I am interested in transitioning into the so cal market. I wanted to network with other investors about the market in that area! Any pointers, locations to avoid, what strategies are working in that market etc... I am from the Midwest and we are an entirely different market then what is out there.
Talk to me!!! :)
Hi @Alissa K.
Just my opinion. I have sold all my pricey San Diego RE, except personal residence. I had 10 rental condos here in the San Diego area and purchased at very low prices comparatively to now values. I purchased them in 2011-2012. The people that have purchased these condos that I sold for double the price I purchased them for bought FHA 3.5 % down, with credit scores in the low 600's and with not much money in the bank. I would not have purchased these condos for this price in 2011-2012, due to not being able to cash flow at these current prices with 25% down like I purchased them originally.
Now they will cash flow if you put 50% down. If that is your plan, then that would be good leveraged debt and add more safety in case we do see this rerun occur again and prices go down 25-50% again. I have lived here in San Diego since 1978 and don't believe my little 3br/1ba 1040 sf house in Mira Mesa in the San Diego area will continue to rise and go to $1,000,000.00 someday. Right now it is at the all time peaks currently about $520,000.00. The only way this could happen would be many more high paying jobs, vastly increasing pay for employees etc... The other way it could happen would be to repeal Dodd Frank and ease the lending standards further. That would be a recipe for disaster.
Swanny
@Alissa S. There is no where in San Diego county that I am aware of that has rent control. However the STR regulations are currently being negotiated. I would not recommend purchasing in San Diego city with plans to STR until after the regulations are closer to finalized.
Your $50K estimate seems high but I suspect it is because your rehabs are either bigger or more extensive than my rehabs because I would be very surprised if the cost of rehab is less in San Diego than MN. My rehabs are closer to $30K per unit. This typically includes new kitchen, new bathrooms (but hopefully not the baths/showers), new flooring where needed (typically most flooring), removing the ceiling texture, new windows, décor outlets and switches, paint, typically some doors and handsets (both entry doors and/or closet doors) and there always seems to be something unexpected. It does not typically include HVAC/furnace, or much/any exterior. However the flooring we use is not on the cheaper side (composite plank). On our last rehab the flooring was close to $7K (there were stairs and the unit is larger than our usual size unit). Our typical rehabbed unit is 2 BR and 1.5 Ba (we have three 2/1 (soon to be 4 as our current purchase is a 3/1 and 2/1 detached duplex) but we have not rehabbed any of the 2/1). Footage on the rehabbed units varies from ~700' to 1240'.
Good luck.
Thank you for that information. I was looking for more long term rentals anyway so STR is only an afterthought for me.
We have basements in MN and that adds cost to rehabs because we use those for added value and 9 times out of 10 we need HVAC and water heater updates. The winters are brutal here and an older furnace tends to turn people off or becomes a sticking point at inspection. our minimum sq footage is 1100 sq ft if we don't finish the basement and more typical is around 1800 to 2500. 3 bed 2 bath is what people want here or bigger. Minnesotans are not accustomed to living in smaller spaces...maybe that is what we use to make up for the winter ;) we have more expensive labor here as well I believe. I know that when I looked at rehabbing in AZ the labor costs were much cheaper.
If you are looking for initial cash flow via San Diego condos today that is a harder nut to crack. Flip those fixer condos unless located in another up and coming area is the easier option? Too many condo home owner buyers continue to support higher SD retail prices sub 500k is likely. Figure by 2020ish two minumum wages buyers combined qualify for near 300k with current interest rates.
You are fantastic! Thanks for the pointer! Hopefully we can connect when I am there! I was leaning toward starting smaller to get a feel with less risk than doing a 500k "fixer upper." We are currently working on pushing minimum wage to $15 here. What is it in your area?
I was in Minneapolis last year and couldn't believe how cheap housing is, prepare for a shock when you enter San Diego! Living in Orange County, I recently went to a realtor meeting and they were crying about the lack of flip opportunities, all this to say, the "Pros" have been flipping for ten years now and with essentially no foreclosures in San Diego, where are you going to find opportunities? Cap rates are 4-6%; SD is at the top of the market (post recession highs), virtually no vacancy factor in SF, OC, and SD. Trust me, unless you have a ton of money, you can't compete! Some of the most sophisticated investors are in Southern California. Not to mention Chinese money is flowing into the San Gabriel Valley (LA) where they are buying whole blocks sight unseen. I would keep your money parked until the next recession.
