How to Invest in San Diego Real Estate from an Agent’s Perspective
In my 35 years as an investor I’ve personally bought fixer-uppers, repos, new construction, and all types of properties. I’ve flipped properties for a quick profit, held a few short term, and I’m now holding some long term. I’ve learned that there is a season for each style of investing. You might hear someone on TV saying to go buy a fixer-upper and you’ll make money. That’s true in some places and at some times, but not in all places and at all times. You have to know the market.
I frequently get inquiries from the Midwest and back east about investing in San Diego real estate. The important thing is not to expect that investing here is the same as investing elsewhere. For example, in many parts of the country it is possible to buy real estate for 5 or 10% down and have it break even. This is impossible in San Diego since our land values are so high.
Another example is the idea of buying a duplex, living in one and renting out the other. You might have in mind the idea of a duplex or triplex in a very nice residential community. While this is possible in some areas, it is very rare. Most areas that are zoned multi-family are near the freeway, or in some other area unsuitable for single-family residences. Since residents in these areas are almost entirely renters, it may not be an area that you would want to live in. And we don’t have any mixed zoning, where you might find a duplex mixed in with single-family homes.
My favorite is the caller who wants a fixer near the beach for $250,000. Right. The problem is that the land alone, with nothing on it, is worth twice that. They don’t understand that around here the land is usually worth more than the buildings on the land, so the fact that the house is a fixer doesn’t reduce the price by all that much.
Investors here are typically looking for growth, not cash flow. The appreciation over time is so desirable, that investors are willing to accept negative cash flow, or a high down payment, in order to participate in it. The low-down payment investor is forced to look in another county or out of state.
An Example of a Real Estate Investment in San Diego.
Now let’s look at a typical house in say, Oceanside that we want to buy for an investment.
|80% 1st mortgage at 4%||1527|
|Taxes at 1.2%||400|
|Total monthly payment||2092|
This property will probably rent for $2100 a month, leaving you with a break even with 20% down.
Note that this is just a simple cash flow calculation, and does not take into account principle reduction, tax savings, vacancy, management or appreciation.
So why invest in San Diego? Investors buy here because we have the finest climate in the country, we are landlocked by National Forests, the Pacific Ocean, Mexico, and Camp Pendleton, and prices continue to rise, sometimes rapidly. Many buy here just to have a “stake” in this market because they want to eventually retire here, and are afraid they’ll never be able to do it unless they buy now. It’s not an investment for first timers, but if you can afford it, San Diego will be an excellent performer over time.
Another big plus is our property tax structure. Propsition 13 limits taxes to a percentage of your purchase price, typically 1.2%, and then they can only go up 2% a year. So if your taxes are $300 a month, you know that next year they will be $306. This stability is a great advantage to the investor. Compare this with Florida, where they have a hurricane and your taxes go from $2000 to $4000 a year just like that. I can tell you from personal experience, it knocks the heck out of your cash flow calculations.
So what to do? If you have only a little to invest, say $20,000, you will have to focus on investing out of the county. There’s nothing wrong with that, and there are some amazing cash flows to be had in nearby Riverside County right now.
Where Should I Invest in Real Estate?
Many times I get emails asking me to give specific advice about where to invest in real estate, or I get phone calls from people who want me to tell them what to do. Well, here’s my answer about real estate investment.
On my bookshelf I have over 25 of the latest books on real estate investing, and I’ve read (and understand) them all. I’ve listened to countless hours of training audios. And I’ve invested thousands of dollars in real estate investment coaching from several organizations, including Rich Dad. And the answer to the question of what to do next is this – do whatever you want.
Now I don’t mean to be flippant here. Clearly, there are some mistakes you should avoid, but most of the time the choice is between one good thing and another good thing. Like should I invest in Florida or Salt Lake City or San Diego, California? The best answer is of course, “All three”, but what if you can only pick just one? There is a way to decide, and I’ll talk about that in a minute. But investing is kind of like the Garden of Eden, “of the trees in the garden you may eat freely”, except for the tree with the bad apples.
