Should I stay or Should I go?
Member since 2021 · 6 posts · 7 votes
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 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:
As indicated, the market reflects multiple variables so here is the bad. The bad is mostly short-term negatives:
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
This feels like Groundhog Day.
With all respect to others' responses, I'd personally advise focusing on @Cody L. and @Dan H. comments. Both because I think they're great comments and also because I know both of their backgrounds - they have a lot of experience and data to draw from.
Since the OP (@Maya German) asked for input, I'll share mine too: You should imagine what your future looks like 5 years from now, and use that to make your decision. This is a long game, and decisions you make now take a long time to fruit or to unwind. Imagine yourself owning a $1M property in whichever-other-market in 5 years. Do you feel good about having it? Are you happy with the effect it has on your life every month? Do you want more of that? Now imagine owning a $1M property in your current market. Same questions.
PERSONALLY, real estate for me is only partially financial. The financial returns are just table stakes, and it's >50% about creating and contributing something and having an impact on a place. So, it'd be crazy for me to just buy and operate something far away. I'm active in San Diego because it's where I'm at. And the best way I've found to marry returns with impact in San Diego is through development - creating additional housing whether through land development, new apartment construction, adaptive reuse of buildings, or expanding existing buildings. I haven't "just" bought a building locally in several years. You're probably not just like me so you'd probably take a different route ... which is the beautiful part of humanity.
So when you ask someone like me, or Cody, or Dan, or anyone who's been on BP for a while, you're going to get the "it depends" answer. We are each doing something different and, if we were just advocating for what we each like, we'd each steer you in a different direction. It would be a flamey war. All the output you see from respondents above (including this) is each independently true advice, but they're coming from different contexts. You've got to identify and articulate YOUR context (What are you interested in? How much involvement do you want? What do you aspire to do?) before any of the advice you get here is really actionable to take.
Excellent perspective @Dan H.. There's a lot of hype and misinformation around the CA markets (markets that vary TREMENDOUSLY). You make excellent points, particularly about the fears of San Diego being tenant friendly in a market with very little vacancy. Tenants tend to stick and keep up with their rents because it's hard to find somewhere else to go and there are so many great advantages to the San Diego area like major employers, great year round weather and tons of recreation. In other words, it's a place people WANT to live. And the impacts of Prop 13 on tax levels can't be understated. I am constantly shocked when I run numbers on many midwest markets and find property taxes at 2%! There are plenty of downsides to California, all of which have been beaten to death here on the forums, but it's nice to see a balanced perspective represented, too.
I love my properties in Southern California. Yes, the state is tenant friendly and expensive. But compared to the assets we own in Phoenix and Las Vegas (where I live) the returns are better.
Plus the pool of potential tenants is greater. I've never had a rental stay vacant longer than (2) weeks. Whereas our Vegas properties have continuously had vacancies that last for a couple of months. Mainly because our Vegas properties are SFR's; and Las Vegas has a oversupply of those type rentals available.
Also I hear most people saying buy in certain areas that are considered “hot” right now. I remember when they said the same about Detroit. And a few co-workers did just that. Until they experienced that first winter and found out the cost for repairs on heating units and roofs (capex) were eating all their profits and some.
You should invest where you are most comfortable. Chasing areas because they are being hyped by promoters isn’t going to work. Like wai Chan said, Texas has some of the highest properties taxes in this country. The Midwest has winters that causes extreme wear and tear on your property. Every area has its own issues. But if you are familiar with area handling the issues are a lot easier.
Good luck.
Thank you very much for all your responses. This is wealth of information that I need to consider. My properties didn't do well on cashflow because when I bought them in 2014 and 2017, I didn't know what I was doing. One good thing is that both properties have nice equity that's why I am considering selling them. One of them is in escrow already. I will be doing a 1031 exchange. I still need to figure out which way to move. This is my retirement nest. I am 45 years old. I have "9-5" job. After reading everyone's comments, I am more about appreciation of the property rather than cashflow. Of course, the cashflow is nice but I want to think long term. I want to eventually dial the process and repeat "rinse and repeat" my moves and learn as I go :)
You seriously need a new property manager. I only have SFR in vegas. With a little over a dozen properties, in 20 years I have never had a 1 month vacancy much less a 2 month vacancy. The average is 1-2 weeks. And 2 vacancies per year out of a dozen properties should also be average or above average. So I would say I have less than a month of vacancy total over all my properties per year. MFR and especially small mfr is much harder here. There is an UNDER supply of SFR rental.
I need all the help I can get. I was doing all on my own and I see my mistakes now. I need a team