Hi Jack, Thanks for replying. I have been investing for a long time. There are many many ways to find opportunities without foreclosures. I have not purchased a foreclosure since 2013 here in MN. All of my deals have been non-mls, non-REO properties and with the demographic of the area, I am sure there are plenty of opportunities there as well. I was more concerned with the high home prices and rental rates and what people were accepting for cap rates and making money with. Strategies in a more expensive location are critical and I want to connect with people who are working the system there and making stuff happen.
Prices of homes are all relative. You are on the ocean and people pay bigger money for that. No one wants to pay a ton to live here...the summers are beautiful, but the winters are horrible. Income rates are a little lower here, but there are many fortune 500s here that bring in the buyers. I believe pricing is all relative and if the economy supports the pricing then it is what it is. The housing supply here is low just like most desirable cities and we are still working out deals. I don't believe there will ever be a recession like the one we had (at least not in my active lifetime), but the market always corrects some and then continues on the upward trajectory. It is typically slower than what we have seen in recent years, but there is definitely a trend.
Hi @Alissa K.
Just my opinion. I have sold all my pricey San Diego RE, except personal residence. I had 10 rental condos here in the San Diego area and purchased at very low prices comparatively to now values. I purchased them in 2011-2012. The people that have purchased these condos that I sold for double the price I purchased them for bought FHA 3.5 % down, with credit scores in the low 600's and with not much money in the bank. I would not have purchased these condos for this price in 2011-2012, due to not being able to cash flow at these current prices with 25% down like I purchased them originally.
Now they will cash flow if you put 50% down. If that is your plan, then that would be good leveraged debt and add more safety in case we do see this rerun occur again and prices go down 25-50% again. I have lived here in San Diego since 1978 and don't believe my little 3br/1ba 1040 sf house in Mira Mesa in the San Diego area will continue to rise and go to $1,000,000.00 someday. Right now it is at the all time peaks currently about $520,000.00. The only way this could happen would be many more high paying jobs, vastly increasing pay for employees etc... The other way it could happen would be to repeal Dodd Frank and ease the lending standards further. That would be a recipe for disaster.
Swanny
Hey Swanny! Thank you so much for sharing your story! It is definitely something to consider. I only hope I can figure it out and be successful there. I am ready for a change and want to invest in my back yard instead of a thousand miles away so I will have to work it out :)
What do you do now if you don't have rentals?
Hi @Alissa S.,
On BP Podcast 238 Brandon Turner and Scott Trench had me as a guest to tell my story regarding me selling these pricey condos in San Diego for true Multifamily (5 units or more in one complex) in NE Ohio. I went from $50,000 cash flow on the 10 condos I owned in San Diego and through the power of the 1031 exchange have traded them in for 7 apartment complexes and 109 front doors in NE Ohio. My cash flow as of October first, will be at $160,000 cash flow after repositioning some excellent value plays in NE Ohio. If I were you, I would live like nobody now, cut expenses, hoard lots of cash and have lot of capital ready to invest in San Diego at the next housing downturn or just keep investing in the Midwest for the time being and buy low and sell high through the power of the 1031 exchange or refi tax free to invest.
That is just one man's opinion. Feel free to go to my profile and reach out to talk to me. That goes for anyone here on BP. I love talking shop!! You may want to listen to BP Podcast 238 first. I can only say so much here on my forum entries. Too much typing all the time.
Swanny
If you are looking for initial cash flow via San Diego condos today that is a harder nut to crack. Flip those fixer condos unless located in another up and coming area is the easier option? Too many condo home owner buyers continue to support higher SD retail prices sub 500k is likely. Figure by 2020ish two minumum wages buyers combined qualify for near 300k with current interest rates.
You are fantastic! Thanks for the pointer! Hopefully we can connect when I am there! I was leaning toward starting smaller to get a feel with less risk than doing a 500k "fixer upper." We are currently working on pushing minimum wage to $15 here. What is it in your area?
