Should I stay or Should I go?

Buying & Selling Real Estate
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Should I stay or Should I go?

Maya German
Member since 2021 · 6 posts · 7 votes

Hello everyone,

First of all, I am new to BP and I enjoy reading people's posts. So here is my dilemma.  I am selling a couple of my rental properties in San Diego, CA and would like to do a 1031 exchange on a multi-family unit. I am not sure if I want to buy a multi-family unit in San Diego because of the high costs. I would like to know what would you do? Would you invest in other state like TX or AZ or stay here in San Diego. Any feedback is appreciated. 

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
5y

I will start by stating that I believe the RE market is an efficient market.  Prices depict a range of variables that basically boil down to risk and return.  For the return, there is both short-term and long term return.  Risk is made up of many items including eviction rates, tenant quality (very much a function of vacancy rates), vacancy rates, etc.

What this really means it that different markets have different strengths and weaknesses.  I recommend all newbies start local.  There are a plethora of reasons for this that I have posted elsewhere.  The OP is not a newbie.

So here is what I believe about the San Diego market:

  • Historically it has produced outstanding long-term returns.  This is a function of both the property and rent appreciation.
  • The rent appreciation has made San diego, contrary to popular belief, and outstanding market for long-term cash flow.  It is simple math that the market with the higher rent appreciation rate will always eventually produce better cash flow than the market with a lower rent appreciation rate.
  • The eviction and missed payment rate in San Diego is one of the lowest in the nation.  It is my belief that this is more a function of the low vacancy rate than the cumbersome eviction process.
  • Prop 13 is unbelievable benefit for long-term investors.  The state average property tax paid has been estimated at 0.77%.  The high appreciation cities pull this down.  What this implies for San Diego is that our average property tax rate is likely below 0.77%.  I know our (H3 Properties) property tax rate is way below 0.77%  We have multiple properties (close to half) that have rates near or below 0.5% of the value.  We have one that I suspect is below 0.25% of value.

As indicated, the market reflects multiple variables so here is the bad.  The bad is mostly short-term negatives:

  • High price of entry. Especially for the investor with no value add using traditional financing that is getting 80% LTV. This is less an issue if house hacking (95% LTV), doing a value add with a refi (extract out of investment), or using creative financing (obtaining higher than 80% LTV). It is why for a long time all or our acquisitions had a value add.
  • Poor initial cash flow.
  • Tenant friendly regulations.  I have found with the low vacancy rate, the tenant friendly regulations are of virtually zero impact but they are real.

I believe strongly that San Diego will continue to be an outstanding long-term market.  I also believe that many markets can produce better return in the short-term.

We are at about the maximum number of units we can handle without changes. If that were not the case, I would more actively be acquiring more properties (we closed on a quad New Years Eve, but our acquisition rate has slowed) like the ones we have (mostly duplex to quad). Because I am considering commercial MF (5+ units) and sustainability requirements on commercial financing, we may in the near future look non-local. It will not be because I do not have huge confidence in the San Diego market. It would be due to the sustainability requirements and my aversion to have to have LTV typically lower than 70% and often lower than 60% on San Diego commercial MF.

Good luck

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  • Stephen Brown
    Real Estate Broker · Huntsville, AL · Member since 2019 · 1k+ posts · 872 votes
    5y

    I may be a little biased but I'd get out of California! Invest where your dollar will do better! Like Texas or even here in Ohio!

    5Reply
  • Benjamin AakerPro Member
    Rental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
    5y
    Hi Maya,
    I recommend first to look at the landlord / tenant laws in the areas you are interested. Southern California is very tenant friendly in my understanding. Also, housing values are through the roof and not keeping up with rents. I'm sure you can find a deal there but it'll be tough to find a good one. Congratulations on the sale(s). Talk to your 1031 service to see if you can exchange two properties at once. I'm not sure that is allowed.
    2Reply
  • Marc RiceBusiness Member
    Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
    5y

    @Maya German

    If you’re looking to invest out of state in rentals I’d look towards the Midwest such as Columbus, Ohio but you can also get started in San Diego with a low money down owner occupied loan and start eliminating your housing expense.

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    2Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Maya German

    We live in LA county and invest out of state and are sure it was the right move for us. Try @Dan H. for a local counter opinion. It's really going to come down to what's the best fit for you.

