New member, currently located in Alameda CA.
Alameda, CA · Member since 2016 · 6 posts · 3 votes
I am new to the idea of real estate investing. Most of my knowledge and experience is in stock market index investing and I have only just started to learn about real estate. My goal is FI in 15 years with a monthly expenses of $4000. In reading and listening to the FIRE community I have come to realize that real estate investing can be a valuable addition to my asset allocation. Looking to get into buy and hold single family to 4 plex in the San Diego area.
@Dan, the house value level is currently at or above pre-recession level. Is it a little riskier to enter the market right now counting on ROI when housing is at point of overvalued?
It happens I responded recently on another topic to this exact question. Copied from my other posting...
If I do not purchase another property (multiplex) in the next 6 months it will have more to do with interest hikes (basically 3/8% in the last month) than the current price of San Diego real estate. While I never try to predict the short-term market, I am confident that the long term San Diego market will be appreciate.
Why do I have this confidence? 1) It historically always has appreciated long term. 2) I had a rental and the family had quite a few rentals at the biggest real estate decline ever. Our rents did not go down at all. So if you do not need to sell (i.e. are not over leveraged) then history shows you will be fine with your San Diego RE buy n hold investment. In fact the only way anyone has lost money on San Diego financed buy n hold residential real estate in the last 50+ years is they sold when it was depressed. 3) I have purchased twice near market highs. In 1992 I purchased a SFR for $167K. It probably fell to upper $140s (close to 20% decline). Today it is worth ~$520K. In 2003 I purchased a SFR at $741K. At the low it was probably worth about $620K (again close to 20% decline). Today it is worth over $900K. So I am not afraid to purchase at market highs but of course prefer to avoid purchasing at market highs but no one really knows when we are at the market high. 4) supply and demand.
The supply is very limited in San Diego. It costs about $100K to break ground on new construction in San Diego. That is after you can find and purchase a lot that permits residential construction. Building is also expensive. We are constrained on the west by ocean, South by mexico, North by Camp Pendleton/OC, and East by quickly harsh environment. So the supply is both limited and expensive to add to. The demand? We have perhaps the best climate in the US. We have diverse environment in close proximity from ocean, to mountains, to desert (all less than an hour from virtually any location in San Diego). We have pretty good jobs (not in general the quality or salary of the San Fran Bay area but good compared to 95% of the nation). In short, it is a very desirable place to live with minimal supply.
Before the recent interest rate increases I was planning on buying at least one multiplex between now and spring time. I have recently looked at 3 properties that had good potential. Now I am more on the fence on completing a purchase. Note the recent interest rate increase is approximately equivalent to an 8% cost increase in the past month (using 4.25% as interest rate a month ago and 4.875% now, both ~0 points: non-owner occupied multiplex). ~8% increase in a month is huge. I am having a hard time believing the current interest rate will not drop at least a little but they may not any time soon.
Good luck
Welcome @Charles Rosenbusch from a fellow Bay Area local! I'd recommend adding keyword alerts for topics you are interested in and staying active on the forums. Best of luck!
Welcome @Charles Rosenbusch. My office is in Alameda, above the Pinball Museum. :)
Once you learn to calculate cash-on-cash returns and compare it to what the stock market is getting you, I suspect that your socks will be knocked off.
Out of curiosity, why are you looking all the way down in San Diego? Nothing against that area, it just seems odd.
@Charles Rosenbusch Welcome! I'm trying to FIRE in the next 5-10 years; nice to see someone on the same path with the same terms ;)
I wouldn't look into SFH in San Diego for huy and hold; instead you'll find a good mix of potential appreciation, forced appreciation, and cash flow in 3-4 unit properties (from what I've analyzed in the last 6+ months)
My husband and I are in process of our first house hack in SD with a 4 unit property, so I am clearly a believer in small SD MFH.
