Investing in San Diego suburbs or OOS?

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Investing in San Diego suburbs or OOS?

Li Lu
New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes

Hi folks, I'm new to RE investing and plan to purchase my first rental property. I live in the city of San Diego. I'm looking for both appreciation and cash flow. Looks like I may not be able to afford properties in the city, as I only have $50-70k for down payment for now. I'm wondering whether it makes more sense to consider some of the affordable suburbs (e.g., Escondido, Santee) or out-of-state areas?

Any advice would be greatly appreciated!

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
5y
Originally posted by @Doug Spence:
Originally posted by @Li Lu:

@Doug Spence Thank you for weighing in. Do you mind elaborating on the tenant friendliness point? Apart from the COVID-related rent moratorium, what other policies make SD tenant friendly (and meanwhile landlord unfriendly)? Would setting a higher tenant selection criteria help lower risks of conflicts?

I'm speaking more towards California as a whole. The landlord-tenant laws make it more challenging to evict tenants than in other states that are more landlord-friendly (Southern states tend to be more landlord-friendly). 

Stricter tenant criteria would definitely help, but you're reducing the total pool of tenants you can rent to if you do that. Also, you have to be careful not to violate any discrimination laws!

Have you had rentals in San Diego?   The reason I ask is not because I disagree with your comment but do not view it as a significant impact.  The reason is the vacancy rate is so low that tenants with a blemish find it difficult to rent c class and above. 

Our rental criteria eliminates anyone who has been evicted, any one who has a rent payment blemish on their credit report, anyone that does not get a favorable review from all landlords they have had in previous 5 years, anyone that has moved more than once prior in the previous 5 years.   We can set this criteria due to the very low vacancy rate. 

The stats show CA has one of the lowest eviction rates in the country (depending on source 5th to 7th lowest).  Related, It has one of the lowest missed payment rates in the country.  

I believe San Diego is lower than the state as a whole because the vacancy rate is lower than the state as a whole.  

Problem tenants are rare in San Diego especially if the LL screens well.  Problem tenants can usually only rent the worst units available (class d units).  

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Li Lu having investments here and OOS I prefer local as the overall returns have been much better for me. However with that amount of capital it will go a long way if you are willing to owner occupy or house hack to start otherwise you can look into a condos with 20% down (minimum required for an investment)

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  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
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    Hi Li! Do you plan on occupying the property? If so, your options definitely open up in terms of minimum down payment requirements which are much higher for non-owner occupied loans. Buying a multifamily property such as a duplex or triplex would be a smart move in San Diego. With an FHA loan, you can put as little as 3.5% down for a duplex.

    San Diego is the third highest appreciating area in the nation. Home prices here rose 9% since last year and are projected to increase over 8% next year, compared to the national average of 4%. Out of state investments might offer you cash flow (which is taxed as income), but you won't find the type of appreciation we have in San Diego.

    Hope this helps!  

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  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y
    Originally posted by @Twana Rasoul:

    @Li Lu having investments here and OOS I prefer local as the overall returns have been much better for me. However with that amount of capital it will go a long way if you are willing to owner occupy or house hack to start otherwise you can look into a condos with 20% down (minimum required for an investment)

    Thank you Twana. Yes I'm aware of the high property prices even in relatively affordable areas of SD county.

    My cash would double in the next 6 months after another investment matures. Do you think it's worth waiting until then to invest in local properties?

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  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y
    Originally posted by @Sherry Chen:

    Hi Li! Do you plan on occupying the property? If so, your options definitely open up in terms of minimum down payment requirements which are much higher for non-owner occupied loans. Buying a multifamily property such as a duplex or triplex would be a smart move in San Diego. With an FHA loan, you can put as little as 3.5% down for a duplex.

    San Diego is the third highest appreciating area in the nation. Home prices here rose 9% since last year and are projected to increase over 8% next year, compared to the national average of 4%. Out of state investments might offer you cash flow (which is taxed as income), but you won't find the type of appreciation we have in San Diego.

    Hope this helps!  

    Thank you Sherry for your reply. I already bought my primary residence SFH, so the investment property would not be owner occupied.

    I totally agree with your assessment. If I invest locally, I'd be mainly expecting appreciation. Just hope to have at lease non-negative cash flows.

    Since you mentioned tax, would OOS rental income be essentially tax-free in most cases considering all the costs (mortgage interest, depreciation, etc.)? I'm asking this because that's the case for most owner-occupied rentals; not sure if the same rule/law applies to OOS.

