Entering buy and hold market right now
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Ricardo R.Pro Member
Property Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votesYing Gong, I too see a prices rising and inventory low. I guess as something to keep in mind, housing appreciation usually occurs at 3% per year as an average nationwide. Of course some areas are much higher others lower and some years you'll see a negative others you'll be positive in relation to appreciation but on the average you'll see appreciation at 3% per year when its all said and done. With that said.....
Don't count on market appreciation... Instead, if you want to get in right now... make sure the numbers work, i.e. cashflow, ROI etc. now. Ask yourself 'If my purchase price was my house value and it never went up again, would this investment still make sense?' .... In my opinion if you are cashflow positive and you're ROI is more than what you could get in traditional investments i.e. funds, stockmarket, etc. then, yes it is. I would just ensure that you have built in buffers, for instance, make sure 1) your cashflow is sufficient enough, for example, if you only cashflow $100 a month, well that doesn't leave you enough room if your numbers don't workout later down the road; what if rent rates drop? or taxes increase?....2) build in other buffers, for example, I personally include water $50/mo. in my numbers... so if for instance rent rates decrease in my area or taxes increase or any other number things, I can drop water and have the tenant pay for such in future listings. Essentially I've built in a $50 buffer before it even affects my cashflow - as it would remain the same - don't forget to include your CAPEX, maintenance and vacancy buffers as well. 3) Don't count on market appreciation - it'll probably be there, but don't count it for the investment to make sense, instead try to look for forced appreciation, such as, can you add another legal bedroom? or something of the sort? (your home value will increase, as well as what you can charge for rent), can you rehab the rental a bit and demand higher rent?
In the end market appreciation will only affect you if you 1) are trying to sell during a down turn or 2) are trying to refinance... if you don't plan on either of those or you're not pressed for those because you've built in enough buffers to cashflow well, even through tough times - then you're only concern is whether or not market conditions will affect rental rates... which is something you can reasonably control through built in buffers such as those above. Just my ten cents....
I hope this helps.
Alex
22 Replies
- 9yRicardo R.Pro MemberProperty Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
Ying Gong, I too see a prices rising and inventory low. I guess as something to keep in mind, housing appreciation usually occurs at 3% per year as an average nationwide. Of course some areas are much higher others lower and some years you'll see a negative others you'll be positive in relation to appreciation but on the average you'll see appreciation at 3% per year when its all said and done. With that said.....
Don't count on market appreciation... Instead, if you want to get in right now... make sure the numbers work, i.e. cashflow, ROI etc. now. Ask yourself 'If my purchase price was my house value and it never went up again, would this investment still make sense?' .... In my opinion if you are cashflow positive and you're ROI is more than what you could get in traditional investments i.e. funds, stockmarket, etc. then, yes it is. I would just ensure that you have built in buffers, for instance, make sure 1) your cashflow is sufficient enough, for example, if you only cashflow $100 a month, well that doesn't leave you enough room if your numbers don't workout later down the road; what if rent rates drop? or taxes increase?....2) build in other buffers, for example, I personally include water $50/mo. in my numbers... so if for instance rent rates decrease in my area or taxes increase or any other number things, I can drop water and have the tenant pay for such in future listings. Essentially I've built in a $50 buffer before it even affects my cashflow - as it would remain the same - don't forget to include your CAPEX, maintenance and vacancy buffers as well. 3) Don't count on market appreciation - it'll probably be there, but don't count it for the investment to make sense, instead try to look for forced appreciation, such as, can you add another legal bedroom? or something of the sort? (your home value will increase, as well as what you can charge for rent), can you rehab the rental a bit and demand higher rent?
In the end market appreciation will only affect you if you 1) are trying to sell during a down turn or 2) are trying to refinance... if you don't plan on either of those or you're not pressed for those because you've built in enough buffers to cashflow well, even through tough times - then you're only concern is whether or not market conditions will affect rental rates... which is something you can reasonably control through built in buffers such as those above. Just my ten cents....
I hope this helps.
Alex
- 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
@Ricardo R. advice is probably spot on for Michigan and most of the country. The only way REI investing works in San Diego at this time is to forecast appreciation (rent and property appreciation). In addition property and rental appreciation in San Diego have historically far surpassed 3%. 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.
