What to do with Equity in San Diego, California

[Isabella Phillips]

Hey Guys! I have a rental condo in Little Italy in San Diego that breaks even monthly with $200k equity in it. I’m trying to figure out the best strategy and would love some advice. I am a gymnastics coach running my own business. I love it but since I’m self employed I’m exchanging time for money and I have no security as far as retirement besides my IRA. My ultimate goal is to acquire enough real estate with buy and hold rentals that my passive income meets/exceeds 10k a month. Should I: 1. Wait and Pay it off (pay off in 2048) and collect $2600 rental cash flow forevaaaa 2. Sell and invest in multi-family out of state. (I am super weary of investing out of state bc traveling would be difficult since I’m self employed right now and if I’m not working I’m losing money plus I would prefer to keep my money where I can see it lol) 3. Sell now while the market is high and pay taxes on the gains and wait for the SD market to drop so I’m not buying at the top of the market. 4. Or ????

[Dan H.]

@Mauricio Salom and @Isabella Phillips

I would be leery of advice from non coastal So Cal investors because, in general, their market is very different. 

Some thoughts:

• How do you think you obtained the equity?  I suspect the mass majority came from market appreciation.
• Which areas do you think have the best ROI? I will give you a hint that no Midwest city is above the 3 large coastal so Cal cities according to Core Logic. I did an exercise recently that showed the average appreciation on the average San Diego SFR in the last 5 years exceeded the cash flow on the average Midwest SFR for the last 50 years.
• Do you know how many months at $200/unit cash flow it would take to achieve $200K profit? I suspect $200/door is generous on cash flow of a Midwest average SFR after accounting for all expenses and cap expense reserves.
• Be leery of numbers provided by OOS sellers. See if they have allocated cap ex reserves. See if they are using actuals or projections (actuals = reality, projections = fantasy. See if their total numbers are anywhere close to 50% rule. If they are showing expenses other than mortgage costs are significantly less than 50% of rent for SFR then you have a good idea that their numbers will not be attainable.
• Be leery of OOS pigs (the type of homes that have real low rents).  These homes will their cash flow significantly consumed by cap expenses and other expenses.

There is no way I would decide to invest in Midwest SFR over coastal So Cal SFR due to the historical ROI of coastal So Cal SFR. However, I suspect that your ex-homes are not the best local RE for buy n hold. I suspect this because I have an ex-home in my rental portfolio. It is my worst performing San Diego RE. This is because it was purchased to be a good home and not necessarily a good rental.

If I were to invest OOS:

• I would not choose the highest cash flow Midwest locals but would look for a location with increasing population and constrained in some way in their RE growth prospects.  So I would look for a location where appreciation is more likely and/or larger than the Midwest cities.
• I would go true multifamily. A couple hundred dollars a unit scattered all over is not as tempting to me as half the cash flow in one larger multifamily with an on site PM. Note 20 SFR at $200/unit is $4K/month and seems like a lot of work. However one 40 unit multifamily at $100/unit (also $4k/month) with an on site PM seems like hardly any work.

Good luck with whatever you choose to do with your equity gain.