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  • Twana RasoulBusiness Member
    Real Estate Agent · San Diego, CA · Member since 2017 · 1k+ posts · 1k+ votes
    5y

    @Li Lu I would say it would be better to wait and invest locally, investing OOS has its own challenges...OOS properties might have better initial cashflow but it does not mean they have better overall cashflow.  My local investments started out a little on the negative side but through rent appreciation after a few years my cashflows are better than my OOS investments and in that same period made much more through appreciation locally than I could ever in my OOS properties...I'd suggest waiting until you have more capital in 6 months or so

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  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Twana Rasoul  Thank you for sharing your experience!

    1Reply
  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
    5y
    Originally posted by @Li Lu:
    Originally posted by @Sherry Chen:

    Hi Li! Do you plan on occupying the property? If so, your options definitely open up in terms of minimum down payment requirements which are much higher for non-owner occupied loans. Buying a multifamily property such as a duplex or triplex would be a smart move in San Diego. With an FHA loan, you can put as little as 3.5% down for a duplex.

    San Diego is the third highest appreciating area in the nation. Home prices here rose 9% since last year and are projected to increase over 8% next year, compared to the national average of 4%. Out of state investments might offer you cash flow (which is taxed as income), but you won't find the type of appreciation we have in San Diego.

    Hope this helps!  

    Thank you Sherry for your reply. I already bought my primary residence SFH, so the investment property would not be owner occupied.

    I totally agree with your assessment. If I invest locally, I'd be mainly expecting appreciation. Just hope to have at lease non-negative cash flows.

    Since you mentioned tax, would OOS rental income be essentially tax-free in most cases considering all the costs (mortgage interest, depreciation, etc.)? I'm asking this because that's the case for most owner-occupied rentals; not sure if the same rule/law applies to OOS.

    I'm not a CPA but based on my own research, all the income you earn regardless of where you earned it, is taxable by the state that you reside in. Additionally, the state in which your investment is located can also tax your income. There may be ways to earn a credit to avoid being "double taxed" and I'd suggest that you speak with a CPA experienced with OOS investments if you were to go down that route. 

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  • Mark Frattini
    Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes
    5y

    Hi @Li Lu,

    Whenever possibly it's best to try and find something within driving distance from you. If you are not able to find something locally then look into investing out of state. Either way make sure you run ALL the numbers and choose the one with the best return. A lot of newer investors find success in house hacking, purchasing a small multifamily, short term rentals or doing a live in flip. All of these are possible in San Diego. Let me know if there is anything I can do to help.

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  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Sherry Chen Thank you for bring up the double taxation issue. Looks like CA residents can claim this tax credit for income from most states.

    1Reply
  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Mark Frattini Appreciate your advice! Local investing does seem to make more sense to me now.

    0Reply
  • Maxwell Ventura
    Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
    5y

    @Li Lu

    You're on the right track. To get the best return on your money I'd suggest going the house hacking route. 

    Housing hacking w/ little to no money down in a duplex OR SFR w/ a value ad play is a great option here in San Diego right now w/ the current state of the market. Taking advantage of one of SD's best qualities -> Appreciation and a much higher return on your initial investment when coming in w/ little $ down.

    In regards to location, there's a much larger portion of small multifamily properties all throughout the metro area and South Bay. Oceanside, Carlsbad and Vista are also areas with opportunity in North County.

    You have the ability to leverage yourself in a very favorable position w/ low money out of pocket and have a portion of mortgage paid by a tenant(s) while your home continues to appreciate. Not only that, value add's are a hot commodity here and it's easier to force appreciation than most places. 

    Lastly, I would encourage you not to put too much emphasis on cash flowing as soon as you move out. The few hundred dollars in cash flow will be insignificant to the growth of your return via SD's stellar appreciation. SD actually has great rental cash flow, just not INITIAL cash flow. Avg annual rent increases are between 3-4% and an increasing rental market will follow along the same trajectory as an appreciating market. 

    This is much better grasped on a spreadsheet when looking at total return (cash flow, appreciation, tax savings, principal paydown) over time. 

    Hope this helps.

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  • Alice Huang
    Investor · Austin, TX · Member since 2020 · 223 posts · 83 votes
    5y

    Hey Li, 

    Welcome to BP! Are you familiar with the BRRRR strategy? Would BRRRR be a possibility for you locally in SD?

    In terms of OOS, it also really depends on how comfortable with the idea of OOS.  Currently, I am residing in Montreal and invest in San Antonio, Texas. Was living in Austin prior to Covid.  My business partner and I will most likely continue to invest in Texas even if we don't reside in Texas in the future.  We strongly believe in the future of Texas.

    Good luck,

    A

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  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Maxwell Ventura Thank you for your input. I already bought my primary residence SFH in SD, so house hacking might not work for me. But I agree with you on the bullish prospect of SD market's appreciation potential. The initial vs overall cash flow perspective is interesting. With various industries (except tech) suffering from COVID-19, do you still expect rent in SD to increase in the near future (1-2 years)?