San Diego market is not a strong initial cash flow market. It relies on appreciation (property and rent appreciation).
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
- 9yRicardo R.Pro MemberProperty Manager · Michigan Ctr, MI · Member since 2016 · 661 posts · 581 votes
@Dan H. thank you Dan, it's always great to see another point of view from a different location. What are your thoughts on the current market, should someone in your area be investing in buy and hold? or should they wait? -- any techniques or things to consider if one was going to purchase buy and hold now in your area?
- 9yMark UpdegraffBusiness MemberReal Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 689 votes
@Ying Gong pick up the book "the housing boom and bust" by Thomas Sowell. It sheds a lot of light on the problems of places that have extensive land use restrictions. I think focusing on areas that are more A-typical will be your best bet unless you're a local expert. From what I know about that market I would be looking elsewhere.
Good Luck!
Updegraff Group Realty4.745 Reviews - 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Ricardo R.:
@Dan H. thank you Dan, it's always great to see another point of view from a different location. What are your thoughts on the current market, should someone in your area be investing in buy and hold? or should they wait? -- any techniques or things to consider if one was going to purchase buy and hold now in your area?
If I do not purchase another property (multiplex) in the next 6 months it will do 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.
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
- 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Ying Gong:
@Dan, what regions in San Diego you would advise to focus on? What about distance to managed property? Should that also be considered since too far away is hard to manage?
I like small multiplexes (duplex to quad) in working class neighborhoods that are somewhat close to where you live. It is my belief that the working class areas will have better cash flow with approximately the same appreciation as more white collar areas. All my properties are within ~20 minutes of my home. They are all working class areas but one is a SFR and it is the worse performing of my properties (it is also a slightly more expensive area than the rest of my rentals).
Good luck
- 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Ying Gong:
I am in Carmel Valley area, the closest working class region seem to be Mira Mesa. I also extended my search to mission valley. Chula Vista seems a bit far.
Most of my units are in next working class city north of there (RB, Scripps Ranch, and Poway are not working class). I have not looked at Mira Mesa much and therefore do not claim the expertise I have in my area but I would think it has many similarities to my area. It also happens to be not much further from where I live than my chosen area so it would be a good local for me also (but I have so much expertise on my area).
My chosen area (which I think you can figure it out or you can look at my profile) I suspect is closer to Carmel Valley than Chula Vista is to Carmel Valley. One thing about Chula Vista is that the coastal is cheaper and older than inland Chula Vista. It is somewhat unique in that manner. Almost every other coastal area prices go up as you get closer to the coast. So there may be some very long term upside to coastal Chula Vista.
Good luck
- 9yShawn AckermanPro MemberReal Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
@Ying Gong Don't overthink it! The numbers are the numbers. If you fully understand how to evaluate a deal for your strategy, apply the evaluation to whichever market your interested in. If the numbers work move forward, if not move to another market. Best of luck!
- Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes9y
Originally posted by @Dan H.:
Originally posted by @Ricardo R.:
@Dan H. thank you Dan, it's always great to see another point of view from a different location. What are your thoughts on the current market, should someone in your area be investing in buy and hold? or should they wait? -- any techniques or things to consider if one was going to purchase buy and hold now in your area?
If I do not purchase another property (multiplex) in the next 6 months it will do 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.
...
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
Dan alluded to it, but I'll underline it: when you're looking at making the numbers for a $900k fourplex work, the cost of financing plays a much larger role than in most other markets - historically low rates are what has made this work for the past couple years.
This means that an increase in rates (like the 50BP rise in the past 3 weeks) can actually turn a solid deal into an unattractive one. That's not the case in many other markets where the variables in the same math equation are different.
The big question, AFAIC if you're looking at B&H in San Diego right now, is what rental rates will do if median income (and financing rates, and inflation) begin to rise. If you think rental rates are likely to rise further (not as a percentage of income, but because income is likely to rise), then the current market can be a fine time to buy. Personally, there's too much uncertainty for me and I'm not motivated enough to take additional risk, so the only thing I'm buying locally right now involves development or re-development.
