here as an alternative to renting. I have some (admittedly limited) experience in rehab but I'm confident that I would be able to take care of cosmetic updates to add value to a neglected but structurally sound property. Ideally I would like to fix up a place like this and then either move out & hold as a rental or sell & cash out on the sweat equity. I recently spoke with a lender who said with my current cash available for down-payment($40k) income/debt/credit etc. I'd qualify for a mortgage around $575k.

My impression so far is that this might be feasible in some of the neighborhoods farther out from the downtown/waterfront area. (Example of a property I saw on my morning zillow search today: https://www.zillow.com/homedetails/1014-Kelton-Rd-San-Diego-CA-92114/17082323_zpid/). Does anyone have any advice or thoughts about this live-in flip strategy in this market/thoughts on what neighborhood would be a realistic option at my price point? Would love for someone to poke holes in my strategy to give me more to consider or any general advice would also be great.

Thanks!

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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Luis F Hernandez
I work downtown. It will depend on your goals and what else you're trying to achieve with the unit. Downtown will have the highest HOA payments (a cost incurred by the owner) of anywhere in SD County. So, if it's purely for investment, I'd say there are better areas. Condos & townhomes typically won't appreciate as fast as SFR or multi-family either.
Are you looking to use the unit as a 2nd home or vacation property as well?
And when you say downtown, be a little more specific please. Are you referring to 92101? If so, which neighborhood / district?
Thanks,
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Luis F Hernandez
OP
Member since 2020 · 8 posts · 1 vote
6y
I am looking to rent it out on a month to month basis. And I was looking for across the street from Petco park. Also was looking at little Italy
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Originally posted by @Luis F Hernandez:
I am looking to rent it out on a month to month basis. And I was looking for across the street from Petco park. Also was looking at little Italy

Those are some high cost areas. I cannot imagine a scenario that they end up starting with positive cash flow without a value add and no associated refinance. Are you prepared to supplement the cost of these units until rent appreciation results in positive cash flow?
I expect downtown San Diego will appreciate great and can be a fine long term hold. The questions are 1) can you afford to hold it until it generates positive cash flow? 2) Can you find a "better" investment? Note better is in the eye of the beholder. I know I can do achieve a better return with a value add than I can buying a tenant ready property downtown, but a value add is more work (so is it "better"?). Similarly I know I can buy properties with better initial cash flow, but will that make it a better purchase over a long term hold?
As indicated, I think downtown San Diego residential property can be a fine long term investment but you need to have proper expectations (i.e. Negative initial cash flow, could be years before positive cash flow, very reliant on appreciation, etc.).
Good luck
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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Luis F Hernandez
I agree with Dan. It depends on what your definition of "better" is?
I too believe the downtown area will continue to appreciate considerably. There are many potential & scheduled development projects in and around downtown including the Manchester Pacific Gateway, Seaport Village, Gaslamp Promenade, 7th & Market, East Village Green, Campus at Horton (Horton Plaza), Chula Vista BayFront & many more.
I've put together videos on my YT channel reviewing most of these.
Happy to help with any other questions. Feel free to DM
Thanks
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Luis F Hernandez
OP
Member since 2020 · 8 posts · 1 vote
6y
why Can't downtown San Diego generate instant cash flow? Can it be done? And has it been done?
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Luis F Hernandez
OP
Member since 2020 · 8 posts · 1 vote
6y
What do you guys think of Pacific beach or north park?
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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Luis F Hernandez
As a general rule of thumb I tell clients you'll need to put down between 20-30% in 92101 if you want to net even between your mortgage payment (PITI + HOA) and your year 1 rents. This can vary greatly depending on the building. There are over 100 different condo buildings in 92101 alone.
Pacific Beach and North Park will be similar for condos & townhomes. Perhaps slightly better w/ the lower HOA's and property value. Again, this can vary significantly depending on where in PB.
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Luis F Hernandez
OP
Member since 2020 · 8 posts · 1 vote
6y
Originally posted by @Maxwell Ventura:
@Luis F Hernandez
As a general rule of thumb I tell clients you'll need to put down between 20-30% in 92101 if you want to net even between your mortgage payment (PITI + HOA) and your year 1 rents. This can vary greatly depending on the building. There are over 100 different condo buildings in 92101 alone.
Pacific Beach and North Park will be similar for condos & townhomes. Perhaps slightly better w/ the lower HOA's and property value. Again, this can vary significantly depending on where in PB.

What about sfr or multifamily in north park?