    2Reply
  • Brandon GoldsmithBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
    5y

    I think some of it depends on your REI goals for either mainly cash flow and if you are looking for general long term appreciation. In Columbus, you can still get both but it is getting more competitive. @Maya German

    [email protected]614-963-3340
    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    5y

    I will start by stating that I believe the RE market is an efficient market.  Prices depict a range of variables that basically boil down to risk and return.  For the return, there is both short-term and long term return.  Risk is made up of many items including eviction rates, tenant quality (very much a function of vacancy rates), vacancy rates, etc.

    What this really means it that different markets have different strengths and weaknesses.  I recommend all newbies start local.  There are a plethora of reasons for this that I have posted elsewhere.  The OP is not a newbie.

    So here is what I believe about the San Diego market:

    • Historically it has produced outstanding long-term returns.  This is a function of both the property and rent appreciation.
    • The rent appreciation has made San diego, contrary to popular belief, and outstanding market for long-term cash flow.  It is simple math that the market with the higher rent appreciation rate will always eventually produce better cash flow than the market with a lower rent appreciation rate.
    • The eviction and missed payment rate in San Diego is one of the lowest in the nation.  It is my belief that this is more a function of the low vacancy rate than the cumbersome eviction process.
    • Prop 13 is unbelievable benefit for long-term investors.  The state average property tax paid has been estimated at 0.77%.  The high appreciation cities pull this down.  What this implies for San Diego is that our average property tax rate is likely below 0.77%.  I know our (H3 Properties) property tax rate is way below 0.77%  We have multiple properties (close to half) that have rates near or below 0.5% of the value.  We have one that I suspect is below 0.25% of value.

    As indicated, the market reflects multiple variables so here is the bad.  The bad is mostly short-term negatives:

    • High price of entry. Especially for the investor with no value add using traditional financing that is getting 80% LTV. This is less an issue if house hacking (95% LTV), doing a value add with a refi (extract out of investment), or using creative financing (obtaining higher than 80% LTV). It is why for a long time all or our acquisitions had a value add.
    • Poor initial cash flow.
    • Tenant friendly regulations.  I have found with the low vacancy rate, the tenant friendly regulations are of virtually zero impact but they are real.

    I believe strongly that San Diego will continue to be an outstanding long-term market.  I also believe that many markets can produce better return in the short-term.

    We are at about the maximum number of units we can handle without changes. If that were not the case, I would more actively be acquiring more properties (we closed on a quad New Years Eve, but our acquisition rate has slowed) like the ones we have (mostly duplex to quad). Because I am considering commercial MF (5+ units) and sustainability requirements on commercial financing, we may in the near future look non-local. It will not be because I do not have huge confidence in the San Diego market. It would be due to the sustainability requirements and my aversion to have to have LTV typically lower than 70% and often lower than 60% on San Diego commercial MF.

    Good luck

    7Reply
  • Melissa Barnard
    Realtor · Southlake, TX · Member since 2018 · 54 posts · 35 votes
    5y

    Hello @Maya German, welcome to BP! I am a real estate agent and investor here in TX (Dallas-Fort Worth Metroplex). I would definitely recommend investing in Texas rather than California due to purchasing power and the rate TX is growing. There have been projections that Austin will be the next LA so if you get in early then it can pay off drastically in the future. 

    2Reply
  • Linda LabbePro Member
    Investor · North Bay, Ontario · Member since 2015 · 709 posts · 262 votes
    5y

    Ohio has some great number for multi family  just another place to look and landlord tenant laws are more then fair to  the landlord

    2Reply
  • Remington LymanBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
    5y
    Originally posted by @Maya German:

    Hello everyone,

    First of all, I am new to BP and I enjoy reading people's posts. So here is my dilemma.  I am selling a couple of my rental properties in San Diego, CA and would like to do a 1031 exchange on a multi-family unit. I am not sure if I want to buy a multi-family unit in San Diego because of the high costs. I would like to know what would you do? Would you invest in other state like TX or AZ or stay here in San Diego. Any feedback is appreciated. 

     I would do a 1031 into a rental property in Columbus, Ohio

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    3Reply
  • Zeke ListonBusiness Member
    Real Estate Agent · Columbus, OH · Member since 2018 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Maya German:

    Hello everyone,

    First of all, I am new to BP and I enjoy reading people's posts. So here is my dilemma.  I am selling a couple of my rental properties in San Diego, CA and would like to do a 1031 exchange on a multi-family unit. I am not sure if I want to buy a multi-family unit in San Diego because of the high costs. I would like to know what would you do? Would you invest in other state like TX or AZ or stay here in San Diego. Any feedback is appreciated. 

