Opportunity in Luxury Home prices in San Diego?

16 Replies | San Diego, California

Hi All,

New to BP and my first post. I'm a relatively young buck (28) who has been focused on the equity markets to build my capital over the past few years. I've worked for a real estate private equity firm specializing in SFRs and worked for a hard money lender in the same space. So I've been around the industry but don't own any physical property at the moment. I'm looking to jump into the SD market with a house-hack type setup, but as we all know, finding good value in SD is quite difficult. I understand value is a subjective term, but from what I'm seeing we're basically speculating that current prices will continue to move higher. I think that's an aggressive assumption given the current point in the cycle, but I digress. Not too much cash flow positive properties in SD these days (or ever?). 

Anyhow, an investment theme I've been watching is the dichotomy between entry level home prices and premium homes a.k.a "luxury homes". Since 2008 there has been a lack of housing supply that has been pushing entry level home prices ever higher. I assume this is where most RE investors are competing. However, due to limited land, rising labor costs, etc. home builders have been pumping supply in the premium home market while demand has been relatively stable. I've been reading articles lately that are showing the beginning of a supply glut in the premium home market (although the articles were mainly focused on east coast prices). My guess is that there is much less competition in the premium home space due to the higher capital requirements.

So ultimately my question is: do any local SD investors see any value in house-hacking a premium home, or even just renting it out completely like a normal LT rental? I'm seeing cap rates that are ~3.5% ($850K+) versus 1.5-2% cap rates in lower priced homes ($750K and below). My PE firm focused on properties in the $850 rent range in places like DFW, Cinci, Etc. so I'm not too familiar with the premium market, but it seems like there's better value in buying an SFR at 3.5% located west of the 5 and trying to house-hack it or LT rental. Any thoughts or advice would be appreciated.

P.S. I grew up in RB but just moved to Leucadia and I'm focused on coastal cities with strong demographics and long-term value appreciation (and maybe cash flow?).

Lower priced homes can have cap rates in the mid 4% range if you self manage for some San Diego suburbs as well as many parts of LA, those results are definitely achievable in the Inland Empire.  High end rentals are doing well now but can be tougher to rent in a down economy because people who have intentions of staying long term buy and those that are just passing through do a bit of belt tightening.  Can it be done? maybe. Is it the best from a math standpoint even in SD? Probably not

Hi @Daniel Fas , welcome to BP.

The majority of our investors who buy in luxury areas are looking to flip properties way more than they are looking for long term rentals.

Example: We currently have a property in Del Mar that we need to sell.  We are asking $1,535,000. After approx 100k in basic upgrading, we expect the after repair value to be near $1.9 mil. 

House hacking in this price range could prove to be risky. The pool of buyers in the luxury market is much smaller. And as you know, hard money isn't cheap. 

Getting a rental property to cash flow in SD is possible; just usually requires a large down payment.

Our investors flip properties until they have enough capital to make a multi-unit property purchase. That's when you'll be closer to finding the cap rates you're ultimately looking for.  

I'd consider house hacking with properties you know will have better chance of selling quickly. SFR's in established areas and 2-4 units almost anywhere in SD county. Best of luck Sir!

@Aly Vizcarra, @Aaron Klatt I appreciate the feedback. 

It seems like the premium market is not optimal from a rental standpoint. Another option I was thinking about was just to sit on a premium property and wait for the appreciation to accumulate before flipping it. I saw a property listed in Leucadia for ~$870K west of the freeway and was thinking that's a prime location for long-term capital appreciation. Anyhow, it looks like the Inland Empire and other suburban areas like you guys mentioned are where the opportunities are for. Thanks again for the feedback.

Originally posted by @Aly Vizcarra :

Hi @Daniel Fas , welcome to BP.

The majority of our investors who buy in luxury areas are looking to flip properties way more than they are looking for long term rentals.

Example: We currently have a property in Del Mar that we need to sell.  We are asking $1,535,000. After approx 100k in basic upgrading, we expect the after repair value to be near $1.9 mil. 

House hacking in this price range could prove to be risky. The pool of buyers in the luxury market is much smaller. And as you know, hard money isn't cheap. 

Getting a rental property to cash flow in SD is possible; just usually requires a large down payment.

Our investors flip properties until they have enough capital to make a multi-unit property purchase. That's when you'll be closer to finding the cap rates you're ultimately looking for.  

I'd consider house hacking with properties you know will have better chance of selling quickly. SFR's in established areas and 2-4 units almost anywhere in SD county. Best of luck Sir!

 Send me info on that flip.  I'd love to flip again as that's how I got started (flipping in Houston to get money to fund my multifamily).  But there is no desire to flip unless it's a $1m+ deal that has $100k+ of profit to be made.

@Cody L. The property in Leucadia I was referring to wouldn't be a good flip opportunity. It's turnkey, recently remodeled and ready for an owner-occupant. So not much value add in the short-term. I'll keep my eyes open though and if I see anything I'll send them your way.  

Originally posted by @Daniel Fas :

Hi All,

...

Not too much cash flow positive properties in SD these days (or ever?). 

...

 I question how many San Diego county buy n hold investors with at least 5 years experience agree with this statement.  It would be an interesting poll.  I will state that I never see a veteran San Diego buy n hold RE investor that has indicated this to me nor have I seen such a post on BP.  The people that post about poor San Diego cash flow either do not have investments in San Diego or are new to the San Diego market. 

Our San Diego RE cash flow is great.  

Originally posted by @Dan Heuschele :
Originally posted by @Daniel Fas:

Hi All,

...

