Best city to buy rental properties?
Flipper/Rehabber · San Diego, CA · Member since 2018 · 46 posts · 47 votes
I live in beautiful San Diego, CA and I want to buy a rental property but have heard that the San Diego rental market is not very strong for investors right now. Also, with the high prices of homes/apartments/multi family places in SD it is hard to find something that fits my budget.
I’ve been trying to do my own research to find good markets to invest in but I feel like I’m just going in circles. How do I even go about evaluating different markets? I know population and job growth are important but what are some other key factors that I need to check before I buy a rental property?
Also, any suggestions on hot markets for rentals under $100k? Im open to buying in CA or neighboring states like Nevada or Arizona where the climate is similar to what I am familiar with in SoCal.
I do not know who you are hearing that San Diego is not a very strong market for investors right now but I suspect it was not from San Diego RE investors. Trulia lists the appreciation for my primary market at 17% last year. San Diego SFR rents have risen $475 on average in the last 3 years (Source San Diego Union Tribune). Rent Jungle indicates the average apartment rent has gone up $540 in the last 5 years. It has been a great time to be a San Diego RE investor.
As for the price of entry... That high entry price reflects how strong the returns have been on San Diego buy n hold RE.
I suspect the Midwest will more align with your budget. Urban areas of Arizona may be challenging to find properties under $100K. In the cactus rural Arizona landscape it may be possible but it may not be easy to replace tenants.
If you purchase OOS, you will need to have a trusted team. In these low cost markets, you traditionally will experience very low appreciation (market and rent appreciation). I would not bother with cheap location (such as the Midwest) small unit count RE. The meager cash flow is not worth the risk or hassle. However, your budget likely does not allow purchasing large multifamily options.
Have you considered house hacking local?
Good luck
I’ve heard from a few people here on BP that SD was a bad market because mortgages are typically the same if not more than rents thus killing cash flow. But it’s good to hear that that could be wrong. I have definitely considered house hacking and I check Redfin daily for multi family properties here in SD but the same issue with affordability comes into play. I need to talk with a lender to see what kind of loans I can qualify for so that I can start looking a little more seriously.
The part about initial cash flow is true. A SFR purchased in San Diego at retail with legitimate financing (>=75% LTV) will be cash flow negative. You can find duplex to quad purchased at retail that will have minimal cash flow but they will be in need of an upgrade (a positive thing in my opinion as the upgrades are typically easy, low risk value add opportunities).
But assume you purchased a slightly negative cash flowing property 3 years ago. Lets use $200 month negative cash flow using conservative vacancy, maintenance, cap expense, and miscellaneous estimates (so a legit $200 month negative cash flow - unlike many cash flow projections provided by sellers that do not include any cap expense estimates). Realize rents on average have risen $475 in the last 3 years (Source San Diego Union Tribune) so today you have ~$275 positive cash flow today (assuming fixed rate financing). With the 75% LTV, it would imply 25% equity stake (not including any equity pay down). A market that performed like my primary market and had 17% market appreciation would result in 68% ROI for the one year. Of course not every year will have market appreciation like last year but in the last 6 years every year has had good to great market appreciation in San Diego.
The initial negative cash flow by itself does not make a market a poor RE investment market. There are many ways to make money in RE. I would take an initially negative but increasing cash flow market over a positive but flat cash flow market every time because I am in the buy n hold for the longer term.
Good luck
I’ve heard from a few people here on BP that SD was a bad market because mortgages are typically the same if not more than rents thus killing cash flow. But it’s good to hear that that could be wrong. I have definitely considered house hacking and I check Redfin daily for multi family properties here in SD but the same issue with affordability comes into play. I need to talk with a lender to see what kind of loans I can qualify for so that I can start looking a little more seriously.
The part about initial cash flow is true. A SFR purchased in San Diego at retail with legitimate financing (>=75% LTV) will be cash flow negative. You can find duplex to quad purchased at retail that will have minimal cash flow but they will be in need of an upgrade (a positive thing in my opinion as the upgrades are typically easy, low risk value add opportunities).
But assume you purchased a slightly negative cash flowing property 3 years ago. Lets use $200 month negative cash flow using conservative vacancy, maintenance, cap expense, and miscellaneous estimates (so a legit $200 month negative cash flow - unlike many cash flow projections provided by sellers that do not include any cap expense estimates). Realize rents on average have risen $475 in the last 3 years (Source San Diego Union Tribune) so today you have ~$275 positive cash flow today (assuming fixed rate financing). With the 75% LTV, it would imply 25% equity stake (not including any equity pay down). A market that performed like my primary market and had 17% market appreciation would result in 68% ROI for the one year. Of course not every year will have market appreciation like last year but in the last 6 years every year has had good to great market appreciation in San Diego.
