Investing in San Diego

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Investing in San Diego

Brandon B.
Specialist · San Diego · Member since 2019 · 16 posts · 20 votes

Hey BP community. 

I am a 1031 exchange accommodator in San Diego and get to see quite a few of the transactions in San Diego county and am involved in a fair amount. 

As I give advice to clients, I always want to make sure it is as comprehensive as possible. I am going to list some facts I am seeing currently in the san diego market - and would love feedback from what others are seeing, as well as additional thoughts you may have.

San Diego real estate:

1. Between 2010 and 2017, 160,000 new jobs were added and population grew by ~8%.

2. Currently, an entire third of San Diego’s population consists of millenials, making it the second most millennial-populated city in the country.

3. San Diego has recently been in the top 10% nationally in terms of real estate appreciation. Since the crisis, San Diego real estate has appreciated by 55.37%. This puts the annual home appreciation average at around 4.5%. 

4. Short term vacation rentals have changed the dynamics, and pricing, of properties on or close to the water. From 2016 to 2017 allow, the short term rental market grew by 15.9%, and while I can't find info on 2018 or 19, I don't think it has slowed down

5. Downtown SD is having a tsunami of investment dollars being poured into it. $2 billion+ from Manchester developments, $1 billion+ on seaport village (including a proposed beach downtown), ~$800 million into Horton Plaza, plus a couple of $100 million dollar developments (such as ritz at 7th and market, and 3 similar developments I know of). Total developments in progress is $5-6 Billion.

6. Rent control has passed - but it seems to be a non factor with limiting rent increases to 8.1% this year, which most properties will not come close to.

7. House flipping is getting harder, but still possible in the right areas. Lots of hard money out there.

8. Since 2006, housing permits for new homes has been significantly below population growth - entering 2019 with San Diego having an estimated 59,000 shortage of dwelling units.

9. With 700,000+ square feet of class A office coming to downtown san diego, how difficult will they be to lease up?

I would love others feedback and thoughts!

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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
6y

@Brandon B.

10. Anecdotal (and CoStar, to some degree) data indicates downtown - and East Village in particular - is overbuilt on the Class A high end for rental product.  And, there's quite a bit more coming there.

11. The loosening of regulations (most significantly, Transit Priority Area parking) introduce real risk that mid tier urban rental rate growth outside of downtown will finally stagnate (or mildly fall?) as new units are brought to market in 2021 and on.  Projects that were not viable in 2018 are currently in permitting and will break ground in 2020.  Here I'm referring to 12-48 unit buildings.  As an anecdotal example, there is one 2 block stretch in North Park with no development in the last 30 years that I know has at least 120 new units coming in the next 24 months, across 3 projects, only because the TPA now makes it viable (I know because one of them is my project).  I would counsel heightened caution to anyone buying older 8-48 unit apartment buildings in the urban core - make sure you're covered if/when significant shiny new supply shows up on your street.

12. If 1031ing into smaller property, the ADU+JADU changes coming Jan 1 (bills AB68 and AB881) provide real opportunity. Rental rates for studio units are very high (+/- $1200 in working class areas, far higher elsewhere) and the ability to carve out a JADU out of existing square footage is both relatively inexpensive and a potential big boost to income and value.

13. STR regulations-to-come are a wildcard for property values and rental supply. @Dan H. alluded to this above.  That's a whole 'nother topic.  

I should add that I support the changes that should result in increased supply - they are good for our community and necessary for investor's long term success here (though the previous status quo has been a HUGE benefit to investors over the past 7 years).  We can't expect a vibrant and balanced local economy to continue without addressing our housing supply as well. 

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    6y

    #5) Going solely by my online tool estimates (Zillow and Redfin), our small STR duplex ~1 block from the beach has fallen substantially in value over the last ~2 years. The fall started when the city passed its anti STR regulations. When those regulations later got rescinded, the price bounced a little up but since has continued a slow decline. For example, ZEstimate has it currently at $1.2M. Around 2 years ago ZEstimate had it at $1.4M. I think the reduction reflects the increased risk of Anti STR regulations at both the city and state level.

    On the positive, it continues to achieve near 100% occupancy at rent prices that seem quite high.

    #3) The last 2 years of appreciation have been modest compared to 2011 to 2016.   Listing the appreciation over the entire period gives an impression of higher recent appreciation than what the near term reality indicates.  I suspect that the near term forward appreciation will be more in line with 2018 and 2019 appreciation than on par with 2011 to 2016 (i.e. modest appreciation).

    #6) This does not reflect the complete impact of rent control regulation.  Here are additional things to consider: 1) units that are below market rate 2) minor value add purchases that are short of requiring tenant to vacate for 30 days (most LL I have been communicating with believe that a significant kitchen remodel may be necessary to terminate lease due to a value add). 3) (this is the one that I find most impactful) Tenant termination is now limited to a few items such as uncorrected lease violations or rehabs significant enough that they mandate more than a month of vacancy.  I can no longer easily terminate a tenant for things like too much clutter, too noisy, bringing unauthorized pets in but getting rid of them when notified, etc.  I have great tenants because historically we do not tolerate much.  If they are below average quality, we get rid of them.  This may be a little more difficult now.

    I am still optimistic of the San Diego RE market for investors, but not nearly as optimistic as I was a few years ago.

    2Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y
    I agree, The control california has on the landlords is unconstitutional! The rent control will only make the properties become less available, and force rental increases every year even at 5-7%.  Im not sure what your question is but, my friend, between the prices, required cash to make them go and vulnerability with regulations, you (we) need to go out of state.  Oklahoma still works with nice cash flow!
    Dawn
    2Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y

    Brandon,
    Thank you for your responses. Are you a commercial specialist? I am a general contractor for SFR. Have been for 30 years. In this rental world I have not been able to pencil any rental properties that come my way. Are your clients monetizing properties?

