All Forum Posts by: Dan H.

I think your primary point is that coastal So Cal including San Diego has been a good place for REI ROI for quite a few reasons and that this is why the prices are high. If so I agree.

Managing one tenant/unit for $10k profit is less effort than managing 10 tenants/units for $10K profit.  Investing in an area that has a long term appreciation history of over 60 years would seem to have less risk than investing in areas with less of a track record of appreciation.  Investing in a area that has historically a high rate of appreciation that appears likely to continue is preferable over investing in an area that may have a long history of appreciation but the appreciation is less.  All of these advantages are factored into the San Diego RE price which can justify the high price of real estate in San Diego.

I do not favor one form of RE profit over another (i.e. cash flow versus appreciation).  If the money is in my pocket, I care little if it came from cash flow, appreciation, or a combination of the two.

This I have done and I think it is the top way San Diego purchases make sense today (i.e. have an opportunity for sweat equity).  Where I have run into issues is with the appraisals.  I add half baths to units and the appraisal gives $5K.  Add a BR with the associated square footage and the appraisal may give $10K ($5k for the BR and then the footage allowance).  I know no one in San Diego that all things being equal would not pay more than $5K for a half bath on a buy n hold investment property in a decent area.  In my market an extra BR is around $250/month additional rent without any additional footage.  At $10K this is better than the 2% rule (rent is 2.5% of appraised delta).  I believe if selling the property a half bath on a unit is significantly more than $5K and an additional BR without additional footage is far more than $5K.

I recently had the two worst appraisals that I have ever seen or heard about.  I appealed both.  One initial appraisal gave me a $10K upper for a 2/2, 1400' unit with laundry room and carport

(the comps were duplexes and mine was a triplex).   Upon appeal they raised the appraisal $60K which still was below market.  The other appraisal was not as bad but still it was the second worse I have ever seen.  I appealed and the appraiser disappeared (same appraiser on both these appraisals).  I was told he simply vanished without being able to be contacted.  I was given the option of losing the lock on the loan or go with the really bad appraisal.  I did not need the full 70% cash out (it was simply going into stocks) so I proceeded with the loan.

My point is that the appraisals do not seem to value the upgrades as much as the market would if you were selling.  If I can not get 50% return on the upgrade I do not proceed.  I have some upgrades that I know on the market would produce greater than 50% return but in the appraisal it was less than or barely the 50%.  Then add in that most refis are at 70% and you can see where this could actually result in a loss of short term capital.  For example I add a 10X13 BR (130' additional footage) and a half bath without any footage (converted part of a closet) at a cost of ~$10K.  The appraisal comes in with a $15K value for the upgrades (hit my 50% profit rule) but at 70% I get $10.5K of value out of the refi.  Was it worth it?  Probably because the rent increased over $300/month.  But immediate cash return was not there and if you rely on getting your investment and some profit out via the refi you may be disappointed.

Good luck

Those soft costs are ~$100k for SFR in San Diego. They are costly and time consuming. It is not irregular that these permits/studies result in needing to change plans. I know an investor that had intended to build a quad but due to parking and setbacks could only build a triplex. It significantly affected his expected profits.

I admire your ambition but I agree with @Justin R. about the challenges but I have not yet been ambitious enough to try this (I have a potential property identified for over a year but have not pursued it).  

I wish you the best of luck.  

 I agree that San Diego has better cash flow for long-term than short-term due to rent appreciation and prop 13 but I would not categorize it as good. 

Example my longest rental unit was purchased in 1993 for $167k (3/2 SFR in Claremont on a nice street). Today it rents for $2100 and market is probably $2300. That seems like a good cash flow (better than 1% rule) but let's analyze the property differently. The property is worth ~$550k. So $2300 is not even 0.5% of current value.

I think using current value is a better indicator of its cash flow potential because the comparison should be to other available opportunities.  So I could take the current equity value to obtain better cash flow in many locales.  On the positive, due to prop 13, I pay just over $2k in prop tax.  If I purchased it today my prop tax would be ~$6500.  So the lowered prop tax helps my cash flow to the tune of about $4.5k annually. 

I also should indicate this is my worse cash flow property but it works well for this example due to the length of ownership. 

But looking at the appreciation, I purchased for $167k and in 1999 (maybe it was 1998) I took out via refinance all my initial investment plus some (70% LTV). I refinance again in 2010 and 2016 to bring LTV to 70% at each refinance. So my initial ~$20k investment has resulted in $365k profit pulled out ($385k-$20k) at 70% LTV and around $383k of appreciation. I think this is my second worse annual appreciation property (used as the example due to length of ownership and not to show best appreciating).

So I still claim San Diego is not a good cash flow market but historically has produced a great ROI on financed buy n hold properties.

I am pro San Diego RE but Cody is correct that San Diego (similar to San Fran) is poor for cash flow. However (similar to San Fran) the historical long term appreciation has produced great ROI for financed buy n hold RE. So there is virtually no reason to choose San Diego over San Fran when you live in San Fran.

