Advice for Duplex Investing in San Diego County

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

Thanks for the advice.

Claudio Salvatorelli

San Diego, CA · Member since 2020 · 150 posts · 54 votes

4y

Hey Paul,

My two cents of advice are to deeply check the area well, check the rent roll, go with a friend/contractor to check the condition of the property, and ask for Mello roos and taxes of the area.

As @Erik Estrada mentioned above there is possibly more inventory and people willing to sell so you can find that good investment opportunity.

Hope this helps,

Claudio Salvatorelli

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

> I would appreciate any and all advice/critique.

Critiques: having paid off property has killed your ROI. the last 2 years (2020 and 2021) have both produced over 20% appreciation. Compounding this means properties have appreciated ~50% over the last 2 years. Your return from appreciation over those 2 years was ~50%. If you had a 75% LTV, you would have achieved an ROI of 200% over the 2 years. Granted the 0% LTV will produce better cash flow, but in the San Diego over the last 2 years the cash flow pales in comparison to the appreciation.

Condos as rentals have potential issues including lack of control as the condo HOA can ban rentals, can dictate flooring, can raise HOA Fees, can enhact a supplemental fee for large capital expense items. Not having control is a risk item.

I am a fan of BRRRR but they require work. They are one of the least passive RE investments. As an engineer, you have a W2 job that often requires significant effort. Are you willing to make the sacrifices that will be required to pull off a successful BRRRR. I was an engineer (avionics SW architect) and have done quite a few BRRRR, so I know the time required and the resulting sacrifices. It worked well for me, but I now have a greater appreciation for more passive investments. If I can get 20% ROI in a passive syndication this may be preferable to getting 80% ROI via a BRRRR that will require hundreds of hours.

Good luck

Joshua J Cawthorn

San Diego · Member since 2019 · 87 posts · 50 votes

4y

Hi Paul,

Well, you certainly have some options! I think you're dead-on that San Diego, like any sub-market, has its specific nuances.

The run-up in real estate over the past 10 years has created incredible competition in San Diego. Finding "deals" is tough to do unless you have special broker/wholesaler relationships or you yourself can put in the work to personally source deals. Otherwise, you're competing on the MLS with everyone else. It's not "hard" in the physical sense, it's just more expensive and therefore pushes your break-even point back further.

Lending is a consideration, but not one that should influence your decision of whether or not to invest. Find a deal that works, including the financing of it, and get started. Time in the market beats timing the market.

I think a value-add deal is going to be your best bet for making money in this market is to force appreciation through improving it. We could get into a whole conversation about how the government incentivizes this exact behavior through the tax code and it's one of the several reasons why investing in real estate is so advantageous, but I don't want to get too off-topic. I just get excited!

If you're interested, I have several agent/broker relationships that specialize in investment properties and I'd could certainly introduce you. Importantly, I'd encourage you to spend some time thinking as specifically as you can about your goals, which markets you're interested in, and your strategy you'd like to implement. The rest is the relationships you make along the way and your willingness to overcome the inevitable onslaught of hurdles and challenges that will separate you from your goals.

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

@Claudio Salvatorelli @Joshua J Cawthorn Thanks for the good advice!!

@Dan H. Thanks for the insight. I do feel remorse over paying the condo off early on, just a bit of a newbie(or maybe due to following a different advice from another popular media source). I would love to look into BRRRR types; how do you find them? MLS? I do have some time that I am able to allocate to see if that is worthwhile. Also, what has been your experience with passive syndications? I know I am sort of starting late in this venture, but even if I can get gains over the next 2 decades, I am happy. Thanks.

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @Paul D.:

@Claudio Salvatorelli @Joshua J Cawthorn Thanks for the good advice!!

@Dan H. Thanks for the insight. I do feel remorse over paying the condo off early on, just a bit of a newbie(or maybe due to following a different advice from another popular media source). I would love to look into BRRRR types; how do you find them? MLS? I do have some time that I am able to allocate to see if that is worthwhile. Also, what has been your experience with passive syndications? I know I am sort of starting late in this venture, but even if I can get gains over the next 2 decades, I am happy. Thanks.

I have purchased properties from MLS, direct from owner, and direct from owner with bird dog fee. Just a few years ago it was easy to find properties on MLS that were good BRRRR candidates (not necessarily meaning I could extract all of my investment but at a minimum value add was double the cost of the work when acting as GC). It is more challenging today as last 2 years appreciation has been crazy and the rate increase. This means it s more challenging and there are few good BRRRR candidates on MLS and the competition is fierce for those few.

My foray into syndications is too new as I have yet to complete an exit. so I am leery to state a verdict on the passive syndications other than they are passive and so far are performing better than forecast (but with last 2 years this is the likely scenario as no one was forecasting in their pro forma the rents increases or appreciation of the last 2 years). I believe if you pick good syndicators that have conservative forecasts, long track records (one of mine does not have a long track record but has done great in shorter track record), and a sound plan you are likely to hit the forecasts.

Good luck

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

Thanks @Dan H..

Have a follow-up if I am going the route of Duplex investment here in San Diego/County (based on the Plan part of my orig. question):

I am ok with an initial neg. cashflow in exchange for an overall appreciation (rent + property value). If looking for a Duplex, non-owner occupied (let's say I am not doing BRRRR or immediate value-add), what are the essential/important things I need to be looking for? For instance, not to buy at retail value -- How do you go about achieving that? What would I be negotiating to achieve the optimal price -- at least PITI being covered by rents?