@Sarah D. is correct that in general SFR in San Diego are not as good buy n hold investments as the small multiplexes. I have a single SFH that I rent out. It is by far my worse performing property. It used to be my residence. In general your ex-residences are not going to be ideal rental properties. They typically were not purchased to be a great rental but to be a good home for you and your family. The two are not the same.
Small multiplexes in my RE investment area are cheaper than SFR because the market for them are investors who will only purchase if it makes sense. There are multiple multiplexes on the market in my chosen RE area that are basically $225k/unit for 2/1 to 2/2, 1000'. You would be challenged to find a SFR at that price point. To put it more concrete you would find it challenging to find either a 2/1,1000' sfr at $225k or a SFR at 4/2 to 4/4 at 2000' for $450k. Note for a rehabbed 2/1.5, 1000' my market rent is $1650 to $1750.
Good luck
@Chris Mason I'm looking at San Diego for a few reasons. I'm heading back into the military and will probably end up there as my initial duty station within the next 18-24 months. Also, compared to the Bay the prices are much more within the realm of what I'm comfortable with for a first buy. I know there are comparable prices in the greater Bay Area but I have spent very little time in those areas and have very little knowledge about them.
Thanks @Sarah D. for the advise, Ill take a look at multiplexes. I was already leaning towards at least a duplex.
I think that has held me back so far with RE has a lot to do with the size of the loans. A 4-plex at 225k/unit comes to 900k which is rather scary. Do you have any advise for a good starting point to just get started towards my first purchase?
@Charles Rosenbusch I would get started in two ways:
1. Start analyzing potential properties. There are tools on BP or you can make your own spreadsheet with all of the specific information/metrics you want. You can have s realtor set you up with an MLS output or just look at other websites for 2-4 units for sale.
2. Talk to a lender and see what you could qualify for and how much cash you need to bring in.
For both items above make sure you are working with investor friendly/savvy people.
The loan amount can be scary until you start running the numbers and seeing the potential the property has. The more you analyze, the more confident you will become with the market and process.
...
Thanks @Sarah D. and @Dan H. for the advise, Ill take a look at multiplexes. I was already leaning towards at least a duplex.
I think that has held me back so far with RE has a lot to do with the size of the loans. A 4-plex at 225k/unit comes to 900k which is rather scary. Do you have any advise for a good starting point to just get started towards my first purchase?
I suggest you start with a duplex. The price per unit improves slightly as you move from duplex to triplex to quad but 1) there are many more duplexes than quads typically on the market 2) It gets you started gradually instead of taking on 3 tenants to start you will start with a single tenant.
I suspect the places that are listed at $225K/unit will sell just above $200K/unit so you can probably get in at ~$425K. These units would have some forced appreciation opportunities which is ideal. They would allow you to learn a lot about buy n hold RE investing. They will almost certainly appreciate in the long term but even if they do not these are cash positive properties (not as cash positive as can be found elsewhere but the appreciation potential beats all of those better cash flowing locales).
So hopefully $425K is less daunting. Unfortunately, with the recent interest rate increase (>0.25% in the last few weeks), the property at $425K was a lot cheaper for the financed purchaser a few weeks ago than it is today.
Good luck
I've been tryingto run numbers based on my understanding of the 50% rule based on this article (https://www.biggerpockets.com/renewsblog/2013/04/0...) and they don't seem to be working out.
$425,000 @ 4% 30yr loan = $2,029.02/month
2 units @$1600/month = $3200/month
So
$3200 (Total income)
-1600 (50% of income)
-2029 (Mortgage)
-429
I left out property tax for simplicity and used the 1600/month rent as a general assumption. I also assumed that I would be renting out both units because that will be the end goal. In the article the author states that he likes to aim for at least $100 per unit and this shows negative. Am I doing this wrong?
Heya. Just watch out for the numbers if you are looking in SD at all, but especially MFRs. It is extremely unlikely that you won't be losing a ton of money each month in negative cash flow because of the prices of properties there.
For help on running the numbers, check out-
https://www.biggerpockets.com/renewsblog/2013/01/1...