- San Diego, CA · Member since 2016 · 3 posts · 0 votes9y
Originally posted by @Dan H.:
Originally posted by @Ricardo R.:
@Dan H. thank you Dan, it's always great to see another point of view from a different location. What are your thoughts on the current market, should someone in your area be investing in buy and hold? or should they wait? -- any techniques or things to consider if one was going to purchase buy and hold now in your area?
If I do not purchase another property (multiplex) in the next 6 months it will do 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.
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
I heard the same story before during 2005-2007 that home prices in San Diego would never fall but we all know what happen in 2009-2012. In fact, home prices in California has been busted many times in the last 40 years. I can tell you for sure the wages are not increasing and the flight of high paying jobs are increasing . what I can't tell you if the home prices would go down or now but my gut feeling is it's a matter of when not if.
- 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Dpak Dewan:
Originally posted by @Dan H.:
Originally posted by @Ricardo R.:
@Dan H. thank you Dan, it's always great to see another point of view from a different location. What are your thoughts on the current market, should someone in your area be investing in buy and hold? or should they wait? -- any techniques or things to consider if one was going to purchase buy and hold now in your area?
If I do not purchase another property (multiplex) in the next 6 months it will do 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.
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
I heard the same story before during 2005-2007 that home prices in San Diego would never fall but we all know what happen in 2009-2012. In fact, home prices in California has been busted many times in the last 40 years. I can tell you for sure the wages are not increasing and the flight of high paying jobs are increasing . what I can't tell you if the home prices would go down or now but my gut feeling is it's a matter of when not if.
If you are indicating that there are short-term down cycles I indicated this was the case and it is undeniable. But it is also undeniable that for any current duration San Diego financed residential buy and hold has out performed inflation, national RE ROI, and any residential buy and hold RE area if the area is only using the cash flow (there are some locales that have had good appreciation and good cash flow and I exclude these locals because they have had the good appreciation). It does not matter if you use 1 year, 3 years, 5 years, ... 50 years. Why has this been true for at least 50 years? Supply and demand plays a role. The supply is limited the demand is not.
>the flight of high paying jobs are increasing
San Diego median income has risen this decade. I do not believe San Diego has had a single year of decrease this decade. It is unclear to me if you are indicating California or San Diego in your comment but if you are indicating San Diego the median income numbers do not reflect a flight of high paying jobs. I work in tech and I can state that we have a hard time filling our openings with qualified candidates. If there were more tech jobs they would be real hard to fill. Many large corporations with offices in San Diego are importing engineers (Qualcomm for instance imports many engineers). I also cannot think of a high paying company leaving San Diego in recent years but I am sure it has happened (but not often).
- San Diego, CA · Member since 2016 · 3 posts · 0 votes9y
Qualcomm is moving tons of jobs out of San Diego to India. Their main competitor are from Asia and they can't compete on cost basis with head counts in San Diego.
I work in Hi-Tech and I am first hand seeing flight of jobs paying $120K+ and I can see it's just a start: Outsourcing along with AI/Automation would obliterate jobs from high cost center like San Diego.
Many companies are replacing $120K job with cheaper workforce paying 50%.
Also, these are my first hand experience.. Let's see where does the median home price stands wrt median income and what's the affordability.
Real Estate has crashed many times in California. Every-time, the reasons were different but the effect was same. I am not making any statement but just stating what has happened before and what is happening in front of me w.r.t high paying jobs.
Also, we all know that the current home appreciation is not because of wage increase but because of massive money by FED and free credit.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes9y
You won't see cash flow in SD right now. I'm in LA and the same thing up here. There's not much way around it. The only thing you could try to buy for there is appreciation, but as you mentioned about where prices are right now, it's hard to say what that would/could look like too.
Your options really are:
- wait until another bust cycle (not recommended)
- buy with hopes of appreciation (risky)
- buy out-of-state where you can get cash flow (not everyone likes this idea)
It's a bummer...I feel the same way about things in LA. I'd love to buy here but have resorted to out-of-state for now.
- Real Estate Investor · Milford, NE · Member since 2011 · 201 posts · 140 votes9y
It must be hard to be so passionate about something and not being able to make it work close to where you live. There are so many deals out in the midwest that we take it for granted.