What numbers I would be baselining on, given the San Diego market conditions (as this is different from most other)?

On average, how long will it be before I see CF breaking even and ascending?

Appreciate yours/folks' wisdom and answers both from experience and current conditions.

Thanks.

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Quote from @Paul D.:

Thanks @Dan H..

Have a follow-up if I am going the route of Duplex investment here in San Diego/County (based on the Plan part of my orig. question):

I am ok with an initial neg. cashflow in exchange for an overall appreciation (rent + property value). If looking for a Duplex, non-owner occupied (let's say I am not doing BRRRR or immediate value-add), what are the essential/important things I need to be looking for? For instance, not to buy at retail value -- How do you go about achieving that? What would I be negotiating to achieve the optimal price -- at least PITI being covered by rents?

What numbers I would be baselining on, given the San Diego market conditions (as this is different from most other)?

On average, how long will it be before I see CF breaking even and ascending?

Appreciate yours/folks' wisdom and answers both from experience and current conditions.

Thanks.

Before the recent rate increases a 0.7% rent to purchase cost ratio typically showed positive cash flow with my pro forma and 0.75% virtually always had positive cash flow using 80% LTV (even better cash flow at 0.75% LTV that has become more common on multiplexes). I have not determines what is required with the increased rates.

How long until cash flow? The last 10 years have had great rent appreciation. There is no way to know how long this will continue. The time to positive cash flow is mostly a function of how close property is to cash flowing at acquisition and the rent appreciation. Non owner occupied duplexes older than 15 years are subject to rent control so max rent increase (without tenant turnover) is 5% plus CPI capped at 10%. Keep this in mind when doing your future pro forma estimates.

Next I try to avoid LL headaches. Lack of Parking can be source of complaints and conflicts. Detached units typically have less conflicts than attached units.

Certain cap ex items result in large tenant impacts. Some of the worst are hardscape resurface, termite treatment (similar for bedbugs), and, slightly less, new roof. Ideally do these before placing tenants if possible.

Good luck

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

Thanks @Dan H.. Rent cap info. is helpful too.

Greg R.

Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votes

4y

I would personally wait a few months to see what the market does. I just moved from SD a month ago but still own properties there and follow the market closely. Inventory is starting to increase. In the winter months I think you're likely to see some improvement in prices. With rates, who knows... I personally don't think we're going to see a lot of improvement there. However, if inventory increases you might find a motivated seller to buy down your rate.

I would personally avoid condos for the reasons Dan cited. However, value add is definitely something that I look for. But you want to make sure that it makes sense, you don't want to inherit someone else's nightmare. One property I purchased in Lakeside was technically a Duplex, but was actually divided into 3 units. This has provided tremendous cash flow. This is the type of deal that will yield high cash flow.

2 Reply

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

Thanks @Greg R. Good info.

Nicholas Coulter

Real Estate Agent · Southern California · Member since 2019 · 681 posts · 281 votes

4y

@Paul D. Hey Paul I am looking for something similar to house hack myself. I have run a lot of numbers over the past 2 months and what I see is there is an option to buy cash flowing assets that will net you a few hundred dollars a month with LTR strategy. I would suggest getting something where you can get a medium term rental that may juice your cash coming in. There is also the hang up with STR restrictions coming into play here where it will be difficult to get a permit to STR your property. the 1% rule is hard to find so you may need to make a play around value add and long term appreciation.

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

@Nicholas Coulter. Hi Nicholas, where are you finding immediate cash-flowing assets in the San Diego area?

Nicholas Coulter

Real Estate Agent · Southern California · Member since 2019 · 681 posts · 281 votes

4y

Quote from @Paul D.:

@Nicholas Coulter. Hi Nicholas, where are you finding immediate cash-flowing assets in the San Diego area?

It’s not a full cash flow play. I want a duplex that I will live in Half and air bnb the other to limit my expenses

Mark Frattini

Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes

4y

@Paul D.

Know which properties are zoned to good schools. Use the right keywords in your MLS search that will bring out some of the "hidden" investment opportunities. I would avoid looking at attached homes if possible. Investigate the listings with only one photo. Since rates just received another increase check with your lender to get an updated quote.

Learn how to use this high rate environment to your advantage. Date the rate marry the home.

OP

Investor · CA · Member since 2022 · 8 posts · 2 votes

4y

Thanks @Mark Frattini. Can you break down on what you mean by right keywords and one photo listings (needing rehab?).

Mark Frattini

Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes

4y

Quote from @Paul D.:

Thanks @Mark Frattini. Can you break down on what you mean by right keywords and one photo listings (needing rehab?).

No listing photos = opportunity. There will be fewer buyers interested as most will want to have a general idea of the layout and what the inside looks like before scheduling a tour. This could also be an indication the inside is a disaster, it might be tenant occupied or have a LA that's apathetic. This is not always the case but it's worth peeling back the onion.

I have about 20-30 phrases I use in the MLS for my clients depending on the property they are after. This works especially well with investors as it helps filter out listings outside our criteria while bringing in ones that might be overlooked by other agents.