    @Alice Huang Thank you for the suggestion and sharing your OOS experience in TX. I'm for sure interested in BRRR investing, but as a novice I'm more inclined to start with the buy-and-hold strategy.

    0Reply
  • Maxwell Ventura
    Real Estate Agent · San Diego, CA · Member since 2016 · 308 posts · 173 votes
    5y

    @Li Lu 

    Yes rents will continue to increase along the same trajectory of an appreciating market. The main exception to this right now (and possibly into the near future) is downtown. Inventory is a bit healthier in 92101 and the condo/townhomes are competing w/ the numerous highrise apartments for rent. 

    Since CoVID, rents have actually dropped slightly downtown, but not by much. Mainly due to overall higher supply. I suspect (with my crystal ball), rents will continue to increase after CoVID settles down and people start to migrate back downtown again. SD County inventory overall is scarce, and there are numerous downtown development projects ongoing and slated over the next 5 years, brining in a lot of high paying careers. 

    Hope this helps!

    0Reply
  • Alice Huang
    Investor · Austin, TX · Member since 2020 · 223 posts · 83 votes
    5y

    @Li Lu

    BRRRR is a buy and hold method, but with minimal out of pocket.

    0Reply
  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
    5y

    The demand in San Diego is strong. The top sectors of San Diego’s economy include a burgeoning tech scene (hello Apple and Amazon), military (which is never going anywhere), and biotech which is stronger than ever before. I work with clients on a day to day basis who are moving from the Bay Area or Seattle who are looking to move here. Rents will continue to rise in San Diego due to overwhelming demand. 

    1Reply
  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Maxwell Ventura Thank you for sharing the market info. @Alice Huang

    @Alice Huang Thank you for clarification. I was trying to say I'm lacking rehab experience. So for the 1st rental property it might be easier for me if it doesn't require extensive renovation.

    @Sherry Chen Thank you. Your analysis makes sense to me.

    1Reply
  • Zach CumminsPro Member
    Real Estate Agent · Carlsbad, CA · Member since 2017 · 53 posts · 68 votes
    5y

    @Li Lu That’s exciting you’re ready to invest in real estate! Are you already a homeowner? Always good to look at all your options with investing whether locally or out of state. 👍🏼

    1Reply
  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Zach Cummins Thank you for your reply. Yes I already have a primary residence home in SD.

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  • Jim Dean
    San Francisco, CA · Member since 2014 · 7 posts · 3 votes
    5y

    @Sherry Chen

    Any advice on where in San Diego to purchase? I am here in San Francisco and interested in learning more investment opportunities in San Diego.

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  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
    5y

    @Jim Dean Absolutely! There are many areas in San Diego that are ripe with investment opportunities, and the right area for you will depend on what type of property you're looking to purchase. Hillcrest, Chula Vista, Imperial Beach, City Heights, Golden Hill are just a few of the areas that are seeing multi-million dollar to billion dollar development projects break ground, and prices here will appreciate drastically in the next 5 years. 

    If you're looking to move to San Diego yourself and owner-occupy your investment property I recommend buying a duplex in Linda Vista/Bay Ho/Clairemont Mesa areas. These neighborhoods are centrally located, minutes from the beach, and near major freeways. The rental demand here is high and proximity is right in between downtown to the south and Sorrento Valley to the north where major tech and biotech hubs are located. 

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  • Doug Spence
    Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
    5y

    @Li Lu

    I live in San Diego as well, and I decided to invest out of state. California very tenant friendly, plus the property values are high and solid cash flow is tough to find! I would look to the south, southeast, and Midwest.

    Best of luck!!

    1Reply
  • Li Lu
    OP
    New to Real Estate · San Diego, CA · Member since 2020 · 11 posts · 4 votes
    5y

    @Doug Spence Thank you for weighing in. Do you mind elaborating on the tenant friendliness point? Apart from the COVID-related rent moratorium, what other policies make SD tenant friendly (and meanwhile landlord unfriendly)? Would setting a higher tenant selection criteria help lower risks of conflicts?

    0Reply
  • Sherry Chen
    Real Estate Agent · San Diego, CA · Member since 2020 · 26 posts · 24 votes
    5y

    Compared to the nation, San Diego has the one of the highest percentages of making rental payments on time during Covid and one of the lowest unemployment rates. Everyday we are attracting high-income earners from Seattle, New York and San Francisco. These are young working professionals working in recession-proof industries such as tech, whose employment is not at risk. With a strong tenant pool, low housing inventory and high appreciation rates, San Diego is a strong market to invest in. 

    https://www.sandiegouniontribu...

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  • Neno D.
    Investor · Thousand Oaks, CA · Member since 2016 · 16 posts · 7 votes
    5y

    Adding my 2 cents for San Marcos, CA. One of the more under appreciated SD suburb with high rents and lots of newer development

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