Aw thanks. LA city is $15 an hour by 2020, LA county is $15 by 2021 and California state law is $15 by 2022.
San Diego is probably somewhere inbetween.
Good luck!
Michael Swan, you are right on! That's what I was telling Alissa as well, I bought my first condo in Cardiff in 1973, ($40k) since then as you know everybody else in America found out about San Diego. If you want to live near La Jolla, that's one thing, but if you are looking for cash flow on a new property, San Diego (or anywhere in California) this is not the place. I was in Cleveland last year and thought it was a great city! Estimated median house or condo value in 2015: $66,200 (it was $71,100 in 2000) That median home price makes me giggle! My wife and I stayed in an AirBnb in Cleveland - a cute little 3/2 valued at $120k !!! I'll be listening to your Podcast!
@Alissa S. yes. all the cashflow seems to be in the Midwest. I recently purchased a new primary residence and I still hold my condo (currently renting for a ridiculous price for the neighborhood its in). im just holding it for awhile to see how it goes to see if I ever want to invest more here if that time ever comes.
@Michael Swan youre awesome swanny!
Thank you Alex,
My pleasure!!
Swanny
>Income rates are a little lower here,
House hold income in Minneapolis is much higher than San Diego. We call the San Diego income to housing costs the "Sunshine Tax".
Minneapolis family income $88.8K in 2015 (first source to come up on Google). San Diego family income $77.6k in 2015 (same source). ~14% higher family income in Minneapolis.
You would think we would save on utilities but water, electricity, and gas are all quite expensive here so even though we use less energy our utility bills may even out (or exceed) with the high energy cost and the water bills.
At least we get the sunshine, beaches, mountains, desert but it does have a cost. It is expensive in relation to income and there are crowds (constantly getting more crowded).
I can live anywhere I desire and I live here but it is not cheap and it is often too crowded.
And that is the typical midwest sfr cash flow rub, where as median in 2000 71k and 2015 is 66k. The median in that example was not able to keep up with inflation @3%. There would be expceptions still but if we are just talking averages in this respect. There would be some that lost much more too or even abandon. Minneappolis excluded I think is the midwest exception and or major parts of Chitown and some other exclusive pockets etc.
Where as the year 2000 71k condo in San Diego is probably around 300k+ today. Factor about 6% annual rent increase for those 15 years which is near tripled rents. It does not take an expert to realize the difference could be multiple 6 figures in total profits. This partly explains why SD is #3 in the nation for total profits since 2000. Note, there is not a single condo in San Diego that lost value since 2000.
This might be of interest for the investor who is playing the bigger picture to bigger pockets long game. Some other investors might also consider the difference in the quality of the cash flow during that same time...vacancy rates, evictions etc...
Lastly, the percentage of property tax is also huge favoring SD,CA ( prop 13) which also is grandfatherable to heirs.
Good luck!
@Alissa S. I like your outlook and positive approach. If you have found deals off market in the past I am sure you will do the same in San Diego. You appear as a no obstacle get it done person. You only go around once, right? You will love San Diego! Enjoy and keep us posted.
Michael Swan, you are right on! That's what I was telling Alissa as well, I bought my first condo in Cardiff in 1973, ($40k) since then as you know everybody else in America found out about San Diego. If you want to live near La Jolla, that's one thing, but if you are looking for cash flow on a new property, San Diego (or anywhere in California) this is not the place. I was in Cleveland last year and thought it was a great city! Estimated median house or condo value in 2015: $66,200 (it was $71,100 in 2000) That median home price makes me giggle! My wife and I stayed in an AirBnb in Cleveland - a cute little 3/2 valued at $120k !!! I'll be listening to your Podcast!
Your numbers are exactly why Coastal SoCal REI has outperformed the Midwest. Your example reflects a depreciation in Cleveland that is worse when including an inflation factor. Typically rents follow RE value so the Cleveland RE is likely renting about the same as in 2000.
Compare that with the appreciation noted on your Cardiff RE. Realize the rents likely have appreciated similarly.