    Hi Maya, I would check out Columbus, OH. You'll find both cashflow and apprecaiton.  

    [email protected]614-665-5793
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    2Reply
  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    5y

    @Maya German investing out-of-state is a business most Midwest agents have been able to do quite well. You can see from the folks above that Ohio has a huge volume of OOS investors and opportunity...and many of us provide a very high level of customer service to our out-of-state clients. 

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    3Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    5y

    I've come to realize the question of "Should I buy in state or out of state", from people that live in low rent areas like San Diego, is similar to someone asking "Should I buy a car or a truck".  

    The answer in both cases will be "it depends".  And in both cases there are no right/wrong answers.  At this point, anyone that's spent any amount of time on this site knows the pros/cons so it's up to your goals and risk tolerances. 

    PERSONALLY, as someone that's in San Diego, I wouldn't buy here.  I take that back, I'd love to buy here.  I've just yet to see any building that was for sale at a price that made sense (for me).  I'm talking about 10-20+ multifamily.

    2Reply
  • Dave PoeppelmeierBusiness Member
    Realtor · Maumee, OH · Member since 2015 · 491 posts · 722 votes
    5y

    @Maya German it depends on what your goals are. If you can afford to stay in San Diego, they only make so much Real Estate there for one of the best climates in the world. We know inflation isn't going anywhere but up, so if you can afford to buy now and hold onto it, you will get the appreciation and higher rents down the line, depending on what happens with Rent Control there and in CA as a whole. We are seeing lots of people come to Ohio from the Coasts and other parts of the world where you can get into the market much cheaper and still see good returns. I live here in Toledo, where it is mostly a Cash Flow play unless you go to the A and B class areas of the suburbs and select parts of Toledo proper and you can get the appreciation of the suburban sprawl as well. Wherever you go, like @Brandon Sturgill said find your "boots on the ground" through Property Managers that know what they're doing, agents that work with investors, etc that can guide you through the intricacies of the local markets. David Greene may have written a slightly popular book on this subject... 

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  • Adrienne Green
    Real Estate Consultant · Chattanooga, TN · Member since 2018 · 384 posts · 330 votes
    5y

    Hi @Maya German! You're getting a lot of great thoughts here. I think @Cody L.'s point of "it depends" is spot on- real estate investing is not a one size fits all approach, the best plan for each person is unique to them.

    Personally, I'm seeing a lot of investors from California and other similarly high priced areas investing as out of town investors elsewhere. There are markets such as where I am in Chattanooga TN where out of town investing is so big, there are plenty of vendors to make it easy. I know contractors and property managers that cater to out of town investors. Feel free to reach out if you'd like to learn more!

    1Reply
  • Emy Bernardo
    Investor · San Diego, CA · Member since 2017 · 112 posts · 92 votes
    5y

    Definitely agree  - it depends! 

    A lot would depend on how the current properties are performing and your reasons for wanting to sell. If you have cash flowing properties that you've owned for several years, you most likely have a good amount of equity and it would be difficult to duplicate your current returns in the current market. Perhaps, you could refinance and pull some equity out and invest in other lower costs markets such as Ohio? We have several properties in the Cincinnati area and they have provided very stable cash flow. Midwest is a long term, stable investment - not the appreciation as in So-Cal. Be mindful in TX, the property taxes are extremely high and the reason we did a 1031 exchange out of the San Antonio market several years ago.

    Other markets to explore are SW Florida/JAX, Ohio (as mentioned), Tennessee, North Carolina, Alabama (super low prop taxes) I'm also interested to see what happens to the Las Vegas market once the foreclosure moratorium is lifted. Check out this article to see some migration patterns of where people are moving. https://www.uhaul.com/Articles...

    Whatever you decide, make sure you line up a great team in that market before you even think of listing your properties for sale. Good luck! 

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    5y

    The way I did, I split my portfolio, half in the local market for appreciation and bit cash flow (you can still cashflow in San Diego) and Half invested in OOS for cashflow. It doesn't matter where is the OOS (but not in TX or AZ). In long run the San Diego purchase is useful for retirement, while OOS income is for paying the bills :)

    If you compare CA vs TX vs AZ, CA is much better than these two since you're local to CA. These three are appreciating market. If you invest OOS, invest solely for cash flow which is mostly midwest.