Run those equations on any property you look at anywhere so you can have an idea of what kind of cash flow profit or loss you're going to be expecting.
@charles
you're doing the number correctly,
the 50% rule is more of a guideline to let you know that you need to expect capital expenditures (HVAC/Roof/Foundation) in the future. so if you plan to save that money ahead of time, you have it when you need it.
Here is a good post about how long items last and approximate costs
for new houses, your capex potentially wont' be an issue for a few years, whereas a 10+ year old house will start falling apart if not properly maintained.
Thoughts?
B
I've been tryingto run numbers based on my understanding of the 50% rule based on this article (https://www.biggerpockets.com/renewsblog/2013/04/0...) and they don't seem to be working out.
$425,000 @ 4% 30yr loan = $2,029.02/month
2 units @$1600/month = $3200/month
So
$3200 (Total income)
-1600 (50% of income)
-2029 (Mortgage)
-429
I left out property tax for simplicity and used the 1600/month rent as a general assumption. I also assumed that I would be renting out both units because that will be the end goal. In the article the author states that he likes to aim for at least $100 per unit and this shows negative. Am I doing this wrong?
Unfortunately 4% loan on an investment property currently does not look possible.
A big problem with the 50% rule is that the largest expense of that 50% is cap expense which tying it to rent rather than size, bathrooms, quality of products, etc. is flawed. I use $300/month cap expense on my small detached rentals and they cash flow using that cap expense. Similar if I purchase a 3/2, 1400' SFR property for $50k that rents for $500/month most of that rent is likely to be cap expense (likely more than 50% of rent will need to go to cap expense).
Regardless San Diego market is not a strong initial cash flow market. It relies on appreciation (property and rent appreciation). Fortunately historically the appreciation of San Diego has had a far better ROI versus better cash flow locales (verifiable fact).
By the way rents on small rental units in San Diego have been going up ~$100/month per year for the last few years. Property appreciation a few years ago was over 20% and has been near 10% annually since then.
If you want good initial cash flow San Diego is not the locale for you. If you are looking for best ROI San Diego historically has much better ROI than the better cash flowing locals (verifiable fact).
Good luck
@Hongbing K. I was planning on using a VA Loan which will help with the cash on cash ROI due to no money down.
@Ying Gong's point is exactly why I am focusing primarily on cash flow.
I found this building on redfin and did a more complex analysis for practice. (Test Case)
Its listed for 499k and currently has tenants in each of the two units paying 1500 each (according to their info). Based on my simple analysis, paying360k for this property would net me 8.50% ROI and only $52.12 in cashflow per unit which to me would be a bare minimum based on ROI.
Closing costs are based on 2.15% for a VA loan with no money down.
So if I'm doing this correctly the seller would have to accept my seriously low ball offer on their property for me to make any sort of decent cash flow, correct? I understand @Dan's point that San Diego is likely not the best place for cash flow at the moment, and this is purely a theoretical analysis so that you all can double check me. Thanks again for all the responses.
Welcome to the BP family! You came to the right place to learn all about real estate investing! Here are some recommendations for you:
Find and connect with other BP members that are in your area: http://www.biggerpockets.com/meet
Read Beginner’s Guide: http://www.biggerpockets.com/real-estate-investing
Check out BP Podcasts: http://www.biggerpockets.com/renewsblog/category/podcast/
If you wish to tag someone in the conversation on the forum, type @ followed by their name and then select the name of that person which should appear below the comments box. He or she will be notified of being tagged so that the conversation will continue.
Wishing you the best!
Your taxes and vacancy rate seems low to me. My impression the property taxes is about ~1% and vacancy rate is 5%-10%.
Welcome to Bigger Pockets. A great resources is the webinars section of the website. https://www.biggerpockets.com/proreplay
@Ying Gong Vacancy is set at 5% so on the low side of average.
Taxes are based on the county assessors website info of $2843/yr. Would this amount be reassessed upon sale based on the sale price? Or will this amount be consistent?
