What return in investment is consider for Investors in San Diego?

7 Replies

I have hear that most investors want 30% in return of there money and others 70% 

What is is exactly the percentage they are looking for to consider  buying a house as a good deal?

Depends on what you are looking to do with the house. Are you simply looking to flip the property or buy and hold? Most of the deals we finance for flips, investors make around an 8% return on total project cost and roughly a 25% return on invested capital (assuming they use debt to purchase / rehab the property). If you are are looking to reposition land or obtain approvals for higher density, the returns can go up substantially. 

Assuming you’re talking about flips and not new developments, 70% is WAY too high of an expectation.

Originally posted by @Kevin Fox :

Assuming you’re talking about flips and not new developments, 70% is WAY too high of an expectation.

@Jose Angel dominguez

I forecast conservative.  I use higher vacancy rate than I have yet experienced.  I use conservative maintenance/cap expense estimates.  I use far lower than San Diego historical property and rent appreciation numbers.  Using those conservative numbers, what I look for is an investment that has a solid chance to outperform other investment options including compensating for any extra effort involved in RE investing.

For example, the S&P 500 has a historical return of ~10% and is very passive. I would not consider investing in RE unless it is projected to outperform the S&P 500 (and any other passive investment option) by enough to warrant the additional effort of owning RE. When I started out the amount that the RE projected return needed to exceed more passive investment options was significantly less than it is today. As Kevin indicated I have never projected a 70% (or that close to 70%) return on any of my RE investments. Any RE investment that is not projecting greater than 10% ROI likely means that investing in the S&P 500 is likely to outperform the RE investment and take less work.

My actual return on investment (ROI) of my San Diego buy n hold residential RE has far out performed my conservative projections (100% so far). We likely have one that has returned in excess of 70% annual return. This is due to great rent and property appreciation. I would not want to forecast as though that same level of appreciation is going to continue forever.

Any investment decision should consider projected ROI, risk, and effort involved.

So the questions should be "What can I invest in that is likely to produce a better ROI than San Diego RE?" I account for Buy n hold RE not being as passive as some other investments in this question. "What is the risk?". "How much effort is involved?".

If you cannot think of anything likely to produce a better ROI that San Diego RE then you should consider the other 2 questions and determine if San Diego RE investing is the best path for you.

Good luck

... And, if you're talking B&H, those returns should also be measured as after-tax returns when comparing to other investment options.

@Brock vandenBerg.. I assign residencial houses contracts to investors.. Im New in San Diego Market.. I’m not sure what investors will do with the property. I would like to find deals that investors will buy without a dough. Example: In Chicago Market investors prefer 30% .. They flip the houses and others rent them.

@Dan Heuschele.
So you buy in and hold? If you were to buy a property what will be your criteria of interest to buy the property and what area?

Originally posted by @Jose Angel dominguez :

@Dan Heuschele.
So you buy in and hold? If you were to buy a property what will be your criteria of interest to buy the property and what area?

Yes we buy n hold.  See my profile for where most of our properties are located but it is the opposite end of San Diego county as IB.

My criteria varies but in general we look for the following:

  • Not a landlord headache: This implies not significant parking issues, no older high density living nearby, and ideally detached.  So far we have not cared if the property meets the other criteria, if it does not meet this criteria we do not make an offer.
  • Cash flow: Ideally the property projects from the start as positive cash flow.   However, we have purchased cash neutral when we had confidence of the value add and confidence of continued appreciation.  The cash neutral worked out real well for us as the value add was better than we projected and post value add the property has had decent positive cash flow.
  • Value Add: We have only taken on fairly minor value adds such as rehabs with bathroom additions.  We have not taken on a repurpose value add (too busy and do not have the experience).  However some of these minor value adds have returned large profits.

When we purchase, we eliminate the property if it appears to be a landlord headache.  If it gets by that check, we then evaluate cash flow and value add.  If a property has minimal cash flow but good value add we would definitely consider it.  Similar for vice versus.  However, our goal is to have both initial cash flow and value add.

My projections show that in our market we can be very confident of cash flow at a rent to full cost (cost + immediate repair expenses) of >=0.75%.  I believe if we miss nothing large we can achieve cash flow at 0.7% but that is starting to present some risk on the initial cash flow.  We slightly regularly see properties that project at this ratio.  We looked at one this weekend.  The issue is that most of the ones that hit this ratio are obvious landlord headaches or have other short-comings that eliminate them from our consideration.

Note that with the rent appreciation, properties purchased just a few years ago at a small cash flow projection are significantly cash flow positive now.  Rents have been appreciating at about $100/month for each year for the last few years.  Therefore a duplex property purchased in 2015 with a projected initial cash flow of $200/month can now be at $800/month cash flow (add $100/month for rent increase in 2016, 2017, 2018 per each unit (duplex = 2 units) and the cash flow is $600/month higher than at purchase).

I have mixed feelings on where property prices are going in the next few years but I have a lot of confidence that rents will continue to appreciate over the next few years.

Good luck

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