The initial negative cash flow by itself does not make a market a poor RE investment market. There are many ways to make money in RE. I would take an initially negative but increasing cash flow market over a positive but flat cash flow market every time because I am in the buy n hold for the longer term.
Good luck
We've had our conversation about SD RE so I won't go into the pros/cons as I think we agree what they are. But I think a bigger issue than "if you buy at 75% LTV, most properties will be negative" is the fact you CANT buy at 75% LTV as the bank won't allow a DCR less than, say, 1.25x
So the bigger issue with SD RE in my eyes is I can't get leverage. I wouldn't even mind going negative for a cool property with some upside, as I have plenty of cash flow to absorb it. But what I can't do is buy with 50% leverage all the time just to hit my DCR requirements as that (along with the high price) causes me to not be able to build my empire and grow. I need the leverage that comes with high cash flow properties to be able to expand and build.
If early on I would have shot my load into 1 property w/ little leverage, I'd have been screwed. Sure it would have went up in value (though I picked a lucky spot to buy in HOuston, a super hip area), but then what? I buy 2 properties?
If you want to get to $50m+ in RE, or $100k/month of profit, I just can't see starting in SD. However, if you just want to buy a few small places (ZERO wrong with that), and take a small loss (if you can find a lender) and bet on long term appreciation, then SD is great.
I’ve heard from a few people here on BP that SD was a bad market because mortgages are typically the same if not more than rents thus killing cash flow. But it’s good to hear that that could be wrong. I have definitely considered house hacking and I check Redfin daily for multi family properties here in SD but the same issue with affordability comes into play. I need to talk with a lender to see what kind of loans I can qualify for so that I can start looking a little more seriously.
The part about initial cash flow is true. A SFR purchased in San Diego at retail with legitimate financing (>=75% LTV) will be cash flow negative. You can find duplex to quad purchased at retail that will have minimal cash flow but they will be in need of an upgrade (a positive thing in my opinion as the upgrades are typically easy, low risk value add opportunities).
But assume you purchased a slightly negative cash flowing property 3 years ago. Lets use $200 month negative cash flow using conservative vacancy, maintenance, cap expense, and miscellaneous estimates (so a legit $200 month negative cash flow - unlike many cash flow projections provided by sellers that do not include any cap expense estimates). Realize rents on average have risen $475 in the last 3 years (Source San Diego Union Tribune) so today you have ~$275 positive cash flow today (assuming fixed rate financing). With the 75% LTV, it would imply 25% equity stake (not including any equity pay down). A market that performed like my primary market and had 17% market appreciation would result in 68% ROI for the one year. Of course not every year will have market appreciation like last year but in the last 6 years every year has had good to great market appreciation in San Diego.
The initial negative cash flow by itself does not make a market a poor RE investment market. There are many ways to make money in RE. I would take an initially negative but increasing cash flow market over a positive but flat cash flow market every time because I am in the buy n hold for the longer term.
Good luck
We've had our conversation about SD RE so I won't go into the pros/cons as I think we agree what they are. But I think a bigger issue than "if you buy at 75% LTV, most properties will be negative" is the fact you CANT buy at 75% LTV as the bank won't allow a DCR less than, say, 1.25x
So the bigger issue with SD RE in my eyes is I can't get leverage. I wouldn't even mind going negative for a cool property with some upside, as I have plenty of cash flow to absorb it. But what I can't do is buy with 50% leverage all the time just to hit my DCR requirements as that (along with the high price) causes me to not be able to build my empire and grow. I need the leverage that comes with high cash flow properties to be able to expand and build.
If early on I would have shot my load into 1 property w/ little leverage, I'd have been screwed. Sure it would have went up in value (though I picked a lucky spot to buy in HOuston, a super hip area), but then what? I buy 2 properties?
If you want to get to $50m+ in RE, or $100k/month of profit, I just can't see starting in SD. However, if you just want to buy a few small places (ZERO wrong with that), and take a small loss (if you can find a lender) and bet on long term appreciation, then SD is great.
I can see how DCR could impact your ability to purchase in San Diego (you purchase commercial residential) but I assume that the OP is thinking SFR to quad not commercial residential. Therefore your obstacle to purchasing in San Diego is unlikely to apply to the OP.
Most of my purchases have been at 80% LTV. The last purchase, as well as the rate quote I received last week, were at 75% LTV with no DCR requirements (non-commercial residential).
As for the $50M in real estate or the $100k/month of profit they are both great goals and it is my belief they can be achieved in San Diego RE. I suspect that one could hit the $50M mark with less than 50 of the correct non-commercial residential properties. We have one such property (over 7 digits of appreciation on a $375K purchase).
I will admit that the means to scale likely is different in San Diego than Houston. It is my view that what we show is that you could succeed in RE investing in Houston or in San Diego.