@Ying Gong it all depends on where the property is. Property tax on my condo is about 6k purchased @ 327k, while my single detached is about 5k purchased @ 604k.
@Charles Rosenbusch I saw that you accounted for property management. Are you not planning on self-manage? If you are going to be local why not try to self-manage the property to reduce expenses?
@Ying Gong Vacancy is set at 5% so on the low side of average.
Taxes are based on the county assessors website info of $2843/yr. Would this amount be reassessed upon sale based on the sale price? Or will this amount be consistent?
Property tax will reset based on selling price. It will be a little higher than 1%. So in your example it will be a little greater than $3600/year. I would use $4000/year. Prop 13 will ensure that the property taxes only have slight increase after purchase.
@Dan, the house value level is currently at or above pre-recession level. Is it a little riskier to enter the market right now counting on ROI when housing is at point of overvalued?
It happens I responded recently on another topic to this exact question. Copied from my other posting...
If I do not purchase another property (multiplex) in the next 6 months it will have more to do with interest hikes (basically 3/8% in the last month) than the current price of San Diego real estate. While I never try to predict the short-term market, I am confident that the long term San Diego market will be appreciate.
Why do I have this confidence? 1) It historically always has appreciated long term. 2) I had a rental and the family had quite a few rentals at the biggest real estate decline ever. Our rents did not go down at all. So if you do not need to sell (i.e. are not over leveraged) then history shows you will be fine with your San Diego RE buy n hold investment. In fact the only way anyone has lost money on San Diego financed buy n hold residential real estate in the last 50+ years is they sold when it was depressed. 3) I have purchased twice near market highs. In 1992 I purchased a SFR for $167K. It probably fell to upper $140s (close to 20% decline). Today it is worth ~$520K. In 2003 I purchased a SFR at $741K. At the low it was probably worth about $620K (again close to 20% decline). Today it is worth over $900K. So I am not afraid to purchase at market highs but of course prefer to avoid purchasing at market highs but no one really knows when we are at the market high. 4) supply and demand.
The supply is very limited in San Diego. It costs about $100K to break ground on new construction in San Diego. That is after you can find and purchase a lot that permits residential construction. Building is also expensive. We are constrained on the west by ocean, South by mexico, North by Camp Pendleton/OC, and East by quickly harsh environment. So the supply is both limited and expensive to add to. The demand? We have perhaps the best climate in the US. We have diverse environment in close proximity from ocean, to mountains, to desert (all less than an hour from virtually any location in San Diego). We have pretty good jobs (not in general the quality or salary of the San Fran Bay area but good compared to 95% of the nation). In short, it is a very desirable place to live with minimal supply.
Before the recent interest rate increases I was planning on buying at least one multiplex between now and spring time. I have recently looked at 3 properties that had good potential. Now I am more on the fence on completing a purchase. Note the recent interest rate increase is approximately equivalent to an 8% cost increase in the past month (using 4.25% as interest rate a month ago and 4.875% now, both ~0 points: non-owner occupied multiplex). ~8% increase in a month is huge. I am having a hard time believing the current interest rate will not drop at least a little but they may not any time soon.
Good luck
Welcome!!!! @Charles Rosenbusch
I think you're smart to consider the VA Loan option. No down payment, no PMI and minimum requirements criteria make for a wiser investment.
@Dan Heuschele gave a good risk assessment of SD real estate. Plan on holding for 10 years and keep in mind changing demographics in coastal and inland communities when looking for your target submarket. Then select the property type that best suits your ROI requirements and management resources.
FYI, I'm also a investor oriented Realtor and I specialize in North County rental properties. Let me know if I can help formulate your investment strategy, scout our properties and run the numbers for you.
Best,
Rod
@Hongbing K. With the military I will be moving every 3-4 years so I have to factor in management, at least for after I have left the area. There is a good chance that I will come back to the San Diego area but it would not be for a while.
@Rod F. Hatefi I will keep you in mind when I get down there. In the mean time I need to keep up on the research so that I can hit the ground running when I'm ready.