[Calc Review] Help me analyze this deal in San Diego

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*This link comes directly from our calculators, based on information input by the member who posted.


I am looking to put an offer on a property in San Diego, in 92102 area code. The property is a duplex, with purchase price of $529k. Each unit has 2bed/2ba. What attracted me to this property is that it is sitting on a 11,144 sq ft lot. Each unit has its own yard but on top of that there is a huge unused lot. My plan was to maybe build more units on the lot later down the line, however I recently found out that based on the zoning I wouldn't be able to build more units on said lot. I spoke to my real estate agent and he mentioned that a law was passed recently in which you can get a permit to build a 1bed/1ba on a lot that meets the required sq ft. The permit alone would cost about $20k and as a baseline I know that there are companies that sell premanufactured 1bed/1ba guest houses for about $50k (~$600/mo if financed). However, not sure if hiring a contractor would be cheaper than buying a premanufactured guest house? If not then I was also thinking of the possibility of purchasing a 'tiny house' and putting it on the lot and living on that while renting out the duplex completely. I have been trying to come up with different exit strategies. 

Please see my link to my calculations, I used the Rental Property Calculator. I would really appreciate some help in analyzing this deal so that I can make a better informed decision on whether to pursue this property or not. Currently one of the units is being rented out for $1500 and the second one is vacant. The average rent for a 2bed/1ba unit in that same area is about $1650. Based on the mortgage payment that my broker helped quote me at it looks like it would be around $3665/mo. If I were to purchase the property I would have to honor the current tenants lease (not sure when that ends), which would mean that my monthly payment would be about $2165 for the second unity. I am currently renting an apartment with my boyfriend in an area closer to work for about $2000.

If I am already paying about the same amount in rent, wondering if it would be worth buying the property even if it means that it is currently not cashflowing. I would really appreciate the feedback! 

A quick look at the numbers, you are getting a FHA loan with little down. I do not expect it pays for itself any time soon. Things I can not find is the correct property tax, insurance as well as FHA insurance. Utilities are to be passed on to tenants. I suggest you be the property manager to get some experience and save money.

The returns and locations C neighborhood looks fine.  A mobile home is a lot easier if you can get a permit for. Run through the numbers again see if you can absorb the negative for say 5 years. Not sure how you will finance the add on perhaps delay til next year.   

In both coasts it is hard to break it even with say 10-20% down on MFH these days. But I think the properties will appreciate more than cheaper states.  Northern CA homes have appreciated 15X while Midwest saw only 3X last 40 years. Those areas that have no appreciation investors are interested in for cash flow as income. 

@Sam Shueh Thanks for the feedback! 

Ok so I updated the report to include the PMI and the property tax. It looks like after the update the cashflow went from -$778 to -$1476.39.

Note: My broker told me that the mortgage payment was $3665 and this already included the MI, taxes and insurance so that would be the total payment already. Since the rental calculator already calculated the P&I and I had already added the property tax ($360.42/mo), I took the some of those and subtracted from $3665 to get the PMI cost.

Your tax rate is INCORRECT.
Voter-approved bonds can increase the 1% base rate, such as bonds providing funding for schools, parks, or other community services. Combined with the 1% base rate, most property tax rates in San Diego County are somewhere between 1.02% and 1.19%.

@Sam Shueh

Hmmm I checked Zillow and checked the 'Tax History' tab and it said that in 2017 that the property tax was $4326 and the Tax Assessment was $367,097. 

I plugged in $4326 to the Rental Property Calculator. This may be a dumb question, but is this now the correct information for the property tax? 

I just wanted to add that if I lived in the second unit, I would househack it by living with my boyfriend and splitting the costs. So our rent payment would be $1082/mo each. 

Should I be accounting the $1082 that my boyfriend will be helping paying as part of the income? Or maybe not? I originally calculated $3000 as the income as each unit would rent for about $1500 if I completely rented both out. 

Some thoughts:

  • I suspect your realtor was referring to CA ADU regulations but they do not apply to duplexes. Verify that you can in fact add a structure but I suspect you cannot.
  • Its negative cash flow is far worse than you calculated because your calculations did not include maintenance, vacancies, cap expense, Misc.
  • The reason for the big negative cash flow is the 96.5% LTV. Using your stated market rent of $3300 and a purchase price of $529K provides a ratio 0.62%. I conservatively use 0.7% as cash flow positive with 80% LTV. I would classify this property as cash flow negative even at 80% LTV.

I am assuming that the only value add is adding the 1 BR/1 Ba which I think you cannot add.  So I am going to provide this value add a $0 value but if you confirm it can have a 1 BR/1 Ba added there will be a value add to weigh into the calculations.

Also note with the 96.5% LTV there is virtually no equity pay down and you will be paying mortgage insurance.

This investment only makes sense as an investment under the following conditions:

  • You can support huge negative monthly cash flow.
  • You expect significant property appreciation
  • You expect significant rent appreciation.

This purchase would have a huge amount of risk and I only see the upside if the appreciation continues like it has for the last 5 years which I think is unlikely.

Good luck

@Dan Heuschele  

Thanks for the feedback! Yes I am verifying that we can in fact build a separate structure. Another option that I was considering was adding an additional bedroom to each unit (possibly a bathroom as well). I am currently trying to do research on what the cost of this would be as well as run comps to figure out the ARV. I am reaching out to some people to see if I can get a rough estimate of the costs. Once I know the costs, estimated rent and ARV......is that all the information I would need to update using the Rental Property Calculator.

Although the cashflow is negative, I am currently paying the about the same amount in rent while living in a 1bed/1ba in mira mesa. So that's why I was wondering to see if I could maybe justify the purchase given that I will be paying the same in rent in the foreseeable future. 

Originally posted by Account Closed:

@Dan Heuschele 

Thanks for the feedback! Yes I am verifying that we can in fact build a separate structure. Another option that I was considering was adding an additional bedroom to each unit (possibly a bathroom as well). I am currently trying to do research on what the cost of this would be as well as run comps to figure out the ARV. I am reaching out to some people to see if I can get a rough estimate of the costs. Once I know the costs, estimated rent and ARV......is that all the information I would need to update using the Rental Property Calculator.

Although the cashflow is negative, I am currently paying the about the same amount in rent while living in a 1bed/1ba in mira mesa. So that's why I was wondering to see if I could maybe justify the purchase given that I will be paying the same in rent in the foreseeable future. 

You are paying about the same only if you only include PITI in the expenses. That will not equate to reality. There will be vacancies, maintenance, capital expenses, and miscellaneous expenses. In low rent markets a rough estimate of the expense, not including debt pay down, is 50% of the rent. In your rental market it will be much less than 50% of the rent but I would allocate $500 to $700/month over the long term (I would allocate $700 but I want my cash flow numbers to be conservative). Assuming my numbers are somewhat accurate this purchase will cost you at least $500/month initially.

Without a significant value add, it is likely going to be many years before you have any return on your investment. 

Therefore the viability of this purchase will primarily be based on the instant equity achieved via the value add.  Without the value add, this purchase will have significant negative cash flow for quite a few years and no means to provide any return on investment for quite a few years.  

Good luck