Investing in San Diego Real Estate

In my 25 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 here 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 out of state.

The good news is that with the current buyers market, cash flow numbers are looking better than they have in the past 6 years!

Here's an investment for growth.

Now let's look at a typical house in say, Oceanside that we want to buy for an investment.

Tax savings were calculated as follows:
Depreciate the improvements 240,000 * 3.636% = 8726/ 12 = 727 per month
Tax savings (40% combined federal and state tax bracket) = 290

This property will probably rent for 1950 a month, leaving you with a negative cash flow of around $132 a month even with 20% down.

Note that this is just a simple cash flow calculation, and does not take into account principle reduction, vacancy, management or appreciation. Some investors buy with "option-ARM" type loans and make interest-only payments to improve the numbers.

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'ill 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 $500 a month, you know that next year they will be $510. 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 state. There's nothing wrong with that, and some states are appreciating rapidly right now. I suggest you buy a couple of houses out of state and when those properties have appreciated, you can 1031 exchange them into a property in San Diego.

Feel free to contact me to discuss your investment goals. Whether it's San Diego, less expensive areas of California, or out of state, I can help you. Just call me at 800-469-6391, or email me any time.