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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Luis F Hernandez
Yes This is could be a great option.
However, now we are talking a completely different price point. North Park has already appreciated a fair amount in the last 5 years. Some of the surrounding neighborhoods around North Park will most likely yield a better short term ROI.
Will you be living in the unit? Is walkability / lifestyle important to you as well.
Have you spoken with a lender yet? Do you know how much you are looking to come out of pocket? Or do you have another means of financing? Do you know what loan product you'll be using. This will factor in determining how much you'll need to come out of pocket. Do you have an exit strategy?
In North Park, TINY 2 bed / 1 bath SFR's (with very minimal lot space) START around $550K and quickly go up from there while your small 2 unit duplexes will start around $700K
Hope this helps.
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Originally posted by @Maxwell Ventura:
@Luis F Hernandez
As a general rule of thumb I tell clients you'll need to put down between 20-30% in 92101 if you want to net even between your mortgage payment (PITI + HOA) and your year 1 rents. This can vary greatly depending on the building. There are over 100 different condo buildings in 92101 alone.
Pacific Beach and North Park will be similar for condos & townhomes. Perhaps slightly better w/ the lower HOA's and property value. Again, this can vary significantly depending on where in PB.

@Luis F Hernandez
I am much more conservative on my cash flow numbers than Maxwell. Not including value adds, with my cash flow projections it is a very rare retail (on MLS) SFR that cash at 80% LTV (might as well look for a unicorn). It is a rare retail duplex to quad that cash flows at 80% LTV. I will go even further, most SFR in downtown would not cash flow at 40% LTV using my numbers.
I can be confident of cash flow at 75% rent to cost ratio without HOA and fairly confident at 70% ratio without HOA at 80% LTV. Downtown typically (maybe always) has less than 50% ratio and an HOA.
You can improve cash flow via STR where permitted, but not enough to get downtown residential to positive cash flow using a PM. STR PM fees are high. We pay over $3K/month for 2 STR units so over $1.5K/month per unit (little tiny units with not much to clean, etc.).
The reality of San Diego market is most retail buy n hold residential RE investments obtain the return due to value adds and appreciation. Without the value add, the purchases need to rely on appreciation.
Have you tried to place a downtown San Diego residential property into a cash flow calculator? Have you tried the 50% rule? Have you calculated the rent to cost ratio and compared it to the 1% rule? What you will see with any of these exercises is negative initial cash flow for retail residential downtown SFR to quad for higher LTV loans. It will not be slightly negative, it will have large negative cash flow.
This is not to say that it is not an OK long term investment. I think it likely would be a solid investment. 10 years from now you may be ecstatic that you purchased, but a year from now may be a different thought (why did I buy this money pit?).
Another thing to note is that lower class areas project better cash flow. You have to be careful with this because lower class areas are riskier and easier to over project the cash flow. The tenants have more issues and are often rougher on property. But if you purchase in a class C area and manage properly, the initial cash flow will be greater than downtown San Diego (as will the cash flow compared to equity). Most of our units are in Class C to B- Escondido (11 of our 19 units). We have other units in better areas (Mission Beach (STR), Pt Loma, Clairemont). We can successfully manage our class C units to produce higher cash flow to equity (excluding the STR) than the units in better locations.
All of the areas you listed are expensive areas that will have poor initial cash flow as a long term rental with high LTV loan. This does not mean that they are not good long term investments. If you want better initial cash flow, you need to look at more working class areas (lemon Grove, El Cajon, Escondido, Spring Valley, National City, etc.).
Many years ago we purchased a duplex. Our value add was converting to STR before Airbnb (today I would not consider converting to a STR a value add due to how many there are and sites like Airbnb and VRBO). As a LTR it was about cash neutral at purchase (it projected minor positive cash flow). Today (not really today due to Corona but a few months ago) that unit has STR rents at 4% of initial cost (1% is considered good for LTR in most areas and unobtainable at purchase in San Diego - cannot easily compare STR to LTR ratios but it produces great cash flow today) and has appreciated over $1M. Do you think it was a poor investment because if did not have initial good positive cash flow?
Good luck
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Brian Koons
San Diego, CA · Member since 2019 · 48 posts · 44 votes
6y
What does everyone think about the Sherman Heights/Logan Heights Area? Its right outside downtown and running numbers relatively conservatively I am able to find properties 2 or 4 unit that will cashflow (not many but every once in a while ill see a good one). Then you will also get pretty good appreciation based off past numbers and low housing supply
0 Reply
Twana RasoulBusiness Member
Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
6y
@Luis F Hernandez Hi Luis, like others on here have said, it really depends on your goals, downtown does have high HOA so it really eats away at cashflow for some time. There are other areas that are just as good or better that you can do well with appreciation and cut down on the amount of negative losses.
I’d consider duplex properties in some areas in central San Diego or close to downtown that you can do much better with in terms of initial cashflow numbers.
Reach out to @Brian Koons on this thread to see how he is doing a few blocks from petco Park on his House hack. I suggest something similar using a VA loan or close to similar using an fha loan.
Good luck!
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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Brian Koons
I like those areas you mentioned. The majority of that entire area is in an opportunity zone too (orange shaded areas).
I recently helped an investor lock down a duplex in Logan Heights off 32nd St under $600K. A 3/1 and a 3/2, each w/ their own front & back yard, and separated by a fence.
The back unit (3/2) was previously renting for $1850 and the front unit (3/1) was renting for $1600 (section 8). Both slightly under market.
We entered escrow (and closed) about 2 months just as CoVID hit. Seemed to be great timing just as we had a slight dip.
Twana mentioned you are currently house hacking over there?
1 Reply
Brian Koons
San Diego, CA · Member since 2019 · 48 posts · 44 votes
6y
I'm currently in escrow and I plan to house hack there. Rent out the other units and the rooms of the unit I'm living in. While doing this, the property will cash flow. Im utilizing the VA loan which definitely helps because there is no PMI, but it just shows it's possible in that area