So a Cleveland purchase in 2000 has 17 years of cash flow but likely without any increase making the buying power of this cash flow significantly less than it was in 2000. Compare with the SoCal RE that reflects significant appreciation. Whatever the initial cash flow the rents on this Cardiff units have likely appreciated similar to the property appreciation. This unit would be cash flowing relative to purchase price much better than the Cleveland property.
1973 was long ago but the numbers for 2000 would show a similar result as would the numbers for 1980, 1990, 2010. Basically it does not matter when you purchased in So Cal it would have on average produced better ROI than the average Cleveland property.
@Alissa S. I like your outlook and positive approach. If you have found deals off market in the past I am sure you will do the same in San Diego. You appear as a no obstacle get it done person. You only go around once, right? You will love San Diego! Enjoy and keep us posted.
Thanks Dylan! I came into real estate in the worst time (the recession before it hit) I have watched the market and know that people are making money. Landlords who bought in 2010 (why didn't I smh...I was more interested in bigger rehab checks then long term gains) are killing it now. I watched one house get snatched up as a foreclosure for 55k (short sale had an offer at 163,000) and they put 15k in to get it rent ready, have rented it for years and just recently sold for 215,000. People were scared to invest at that time but if you were saavi and had some financing, you would have killed it!
I am a get er' done kinda girl, I am just looking for focus on what strategy to choose based on current market conditions.
Dan Heuschele, you are absolutely correct about So Cal RE. I, however, am a senior so I my approach is different. My primary residence has good equity, but as a senior, I couldn't care less about appreciation on units. My focus is purely cash flow. My little condo has $7000 annual cash flow, vs. units in NE Ohio = $24,000. My condo hasn't appreciated in three years and I am tapped out on depreciation. A new building should depreciate around $24,000 the first year.
Thoughts?
Dan Heuschele, you are absolutely correct about So Cal RE. I, however, am a senior so I my approach is different. My primary residence has good equity, but as a senior, I couldn't care less about appreciation on units. My focus is purely cash flow. My little condo has $7000 annual cash flow, vs. units in NE Ohio = $24,000. My condo hasn't appreciated in three years and I am tapped out on depreciation. A new building should depreciate around $24,000 the first year.
Thoughts?
It was not clear to me that you still owned the Cardiff condo. On the positive your appreciation is through the roof and you have a significant prop 13 benefit. The questions are how does the prop 13 benefit compare to the lost depreciation write off and is it a good rental. In general I would think that it is a rare condo in San Diego county that provides decent returns relative to its value using LTR. Have you considered turning over to PM that would run it as an STR? My family has a duplex STR that uses a PM; it has been a homerun. The annual rent likely exceeds what it would cost to build the units. The PM gets paid well but there is no way we could handle the units as STR without a PM.
Basically I am missing too much info to provide a definitive answer but hopefully I have provided some things for you to consider. I know that when my units loose their depreciation write-off they will need to be evaluated if they are still the best investment option (actually this evaluation is on-going but a significant parameter has changed after the depreciation can not be written off).
If you decide to keep it and need cash out there may be reverse mortgage, refinance, and ELOC (non-owner occupied ELOC are not super easy to find) options.
Good luck
Dan Heuschele
Where are you finding your deals that your making offers on? MLS? Off market? Pocket listings?
I'm personally torn on this market. I'm currently renting in San Diego and buying cash flowing properties in Texas. I'd love to put some money into the market here in an owner occupied house. Checking out foreclosure houses so I can do some value add. But the numbers currently make no sense. Maybe they will in 3-5 years IF prices rise and WHEN rents do.
I have made offers using all 3 of the methods you listed but most of my purchases have come from MLS.
The numbers can make sense in certain areas with certain purchases. You need to find those areas and purchases. I am in escrow on a REI currently and made another offer in the last month (that offer was accepted but the owner had issues with the inspections I desired so we used our escape - the unit has a lot of deferred maintenance/cap expense and I needed to have the inspections or a much lower purchase price).
I find CA RE investors investing in Texas an interesting choice as they pay income taxes here and property taxes there. Foundations also can be an issue in Texas. How long have you been investing in Texas?