    0Reply
  • Adam Regos
    Specialist · San Diego, CA · Member since 2020 · 29 posts · 4 votes
    5y

    @Maya German

    I live in San Diego and have been doing research and like San Antonio for a mix of cash flow and appreciation.

    New braunfels specifically is close enough to Austin to see some of that type of appreciation but also has cash flow.

    My mom and I just did a 4plex out there!

    PM if you have any questions

    0Reply
  • Mark Frattini
    Real Estate Agent · San Diego, CA · Member since 2014 · 338 posts · 176 votes
    5y

    @Maya German

    This is a very situation specific question and depends on many unknown factors. Having said that, I always recommend investing local whenever possible. 

    0Reply
  • Emy Bernardo
    Investor · San Diego, CA · Member since 2017 · 112 posts · 92 votes
    5y

    As the Real Estate Guys always say "live where you want to live and invest where the numbers make sense."

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    5y
    Originally posted by @Emy Bernardo:

    As the Real Estate Guys always say "live where you want to live and invest where the numbers make sense."

    I say that all the time.  I didn't realize it was a saying.  Good to hear.  It's valuable.    I have people tell me "Ew, you have a property over on that side of town?  I'd never live there".  I reply "Yeah, no kidding.  I wouldn't live there either.  But I didn't buy this building to live in".

    Not as common is "You live in San Diego?  But you're a multifamily guy. There are no multifamily deals in San Diego" . I reply "Yeah, no kidding.  I don't invest here.  I live here"

    1Reply
  • Wai Chan
    Rental Property Investor · San Diego, CA · Member since 2014 · 80 posts · 44 votes
    5y

    @Emy Bernardo

    I am also thinking to 1031 some of my SFRs from DFW area to some multifamily deal in midwest. I will still keep my rental in San Diego though. I have purchased those in the right time so they actually cashflow and appreciate very well :)

    You mind telling me the "bad" thing you come acoss in the Cincinnati market? Any other market you have studied for cash flow in mid west area?

    1Reply
  • Emy Bernardo
    Investor · San Diego, CA · Member since 2017 · 112 posts · 92 votes
    5y

    @Wai Chan   - I don't have any bad things to say about the Ohio market.   The single family rentals we own are halfway between Cincy and Dayton in a little town called Middletown.  We work with an outstanding turn key provider/property manager who takes great care of the properties and tenants; definitely the most "passive" real estate investment we've had to date. We've never had an issue with vacancies and no missed rent during the pandemic.  Our property manager took a very proactive approach working with their tenants to get ahead of any issues with rent payments during the pandemic. Ohio is also landlord friendly.  Property taxes aren't the lowest but definitely less that Texas.  And, since there isn't rapid price appreciation, you aren't getting hit with big annual property tax increases.  Unlike what we experienced in San Antonio a few years ago and now are dealing with in Idaho - which has totally gone bananas!   Thank goodness for Prop 13 in California. These other states need Prop 13!!

    1Reply
  • Wai Chan
    Rental Property Investor · San Diego, CA · Member since 2014 · 80 posts · 44 votes
    5y

    @Emy Bernardo thank you! Yes, every year I receive the tax mail from the county in DFW I will have heart attack. I am happy to see the property appreciate so much but the rental income just cannot keep up with the property tax increase. Also the insurance cost is also killing me. A 200K house cost me US1300/year on insurance and people still say that I have got a good deal....

    1Reply
  • Don SpaffordPro Member
    Investor · Idaho Falls, ID · Member since 2016 · 912 posts · 629 votes
    5y

    @Maya German Something else to throw in the mix to think about is your tenant base. Some areas have low prices and high rent to price ratios, but have not so great tenants with high turnover. I've got some units in the mid-west that used the pandemic and eviction moratorium to their advantage and didn't pay for almost all of last year until there was a brief window to evict and we got them out. But my properties in Eastern Idaho, not a single one of my tenants had a problem, they all paid as they always do, on time and never give me any problems, never had any evictions or damaged property. For me personally, I would prefer a stable tenant since the high returns on paper don't always work out in real life. If Eastern Idaho interests you, PM me and I can let you know some things available that may work for your 1031. Prices are higher, not as high as Boise, but still rising and stable tenants in a low crime area.

    3Reply
  • Dan Rowley
    Investor · Cary, NC · Member since 2012 · 214 posts · 194 votes
    5y

    @Maya German San Diego is still in CA correct ? I would suggest investing in other states that are business friendly

    0Reply
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