Hello from San Diego, California
Indianapolis, IN · Member since 2014 · 13 posts · 9 votes
Greeting fellow BPs.
My name is Tommy Nguyen from San Diego, CA. Have been a long time lurker here but finally decided to post and participate.
A little bit about myself. Currently working as an engineer in a biotech company. I want to start investing in real estate as an exit strategy of the rat race (Rich Dad Poor Dad reference). After 4-5 months discussing with my wife, we want to start with a small multifamily in San Diego area where we can live in one unit and rent the other(s).
I'd love to network with other investors in the area to learn more about RE investing in general and learn more from your insights on San Diego market specifically. I don't know what I can offer in return but I definitely have the energy and appetite to learn the rope of RE investing and will definitely give back in one way or another.
I'm looking forward to hear from y'all.
I have a real example that is unfortunately for is not a 7 digit profit but is a 6 digit profit.
I purchased a SFR in 1992 near the market high at $167k. In depreciated into the low $140k. Today the SFR is worth ~$530k (it has not been appraised in a while). I realize inflation has changed the value of the dollars ($530k is worth a lot less than $530k was worth in 1992).
The point however is that a peak that resulted in close to 20% decline in value today looks like a bargain. If we are at a peak and decline (know one knows) I have a lot of confidence that in the long term the price will not only rebound but increase. Why do I have this confidence? 1) it always has. In the last 50 years there has been many years were values have declined but they have always rebound and increased. 2) supply n demand: San Diego has best climate in continental US and compares with the other best climates in the world. We have good jobs/economy. It is a very desirable location to live. As for supply it is constrained on west by ocean, on the south by Mexico, on the north by Camp Pendleton, and on the East by a quickly harsh climate.
The only people who have lost money in financed buy n hold residential real estate in San Diego in last 50 years are those that sold at the wrong time. Maybe they were over leveraged or could not stomach a decline. Maybe being a landlord was not something they wanted to do. Note purchasing at an unoptimal time such as my 1992 purchase would not result in loss and in fact if financed at 90% LTV (easy to do for owner occupied but in reality I put 20% down) would have cost maybe $20k (20% likely cost ~$36k). That $20k would have resulted in well over $450k of equity. I pulled out my equity in 2002 and in 2010 so my initial investment is no longer in that RE and the equity has been leveraged for other investments (those two refinances were used exclusively for other buy n hold RE investments but my more recent refinances have not yet been placed into RE investments).
So historically San Diego has always appreciated long term. San Diego is a very desirable locale with limited supply. The appreciation is significant when financed with high LTV. The rents appreciate with the value. The equity from appreciation and principle buy down can be leveraged (typically through refi or something like a HELOC) for further investments.
Good luck.
@Tommy Nguyen The 1% rule was quoted in The Rich Dad Poor Dad set of books (and perhaps far before those) as a way to quickly figure if your property would cashflow. Essentially, 1% of the purchase price needs to be the monthly income of the property for positive cashflow.
Example: A $500,000 property must generate $5000/month (or 1%) for it to be a worthy investment.
In some markets this is easy to reach, in others (most of California) it is closer to .5%
Thanks. .5% is the number that I have seen in 99.99% of my analysis (exaggerated a bit) ;)
@Tommy Nguyen The 1% rule was quoted in The Rich Dad Poor Dad set of books (and perhaps far before those) as a way to quickly figure if your property would cashflow. Essentially, 1% of the purchase price needs to be the monthly income of the property for positive cashflow.
Example: A $500,000 property must generate $5000/month (or 1%) for it to be a worthy investment.
In some markets this is easy to reach, in others (most of California) it is closer to .5%
Using the 1% rule discounts the cost of money. In RE the cost of money is significant. Before the recent interest hikes if an RE was purchased with conventional non-owner occupied financing it would likely cash flow fine at .7% assuming 20% down. However, the same unit purchased with a hard money loan would be significantly cash negative.
That is only one of many flaws of the 1% rule. Another is the $30K Pig RE. A issue with the $30K RE is that cap expenses has more to do with number of bathrooms, square footage, etc. then it has to do with what the unit cost. So if I buy a $30K unit that is 2/1 with 1000' the cap expense is likely to be close to the same as the $250K 2/1 unit with 1000'. Yet the 1% rule treats the expenses, including the cap expenses, at though it is tightly coupled to the purchase price (which it is not).
Finally the 1% rule is easier to find in Class C and below neighborhoods. Typically these tenants are less desirable and more work than tenants in class A and B neighborhoods (there are of course exceptions). So the unit that satisfies the 1% rule is likely to have more damage from the tenants, more late/missed payments, more evictions, and in general be more work.
If you cannot tell I think any rent to cost value except for simply comparing apples to apples is a disservice to naïve investors. I know I would not consider the highest rent to RE value neighborhoods in San Diego as they are all in the worst neighborhoods.
@Dan Heuschele this is one of the best explanations I've seen regarding using the 1% rule or any rule like it. I think these rules are good for quick analyzations of REI properties, but should not be the sole deciding factor. Before pulling the trigger on any investment the numbers must be ran against that specific market, size of the property, types of rooms in the home, age of the home, etc, etc. Thank you for helping clarify that point. I already have a couple investment properties and looking to pick up two more this year, but I'm still a newby in this business so it helps to see these topics explained in various different ways so us newbies can understand the full scope of our investments.
That San Diego was hot today! I need to get out and start looking at properties. Waiting to hear from my realitor Monday getting excited to make our first deal this year!