I don't know if I'd be interested in investing full time if I could only look at my portfolio by flying across country.
Are there NO areas of San Diego that will cash flow a little? Even in the crappy neighborhoods? Or inland? Hows Imperial Beach or El Cajon?
Excuse my ignorance, I live in NE
- Real Estate Broker · Temecula, CA · Member since 2014 · 992 posts · 782 votes9y
Have you given some thought to investing in Temecula? It is not that far and a has a lot of commuters to San Diego at a fraction of the cost. For Example, you could buy highly upgraded 3600 SF house with a view and pool for $569000. THis is currently renting for $3500.
You could also buy a nice 4 bedroom house for 450000. Excellent schools, Low crime, Great rental market, Good cash flow depending on if you buy in high tax area or not. Appreciating and growing area.
I sold one san diego house to buy 3 in Temecula a few years back. I ended up with an extra $1500 in rent monthly. It's worth researching.
- Real Estate Agent · Louisville, KY · Member since 2015 · 25 posts · 6 votes9y
I have multiple clients who buy and hold properties here in Louisville. They usually fly in for the weekend for California You can buy apartment buildings for $200,000 here.
- Fresno, CA · Member since 2015 · 552 posts · 181 votes9y
Originally posted by @Ying Gong:
San Diego housing price is at and above pre-recession level. I am wondering whether the timing is not right to enter market for buying and holding (for rent) when positive cash flow seems generally challenging. It seems to be risky to expect further rise in property value as objective. I like to hear some thought on this.
I think long term buy and hold is good in San Diego. Especially if you can find cashflow. What areas are you looking at? I love the beach areas but it's difficult to find anything near cash flow.
I don't think property values will rise too much with interest rates going up soon. But if there is true inflation then property could rise. But so will all other costs.
- 9yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Dpak Dewan:
Qualcomm is moving tons of jobs out of San Diego to India. Their main competitor are from Asia and they can't compete on cost basis with head counts in San Diego.
I work in Hi-Tech and I am first hand seeing flight of jobs paying $120K+ and I can see it's just a start: Outsourcing along with AI/Automation would obliterate jobs from high cost center like San Diego.
Many companies are replacing $120K job with cheaper workforce paying 50%.
Also, these are my first hand experience.. Let's see where does the median home price stands wrt median income and what's the affordability.
Real Estate has crashed many times in California. Every-time, the reasons were different but the effect was same. I am not making any statement but just stating what has happened before and what is happening in front of me w.r.t high paying jobs.
Also, we all know that the current home appreciation is not because of wage increase but because of massive money by FED and free credit.
Your perspective on the hi-tech employment opportunities in San Diego does not match my perspective. The facility I work at has been hiring 20-30 employees a month and cannot fill our need with ideal candidates. We lost 5 engineers in the last month. The most recent loss got a 20% raise for leaving.
Qualcomm publicly has advocated for increasing H1B visas because they traditionally have issues hiring hi-tech employees. My perspective is that they advocate for more H1B visas in an attempt to keep salaries down rather than pay what the supply and demand would dictate if it were not 85,000 H1B visas every year.
Regardless of our differing perspectives on the job outlook, median income in San Diego has risen this decade and our buy n hold properties have increase faster than inflation going back 1 year, 3 years, 5 years, ..., 50 years. Any short term decline has always been recovered.
- Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes9y
@Dan H. Thanks for sharing your buy and hold experience, specifically the numbers for how properties appreciated, after 20% market declines. I've tried to explain this to many people who say bad things about investing in California. Now, instead, I just agree with them that this is a horrible place to invest. Wink, wink, nudge, nudge.
- Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes9yI live in sam@n diego and love it. When I decided to get into real estate I almost started here (as most people do -- start where you live). But the returns were terrible. The amount of rent you could get in relation to the property cost was terrible. Deciding to go to houston for rental properties was the best decision I ever made. I now have 1000+ units and $700k+ of rent roll. If I bought in San Diego I might have a dozen or so units and be no where near as secure as today. I have no problems with people that want to buy in San Diego. They're buying for appreciation and not cash flow. Nothing wrong with that -- to each their own. Just not for me.
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