Not too much cash flow positive properties in SD these days (or ever?). 

...

 I question how many San Diego county buy n hold investors with at least 5 years experience agree with this statement.  It would be an interesting poll.  I will state that I never see a veteran San Diego buy n hold RE investor that has indicated this to me nor have I seen such a post on BP.  The people that post about poor San Diego cash flow either do not have investments in San Diego or are new to the San Diego market. 

Our San Diego RE cash flow is great.  

 I have 11 years of exp, and am in the "San Diego is an awesome place to invest, ifyou don't care about cash flow".  I don't look all that much, because I've already looked a lot.  I've never seen a deal that makes even a little bit of sense.

I wish it were not true as it would be cool to have something close to home. 

Now I want to find that last deal sent to me.  A 17 unit in La Mesa I think.  Something like $350k/door for $1,100 rents.  That's crazy.   The last deal I bought in Houston, in a super hip area, was $70k/door and I get $950/month rents.   And even though I bought it only a few years ago, it's appreciated enough where I did a refi, got 100% of my initial cash out + some more.  So now I own this 40 unit w/o any of my own money it in and it throws off major cash.   I'd have loved to do that in SD.  The deals just are not there.  Or at least no one has sent me one.  If you know of one, let me know. 

Originally posted by @Aaron K. :

@Dan Heuschele my guess would be that you bought your cash flowing San Diego properties at least a few years ago which is why they cash flow.

 My last purchase was late last year.  We have made purchases regularly including near market highs and near market lows.  Every San Diego purchase has out performed our 2 OOS investments but one of our OOS RE had some Mother Nature misfortunes.  

Certainly investors with at least 5 years of San Diego buy n hold will have purchases from at least 5 years ago otherwise they would not have 5 years of San Diego buy n hold experience.  

Five years ago I was hearing the same thing about OOS cash flow versus San Diego cash flow.  How many of those OOS higher cash flow purchases from 5 years ago do you think have higher cash flow than my San Diego purchases from that same time frame?  I suspect very few. 

Add in the value gain from market appreciation and San Diego has historically produced very good returns. 

I suspect 5 years from now many San Diego OOS investors will wish they had purchased in San Diego. 

@Dan Heuschele I have no doubt that San Diego is a good market over the long term.  However for immediate cash flow which many investors are seeking most of the properties that I've seen would require a larger than normal down payment, or forced appreciation that will just eek out some cash flow after expenses.  You could be finding properties off market and getting them at a steep discount but I can't say for sure.

Originally posted by @Aaron K. :

@Dan Heuschele I have no doubt that San Diego is a good market over the long term.  However for immediate cash flow which many investors are seeking most of the properties that I've seen would require a larger than normal down payment, or forced appreciation that will just eek out some cash flow after expenses.  You could be finding properties off market and getting them at a steep discount but I can't say for sure.

Your view is exactly what many were thinking 3, 4, or 5 years ago. Those purchases likely have outstanding cash flow today. Do you know the average apartment rent in San Diego has gone up over $500/month in the last 5 years and that the average San Diego SFR rent has gone up almost $500/month in the last 3 years?

You can always find a reason not to buy: poor cash flow, interest rates are too high, prices are falling, prices have risen too much, prices are too high.  

We especially look for easy forced appreciation to do a BRRRR process. If you have very little invested in a property (after BRRR) then even "eeked" out cash flow is fine. I also suspect this small cash flow is greater than the actual cash flow you would receive on the average low priced Midwest property.

Do you know what the average market appreciation for the average San Diego SFR has been for the last 5 years? Recently when I looked it was $152k. Do you know how long it would take the average Midwest high cash flow SFR to achieve $152k? If you go bachwards in time (the only direction that we know) it would take over 50 years.

Good luck.  

Originally posted by @Daniel Fas :

@Aly Vizcarra, @Aaron Klatt I appreciate the feedback. 

It seems like the premium market is not optimal from a rental standpoint. Another option I was thinking about was just to sit on a premium property and wait for the appreciation to accumulate before flipping it. I saw a property listed in Leucadia for ~$870K west of the freeway and was thinking that's a prime location for long-term capital appreciation. Anyhow, it looks like the Inland Empire and other suburban areas like you guys mentioned are where the opportunities are for. Thanks again for the feedback.

 This sounds good until it isn't. 

Originally posted by @Aly Vizcarra :

Hi @Daniel Fas , welcome to BP.

The majority of our investors who buy in luxury areas are looking to flip properties way more than they are looking for long term rentals.

Example: We currently have a property in Del Mar that we need to sell.  We are asking $1,535,000. After approx 100k in basic upgrading, we expect the after repair value to be near $1.9 mil. 

House hacking in this price range could prove to be risky. The pool of buyers in the luxury market is much smaller. And as you know, hard money isn't cheap. 

Getting a rental property to cash flow in SD is possible; just usually requires a large down payment.

Our investors flip properties until they have enough capital to make a multi-unit property purchase. That's when you'll be closer to finding the cap rates you're ultimately looking for.  

I'd consider house hacking with properties you know will have better chance of selling quickly. SFR's in established areas and 2-4 units almost anywhere in SD county. Best of luck Sir!

Currently I have a Luxury home in South FL / Weston FL - Fix & Flip Opportunity Asking $6.5M / Rehab $1M Est. / ARV $11M / AS IS Appraisal Value $10.2M - I Come across luxury homes in Fl & Cali Mainly and would love to work with you and your buyers if interested in this current deal or any future deals I may come across.