San Diego house flippers... are you scared of these indicators?

12 Replies | San Diego, California

May 2018 YOY home sales down 6.1%

May 2018 YOY Months of unsold inventory up 11.5% (2.9 months of unsold inventory)

Still in a  relatively strong market and housing prices continue to go up but do these #s give you concern? 

Months supply of inventory will be important, when it starts to reach 6 months, that's when it really starts to turn into a buyer's market. A deal is still a deal wherever the market is. Right now as not much inventory has been available, as long as you priced your house well, the risk of the investment is lower being in a seller's market. Lower risk generally translates into a lower return. As it becomes riskier for flippers to buy in, it will sweat some flippers out of the market because of higher risk. However higher risk generally translates to higher returns as long as you are buying the properties correctly.

I have been looking forward to a market correction. We've had the luxury for a while of having a very short supply of housing for a while. Buy and hold investing is ultimately the better way into long term wealth building. Flipping is a great way up front to build capital quickly. I always advise my fix and flip investors to begin having vision beyond flipping and eventually transition into holding real estate long term.

@Jonathan Phillips working with your company have you seen fix and flips slow down in last three months or increase? 

I think also a good time to still buy and hold in many situations in San Diego especially if you can take advantage of good loan program like FHA.

@Ellis Hammond I have not noticed too much of a slow down. We have stayed between 10-15 deals closed each month for 2018. I've seen a slight uptick of deals with value add potential or buy and holds. 

We are still anticipating a market correction will begin to open the door for more attractive deals for our buy and hold buyers.

I am concerned, tariffs, rising rates and affordability around 26% to me are all indicators of trouble. I'm taking on deals with lower exit values and large spreads to ensure flexibility on price and more available buyers. Staying liquid is important. 

@Jonny Phillips are buy and hold investors you work with lowering their criteria as far as returns go aka playing appreciation > cash flow?

The only way I see buy and hold working currently is if you can move into a unit through FHA or VA type loans (which is what I'm doing)

@Tim G. you are a beast in our market my brother. Love to connect more. I’m with you in that I’ll be ready to pounce when the time comes.

Originally posted by @Ellis Hammond :

@Jonny Phillips are buy and hold investors you work with lowering their criteria as far as returns go aka playing appreciation > cash flow?

The only way I see buy and hold working currently is if you can move into a unit through FHA or VA type loans (which is what I'm doing)

@Tim Gordon you are a beast in our market my brother. Love to connect more. I’m with you in that I’ll be ready to pounce when the time comes.

 @Ellis Hammond I appreciate the kind works. I consider myself more of a tortoise, slow and steady. But they're beastly in their own way. 

I am hoping for a more flat response to the current market conditions but preparing for a drop if it were to occur. I graduated college in 2008 and moved to California during what is now only compared to the great depression. This makes me feel like emotionally I share a lot of traits with those grandparents who used to hoard items due to the pain they experienced during the depression. Paranoia and excessive fear of an impending crash. But the expectation of that occurring and us all being able to scoop up properties doesn't feel possible. If we're all waiting for the crash to buy, who is going to start moving in to purchase and at what discount on today's prices. 

I'm not sure that is necessarily going to happen again, drops and flat spots are likely. Massive implosions of markets I'm not so sure, if anything is first to go I think its the stock market. The way migration seems to be going it looks to me like the small towns will become the next ghost town and the major metropolitan markets will continue to have strong values (even if they drop) with demand being so high to live in these desirable places. 

Regardless, in the now. Yes I see a slow down, buying on speculation or even on current ARV's is risky and there should be a cushion in case some quick reductions are needed to get out of a deal.

love that illustration @Tim G.

And many of those thoughts is why I posed the question originally bc I still see and read from others stability in our market.

I personally am interested In purchasing 2-5 more units over the next 2 years. Mostly bc I want to take more advantage of my season of life than the market but also agree that regardless of what happens to next 2-3 years the San Diego market will only go one direction the next 30 years... ^^^^^^^

Originally posted by :

The only way I see buy and hold working currently is if you can move into a unit through FHA or VA type loans (which is what I'm doing)

How would you define "working" in this context?

So you can reference specifics, I scrambled the real numbers on an actual proforma for a property in the image below.  What metrics are you looking at to decide whether an investment in this property would "work" for buy and hold?

@Justin R. so if you rented out the studio tomorrow you would have a 6%+ CoC return? (thats one thing i look at to see if its working). I think that looks like a working deal to me.

A little confused to what the 180K went to if you moved into this property. Maybe you put 20% down and did renovations? 

Rents also look low for San Diego or at least where I look at property so at first glance this deal looks pretty sweet. 

Location is also important for me here in SD. Where is the area going? Would I want to live there. 

Im assuming you have done multiple deals here in SD... what was your play on this? is this your current place?

Originally posted by @Ellis Hammond :

@Justin R. so if you rented out the studio tomorrow you would have a 6%+ CoC return? (thats one thing i look at to see if its working). I think that looks like a working deal to me.

A little confused to what the 180K went to if you moved into this property. Maybe you put 20% down and did renovations? 

Rents also look low for San Diego or at least where I look at property so at first glance this deal looks pretty sweet. 

Location is also important for me here in SD. Where is the area going? Would I want to live there. 

Im assuming you have done multiple deals here in SD... what was your play on this? is this your current place?

The play here was that the studio didn't exist when I bought it, and it required capital to make that happen (legally, which I've found is required if you want to refi out the capital right away).  And, yes, the rents were low.  This particular property is in 92105.

The other thing that's not shown here (that I intentionally removed prior to posting) that many people don't think about is the distinction between Operating Cash Flow (cash available from operations) and Free Cash Flow (cash available for distribution after re-investing in the asset) ... as well as the percentages for Cash-on-Cash, Earned ROI (including value of loan amortization), and Unearned ROI (including market-based change in value).

I was asking what you mean by "working for buy-and-hold" because I usually see people enter the market already restricted: has to be an area I want to live in ... only $X available to use out of pocket ... must be in a condition financeable for FHA ... must be an SFR ... has to have historical expenses available ... must already be a residential property ... whatever. Add on top of that financial metric restrictions and it feels more and more impossible. Wanted to see what your financial restrictions were.