Should I stay or Should I go?

32 Replies

Hello everyone,

First of all, I am new to BP and I enjoy reading people's posts. So here is my dilemma.  I am selling a couple of my rental properties in San Diego, CA and would like to do a 1031 exchange on a multi-family unit. I am not sure if I want to buy a multi-family unit in San Diego because of the high costs. I would like to know what would you do? Would you invest in other state like TX or AZ or stay here in San Diego. Any feedback is appreciated. 

I may be a little biased but I'd get out of California! Invest where your dollar will do better! Like Texas or even here in Ohio!

Hi Maya,
I recommend first to look at the landlord / tenant laws in the areas you are interested. Southern California is very tenant friendly in my understanding. Also, housing values are through the roof and not keeping up with rents. I'm sure you can find a deal there but it'll be tough to find a good one. Congratulations on the sale(s). Talk to your 1031 service to see if you can exchange two properties at once. I'm not sure that is allowed.

@Maya German

If you’re looking to invest out of state in rentals I’d look towards the Midwest such as Columbus, Ohio but you can also get started in San Diego with a low money down owner occupied loan and start eliminating your housing expense.

I think some of it depends on your REI goals for either mainly cash flow and if you are looking for general long term appreciation. In Columbus, you can still get both but it is getting more competitive. @Maya German

I will start by stating that I believe the RE market is an efficient market.  Prices depict a range of variables that basically boil down to risk and return.  For the return, there is both short-term and long term return.  Risk is made up of many items including eviction rates, tenant quality (very much a function of vacancy rates), vacancy rates, etc.

What this really means it that different markets have different strengths and weaknesses.  I recommend all newbies start local.  There are a plethora of reasons for this that I have posted elsewhere.  The OP is not a newbie.

So here is what I believe about the San Diego market:

  • Historically it has produced outstanding long-term returns.  This is a function of both the property and rent appreciation.
  • The rent appreciation has made San diego, contrary to popular belief, and outstanding market for long-term cash flow.  It is simple math that the market with the higher rent appreciation rate will always eventually produce better cash flow than the market with a lower rent appreciation rate.
  • The eviction and missed payment rate in San Diego is one of the lowest in the nation.  It is my belief that this is more a function of the low vacancy rate than the cumbersome eviction process.
  • Prop 13 is unbelievable benefit for long-term investors.  The state average property tax paid has been estimated at 0.77%.  The high appreciation cities pull this down.  What this implies for San Diego is that our average property tax rate is likely below 0.77%.  I know our (H3 Properties) property tax rate is way below 0.77%  We have multiple properties (close to half) that have rates near or below 0.5% of the value.  We have one that I suspect is below 0.25% of value.

As indicated, the market reflects multiple variables so here is the bad.  The bad is mostly short-term negatives:

  • High price of entry. Especially for the investor with no value add using traditional financing that is getting 80% LTV. This is less an issue if house hacking (95% LTV), doing a value add with a refi (extract out of investment), or using creative financing (obtaining higher than 80% LTV). It is why for a long time all or our acquisitions had a value add.
  • Poor initial cash flow.
  • Tenant friendly regulations.  I have found with the low vacancy rate, the tenant friendly regulations are of virtually zero impact but they are real.

I believe strongly that San Diego will continue to be an outstanding long-term market.  I also believe that many markets can produce better return in the short-term.

We are at about the maximum number of units we can handle without changes. If that were not the case, I would more actively be acquiring more properties (we closed on a quad New Years Eve, but our acquisition rate has slowed) like the ones we have (mostly duplex to quad). Because I am considering commercial MF (5+ units) and sustainability requirements on commercial financing, we may in the near future look non-local. It will not be because I do not have huge confidence in the San Diego market. It would be due to the sustainability requirements and my aversion to have to have LTV typically lower than 70% and often lower than 60% on San Diego commercial MF.

Good luck

Hello @Maya German , welcome to BP! I am a real estate agent and investor here in TX (Dallas-Fort Worth Metroplex). I would definitely recommend investing in Texas rather than California due to purchasing power and the rate TX is growing. There have been projections that Austin will be the next LA so if you get in early then it can pay off drastically in the future. 

Ohio has some great number for multi family  just another place to look and landlord tenant laws are more then fair to  the landlord

Originally posted by @Maya German :

Hello everyone,

First of all, I am new to BP and I enjoy reading people's posts. So here is my dilemma.  I am selling a couple of my rental properties in San Diego, CA and would like to do a 1031 exchange on a multi-family unit. I am not sure if I want to buy a multi-family unit in San Diego because of the high costs. I would like to know what would you do? Would you invest in other state like TX or AZ or stay here in San Diego. Any feedback is appreciated. 

 I would do a 1031 into a rental property in Columbus, Ohio