@Maxwell Venturaundefined
1 Reply
Jared Espindola
Rental Property Investor · Boston, MA · Member since 2019 · 8 posts · 3 votes
6y
Hi all, hoping to piggyback on this conversation a little - hope that's okay.
I'm planning to move with my sister to the San Diego area at the end of the summer. We still have a lot of family in Boston, so are only planning on being out west for a year or two before moving back. I've been considering the option of a long-term/live-in flip while we are out here as an alternative to renting. I have some (admittedly limited) experience in rehab but I'm confident that I would be able to take care of cosmetic updates to add value to a neglected but structurally sound property. Ideally I would like to fix up a place like this and then either move out & hold as a rental or sell & cash out on the sweat equity. I recently spoke with a lender who said with my current cash available for down-payment($40k) income/debt/credit etc. I'd qualify for a mortgage around $575k.
My impression so far is that this might be feasible in some of the neighborhoods farther out from the downtown/waterfront area. (Example of a property I saw on my morning zillow search today: https://www.zillow.com/homedetails/1014-Kelton-Rd-San-Diego-CA-92114/17082323_zpid/). Does anyone have any advice or thoughts about this live-in flip strategy in this market/thoughts on what neighborhood would be a realistic option at my price point? Would love for someone to poke holes in my strategy to give me more to consider or any general advice would also be great.
Thanks!
2 Reply
Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Jared Espindola
Most of 92114 is Encanto, a level C neighborhood. You can do pretty well PPSF over there but most of the area is a little rough. It can certainly translate into a good investment. Just depends what your other goals are and if you'll be living there... or moving your sister out.
Have you tried looking in some of the surrounding neighborhoods? Lemon Grove, Paradise Hills, Chula Vista, Oak Park, Rolando?
Hope this helps
0 Reply
Jared Espindola
Rental Property Investor · Boston, MA · Member since 2019 · 8 posts · 3 votes
6y
@Maxwell Ventura Thanks this is definitely helpful - one thing that I've been concerned about, since I'll have my sister with me, is unintentionally moving to a rough part of town. I'll do a little more research on the neighborhoods you mentioned, appreciate the tip!
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Originally posted by @Maxwell Ventura:
@Jared Espindola
Most of 92114 is Encanto, a level C neighborhood. You can do pretty well PPSF over there but most of the area is a little rough. It can certainly translate into a good investment. Just depends what your other goals are and if you'll be living there... or moving your sister out.
Have you tried looking in some of the surrounding neighborhoods? Lemon Grove, Paradise Hills, Chula Vista, Oak Park, Rolando?
Hope this helps

My view is referring to Encanto as level C is generous. It competes with the most notoriously violent areas in San Diego (I lived there 5 years and my house took bullets as did my closest friend's house no where near my house). This was many years ago and I do realize most houses never take bullets. I also believe San Diego's most notoriously violent areas would seem nice compared to some other large cities' worst areas.
Curious, what areas in San Diego would you classify below a C area? Are there any? Is San Diego's worst areas no lower than class C because they are expensive (compared to other cities) and appreciate well? I do agree that is two criteria that some people would use to determine the class of the area but they are not the only criteria.
I am not saying these cannot be good investment areas. But the class of the tenant has to be factored into the Pro forma. This includes more late/missed rent, higher risk placing tenants, higher tenant turn over costs, more tenant issues, etc. So I suspect they are best left to either experienced LLs or LLs with a lot of time to deal with the various issues.
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Maxwell Ventura
Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
6y
@Dan H.
I'm sure you could make a case for Encanto to be classified as a D neighborhood as well.
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