I have purchased near market highs and have experienced RE depreciation in the short-term but those purchases now look like I was a genius purchasing even though the purchases were near market high. In 1993 I purchased a SFR at $167k. It fell to low $140s. Today it is worth ~$575k. In 2004 I purchased a SFR FOR $741k. It fell to ~$620k. Today it is worth ~$950k. The only people to have lost money on San Diego buy n hold RE in the last 50 years are those that sold at the wrong time typically because they were over leveraged.
Good luck
@Alissa S. As a real estate Broker of 14 years in the Southern California area, I can share the following information with you and maybe it can help a little, and maybe it can't.
Historically dating back to 1984, our cycles in CA have been as follows: 5-7 year UP CYCLES (Peak Values) and then a 3-4 year DOWN CYCLES (Declines/Recession)- (with the exception of the Dot.com bust in 2001). I feel 33 years of history is a good indication of what typically happens, although we all know this does not mean 100% the same cycle will occur, but it's a good foundation.
Currently we are entering year 6 of our up cycle with appreciation showing approx. +72% since 2012-2017 (will vary slightly depending on certain areas of California). Historically, our down cycles have NEVER surpassed the % appreciation of an up cycle, so depending on your end game, you should always make money if you hold the property long enough. I've never lost money buying a home in CA.
Since 1984, home prices have increased 8X, while median incomes have increased only 3X-4X...The math does not work and something will have to give at some point.
Inventory is LOW while demand still remains to be high because of low interest rates, which is keeping prices over inflated.
Homes are starting to sit on the market longer in many areas. Because I specifically work the Orange County market (45 minutes from SD), homes are reaching 60+ DOM because I believe sellers are asking for that crazy price point and buyers are starting to say "NO".
As for rents, rent to value ratios are not impressive in almost all areas of Southern California. Our rent/value ratios range between .03 to .05 in most areas. So if you have been use to the 1%+ rule in the Midwest, I don't believe you will see that happening here, and if it does, it's high desert/inland markets..Not SD!
You mentioned cities maxing out rent rates. There are several rent control areas, so you need to make sure you are aware of what is going on in those markets, the laws behind what you can and can't do, etc.
I've analyzed several deals in the SOCAL market over the past 6 months and the average CAP rate here is 4% and COC is a negative or very low, depending on how the deal was structured/financed.
The play for most investors in CA is appreciation speculation, flipping and wholesaling...not cash flow.
With wholesaling, be careful of the "daisy chain" deals out here and several-several SHADDY non-licensed peeps who are trying to jump on the wholesale game. I know first hand that CA is talking about cracking down on wholesale laws and it won't be the same game it is today much longer.
I know lots of flippers who have success through the years of relationships they have been building, but many get burned because they can't pick up the deal for the price that makes sense, flaky contractors taking their money and buyers beginning to not pay for top dollar homes.
Because my group has agreed to NOT purchase a property unless in cash flows, we are having to look outside of CA or other niche areas of real estate.
I'm sure you will be great at whatever path you take..Good luck!
A couple thoughts. Price to rent can be used to compare and or predict initial cash flow on like properties in the same location/zip. The ratio number does not meaningfully transfer to compare and contrast to other locations 1000 miles away.
Properties with little to no appreciation can primarily return via cash flow ( higher initial price to rent ratios) and without that there is hardly a chance to profit. Other locations might have more going for them and usually have lower initial price to rent ratios. It could make much less investment sense to compare price to rent ratios as if these properties were next door to each other.
Good luck!
@Michael Swan Really loved your episode! Great strategy and very good advice and information! Kudos!
Hi Alissa,
Im a general contractor, originally from the midwest, having lived in So cal for 30+ years. I do custom remodels and builds from ground up. I have lots of information, but where do you want to focus? If your focus is cash flow, the cash flow is big but at the expense of lots of cash invested to get properties and make numbers attractive which of course brings your ROI down. So you definately need to either 1031 exchange into some great properties that make sense to you or go find a meth house, make that ridiculous offer (near asking or over cause everyone wants it) and find a great GC (me) to renovate it within a tight and thrify budget (I could partner here) and add tons of newly developed equity.
I am interested in the cash flow thing but am able to build equity easily on SFR. The investment of my cash is much better if I have multiple units to prorate the investment.Just my opinions!
Love to keep connected.