Increase Your Real Estate Investment Intelligence
So where should I invest? Do I invest in condos, houses, apartment buildings or commercial? Really good questions. I’m learned some thing along the way, and just to let you know, even when I’m hanging out with very experienced investors, they keep asking themselves the same questions. That’s because markets constantly change, but more importantly, the personal situation of the investor changes. In other words, as time goes by, your goals change, your net worth changes, your experience grows, and so the type of investment you’re looking for changes to match. And so you see it really is impossible to give any “one size fits all” advice about what kind of investment to make.
And even more to the point, listening to other people telling you what you should or shouldn’t do doesn’t teach you anything. Exercising your investment intelligence muscles and trusting your own instincts is the only way to go.
Rules Of The Real Estate Investment Game
But I can give you some guidelines.
When you’re first starting out, most real estate investors go with single family residences for capital gains. That means buying 3 bedroom, 2 bath homes in areas of rapid appreciation. If possible, buy in areas you like to visit, so you can write off your trips as business expenses.
At some point (you’ll know when it is) start trading some of the houses for multi-unit properties. In Monopoly this is known as “4 green houses, 1 red hotel”. Units will generate more cash flow, depreciation, and leverage. This is also the way to retire, since you can’t live off “break-even” properties. Sooner or later, you will have to have cash flow.
Avoid negative cash flow, except for short periods of time in highly appreciating property.
Start with small deals to get your feet wet and gain experience. Then graduate to larger properties. This is because there is no substitute for experience and building up your own financial intelligence. If you’re impatient and “go for broke” you might actually succeed in getting there.
In a buyer’s market, find undervalued bank owned properties or foreclosures that you can fix up. You can then refinance to get your cash out, keep the property and buy another to do it again. Or trade it for two more fixer properties.
In a seller’s market, buy new construction, with occupancy as far in the future as possible. In this case, you will have instant equity when you take possession. Tie up as many properties as you can.
When an area appreciates, you’ll find that the numbers don’t make sense anymore, meaning it takes too much capital to achieve break-even. I call this “game over.” That means it’s time to find a new area to invest in. Other “game over” situations occur when the builders won’t sell to you unless you live in the property, or other investors are buying up all the lots for cash so you can’t buy one using a construction-to-perm loan. There’s always opportunity someplace, but there really are windows that open and close in certain areas. That’s another reason why you usually can’t follow other investors – what I did 3 months ago, you probably can’t do now, because the game is over in that market.
Risk vs. Reward
One method I’ve learned to use when making a decision is to weigh the risk versus the reward. If risk outweighs the reward, you don’t do it. If reward outweighs the risk, then it’s a go. For example, should you run a red light? The reward is you get there a minute sooner. The risk is you get a ticket, or get in a car crash and are crippled or die. So since the risk clearly outweighs the reward, you don’t run the light.
Now let’s talk about real estate. To buy a house in Florida, your risk is $10,000, your net worth increases each month as principle is paid down, and you get a depreciation write-off. There is no negative cash flow. The market appears to be at the beginning of an expansion cycle, and you expect the property to go up in value $20,000 next year. Should you do it or not? How about one in Bend, Oregon? You can buy a new house for $280,000. With 10% down plus closing costs, your investment is over $30,000. The property will only rent for $1000, costing you $600 a month in negative cash flow even if you do interest only. Also, you believe that the market has peaked, and the chance of appreciation is low. So you’re risking $30,000 plus $600 a month, and your reward is only depreciation. Is the reward worth the risk? As you can see it’s important to know where to invest in real estate and doing the math to determine viability.
Investors face questions like this all the time. Should I do a 1031 exchange or should I just sell and pay the taxes? Should I buy in San Diego or Hemet? Should I buy a single family or units? By looking at the risk and the reward, you can decide which decision is right for you at this stage of your investment career.
Feel free to contact me to discuss your investment goals. If your thinking of investing in San Diego real estate I can help you. Whether it’s San Diego County, less expensive areas of California, or even out of state, Just call/text me at 760-889-2272, or email me any time.