I do want to point out that both San Fran and San Diego have historically better ROI for financed buy n hold than better cash flow locales.

Good luck

I agree with @Chris Stephens that 5% is very high expectations.  I literally get a letter almost everyday.  One  of my units would hit your criteria.  I would guesstimate I get a letter on that unit almost weekly.  Basically San Diego is difficult for letter campaigns but you only need one closure to make it worth while. 

Are you also networking outside of BP?   There are numerous meetup groups that can provide an opportunity to network.  Basically the more people that know of your desire the better. 

Other things to consider: Do you have a buyers list?  Do you have the means to close if you do not find a buyer?  If not, are you ethically ok with this and can it impact your RE license?  Do you plan to be forthright with the seller and tell him your intent?

Good luck

Most leases prohibit sub leases.  I have never seen a lease that does not prohibit subleases.  

Recently in San Diego a tenant did sub lease a property without consent (not clear if the lease explicitly disallowed sub lease).  It made the news and tenant was evicted.  

I think if you are going to go this route it should be communicated to landlord with some sort of mutual benefit. Note tenant turn over results in heavier wear n tear (we have 2 STR since the late 1990s so we know what can happen as we have seen a lot).

However a landlord may be ok with this for above market rent.  

So basically I am advocating full disclosure to the landlord.  

Good luck. 

 Mostly I agree with Sarah but San Diego area returns are primarily on appreciation (rent and property).   The total returns for financed buy n hold San Diego RE is historically near the top in the country.  C class properties typically appreciate in relationship to the class a and b properties.  So I claim there is virtually no location that historically has a better return than the San Diego financed buy n hold RE regardless of the property class.  

So the San Diego C class has similar appreciation as class A and B (better if the c class area is an area that is improving toward class A/B) with potential better cash flow.   But class C properties/areas often have tenants that are more effort than tenants of class A/B properties.  

I do agree with Sarah's sentiment on city heights.  The SFRs that are converted to duplex/triplex makes it difficult to get the pride of ownership improvement that areas like North Park experienced over many years/decades.  In addition, few of these duplexes were permitted (if they had any permit it was for a granny flat).  

 So you think all the wealthy investor who invest in San Jose/San Fran real estate are making poor investments?

I think most of them know what they are doing and have achieved great ROI if they invested in financed buy n hold properties as the OP is considering. It is easily verified that the ROI on San Francisco financed buy n hold has out produced areas that rely mostly on cash flow.

Markets in the short term fluctuate but there are some markets, including San Francisco area, that historical have long term appreciation going back over 50 years.  That take it to the bank, historically guaranteed appreciation is why the property costs are so high and investors (not dumb investors) are willing to continue to purchase. 

@Rocely Mati as various posts have indicated you can achieve better cash flow in other locations but you live in perhaps the best location in the nation historically for ROI for financed buy hold and are considering investing elsewhere. Think about that. Think about all the wealthy investors (including foreign investors) who can invest anywhere in the world and choose to invest in San Francisco area. Are they stupid?

I like your idea of house hacking a duplex in one of the best areas for financed buy n hold ROI in the nation (likely the best location).

Good luck 

@David Singyee

San Diego house hack cons: Cash flow: 1) initial cash flow in San Diego is worse than almost everywhere else. Note I stated initial cash flow because long- term cash flow is better but probably still not great (see rent appreciation and prop 13 below) 2) related to the first is the high price of property  

Those are my only cons but they get many people to choose to invest elsewhere. 

San Diego house hack pros: 1) appreciation which is both rent and property appreciation. San Diego has a long history of long term appreciation. This includes both property appreciation and rent appreciation. This appreciation has made San Diego one of the top ROI locals in the nation for financed buy n hold properties. 2) oportunity for sweat equity is better than cheaper locals. I can purchase a property and rehab it using contractors and achieve close to 50% over cost appreciation (I.e. A $20k rehab I expect at least $30 of equity for a $10k positive equity gain). 3) prop 13. Prop 13 basically virtually guarantees taxes will not go up faster than rents. In addition with San Diego historical property appreciation it basically means the rental owned long term will be producing better cash flow than the recently purchased like rental. I have a rental that I pay prop taxes at ~$2k/annual that would cost a new purchaser ~$6k annual. This is a great benefit for long term buy n hold. 4) because of the higher costs it takes less units which requires less management. Example if I purchased somewhere where unit price is $60k I need to purchase 10 units to get $600k of property but if I purchase somewhere where unit costs are $300k then I only need 2 properties That is 1/5 as many tenants, kitchens, roofs, yards, foundations, walls, etc

I suspect you know the general benefits of house hack anywhere including experienced gained, supplemented residence costs, benefit of principle pay down,  ideally appreciation, etc.  

Good luck