    0Reply
  • Alyssa Dyer
    Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    6y

    @Dawn Matze I'm OK all the way! Curious what made you bring it up? Typically people bring up other cash flowing markets first.

    0Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y
    Hi Alyssa,
    What made me bring it up is that a good business friend (couple) took their Bay (Los Gatos, CA) area equity (1Mill) from a SFR and bought 4 duplexes in Oklahoma City  (Yukon) and is netting 10 K month positive cash flow, compared to his 3-4 K in CA.  This is extremely intriguing to me and so Im considering the OK city surrounding suburbs like Edmond and Yukon as my 2020 investment strategy. Any feedback is much appreciated.
    DAwn
    1Reply
  • Cassi Justiz
    Rental Property Investor · Edmond, OK · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    Hi @Dawn Matze, 

    I'm with Alyssa in the Oklahoma fan club. :) We see a lot of out of state investors, especially investors from California move into this market and have great success. Oklahoma has great options for out of state investors. You can get cash flowing investment property, 1%(ish) property taxes and Oklahoma is a super landlord friendly state. 

    1Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y
    Cassi
    Thanks for the confirmation. I really know nothing about OK except the small amount of looking for duplex, triplex Ive seen online.  Can you help with where I should start?
    Thanks
    Dawn
    0Reply
  • Micah B.
    Enid, OK · Member since 2017 · 4 posts · 2 votes
    6y

    What specific metrics are you looking for in a property? Are you set on a certain market in Oklahoma?

    0Reply
  • Kurt Michaelson
    Mustang, OK · Member since 2018 · 154 posts · 110 votes
    6y

    @Dawn Matze, @Cassi Justiz and @Alyssa Dyer have been very helpful in my short time here in the OKC market.

    2Reply
  • Alyssa Dyer
    Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    6y

    @Dawn Matze great to hear! Well, I'm happy to answer any questions about the market. Yukon is an A class play, lower cash flow than you can get in other areas but lower maintenance and surprises as well. Are you considering pursuing a similar strategy? 

    @Kurt Michaelson thank you for the shoutout! 

    1Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y

    So glad to see you work with investors. Can you give me a few examples? duplexes and tri’s? also is there much available right now?

    dawn

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    6y

    San Diego seems like it has a lot going for it. It would make sense the billions are being invested as the risk are probably very low compared. I know of out of staters that invest in SD and report back it is a breeze generally to manage. It is America's finest city so I guess the above is well known to investors already. Perhaps with Calif new adu law there might be some new opps for those who can construct those and add upto two additional units per sfr.  Good luck!

    0Reply
  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    @Brandon B.

    10. Anecdotal (and CoStar, to some degree) data indicates downtown - and East Village in particular - is overbuilt on the Class A high end for rental product.  And, there's quite a bit more coming there.

    11. The loosening of regulations (most significantly, Transit Priority Area parking) introduce real risk that mid tier urban rental rate growth outside of downtown will finally stagnate (or mildly fall?) as new units are brought to market in 2021 and on.  Projects that were not viable in 2018 are currently in permitting and will break ground in 2020.  Here I'm referring to 12-48 unit buildings.  As an anecdotal example, there is one 2 block stretch in North Park with no development in the last 30 years that I know has at least 120 new units coming in the next 24 months, across 3 projects, only because the TPA now makes it viable (I know because one of them is my project).  I would counsel heightened caution to anyone buying older 8-48 unit apartment buildings in the urban core - make sure you're covered if/when significant shiny new supply shows up on your street.

    12. If 1031ing into smaller property, the ADU+JADU changes coming Jan 1 (bills AB68 and AB881) provide real opportunity. Rental rates for studio units are very high (+/- $1200 in working class areas, far higher elsewhere) and the ability to carve out a JADU out of existing square footage is both relatively inexpensive and a potential big boost to income and value.

    13. STR regulations-to-come are a wildcard for property values and rental supply. @Dan H. alluded to this above.  That's a whole 'nother topic.  

    I should add that I support the changes that should result in increased supply - they are good for our community and necessary for investor's long term success here (though the previous status quo has been a HUGE benefit to investors over the past 7 years).  We can't expect a vibrant and balanced local economy to continue without addressing our housing supply as well. 

    4Reply
  • Brandon B.
    OP
    Specialist · San Diego · Member since 2019 · 16 posts · 20 votes
    6y

    @Dawn Matze

    The only SFH deals being purchased, as rental investments, I see that make any sense - are those where ADUs are being added or where there is a deep value add component.

    Almost every investment property of four units or less has multiple offers as soon as it is marketed.

    I see more value in properties that are over four units, mostly because it is a different type of loan and therefore reduces some of the competition.

    I really believe the growth San Diego is experiencing makes it a great place to invest, but you just have to be careful and can't just buy anything today. There are good deals out there, but many of them are being found though relationships rather than the MLS.

    0Reply
  • Dawn Matze
    Contractor · Carlsbad, CA · Member since 2017 · 19 posts · 7 votes
    6y
    Yes I agree Brandon! Furthermore SD is a beautiful, wonderful place but the more I look for investments (over 5 units) the competition is fierce, Owners dont care about whether the cash flow works or not. They will sit on the price and wait. Wait for the 'funny money' buyer in a 1031 exchange and then evaluate it based on vaca rental income which is always a threat in the municipality it resides. Often it doesnt pencil about 90% of the time. Your thoughts Brandon Burns?
    0Reply
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