San Diego Housing Bubble News and Analysis

Beach condos tend to be old builds. I would look long and hard at the special reserves, repairs from the HOA.

Location is the only thing that holds real value though.

thanks werewolf-
great pt on the reserves

built mid 80's

hoa monthly $ covers city maint(trash/h20 etc)., landscape and outside build. repairs. will have to check on other aspects/411

Shared walls aren't ideal, but they aren't necessarily a con. We lived in an 80's townhouse in Carmel Valley for a couple years, with neighbors on both sides, and we NEVER heard them. We also had a crying baby for a good stretch of that time and they never heard him. Some condos are better insulated than others.

That said, I wouldn't personally consider any coastal condo to be a good investment right now.

More likely, they heard him alright. But they didn't say anything.

In an SFR, I had a crying baby neighbor. It didn't bother me, but I sure heard him.

built as condos or is it a conversion?

get copy of HOA reserve review - this review is required at the 2 year point and regular updates are required - don't close escrow without seeing this document - if seller / agent is reluctant to produce the review walk away

http://piggington.com/us_home_prices_to_...

We live in an 80s town home in Carmel Valley. Neighbors got a German Shepherd and decided to train it using an alternative method.

Didn't work, now we get to listen to loud barking at 5:30 in the morning through the wall and believe me, we hear it just fine. We also get to smell the crap from the dog wafting in from the back yard which in true town home fashion, is mere feet from our bedroom window. Apparently, the novelty of picking up dog crap wore off after a few weeks.

Town homes and Condos are historically much cheaper because of problems like these, but people forgot about this in the last few years and ran the price up. If you could pick your neighbors, Town homes/condos would be fine, but unfortunately, the world is full of dip shits, do you really want to share just a wall with them?

What is the fair rent? Price to rent ratio hasn;t been mentioned, that is the first thing I like to see when giving advice on a purchase.

We asked, they said no, and they had no reason to lie. We believe them because the other neighbors would occasionally throw large parties (30 is large for a condo) and we only heard them if we went out on the patio. It was silent inside next to the shared wall.

How many units are really owner occupied? How many are rentals? How many are seasonal and/or short term rentals? HOA reserves? Any been through or are in foreclosure? NOD's?

Good things to find out, since you'll be a part owner of a building in a recessionary economy.

If you are down by the beach adjoining neighbors making noise is not the biggest factor. Trains, beach goers and drunk neighbors carousing are far more significant. Its part of beach life.

WOW.

you all are awesome!

thanks for all the info. def some valuable things to investigate.

we currently live in a 'complex' situation so i'm well aware of the drawbacks it can have(unfortunately). we also live in the neighborhood so we aren't too worried about any surprises in that regard. we are more concerned with the future $ issues.

we have checked into the area rents for equally sized dwellings and IF we were able to get the going rate we could cover out mortgage (even at the current asking price).

still not sure how much the prices will drop in the next year+ so that's really the biggest deciding factor in all this...

:)

It is not about if you can cover the mortgage, the question about the rent price is so you can use a time tested formula of rent to price ratio that will give the rest of us an idea of how it pencils out. Places that pencil out have a support level, where an investor would buy it, giving it a floor price, that way we can see the risk.

If it is in a complex, then finding a comparable rent should be easy, not for the area or a house, but for one in that complex. If the going rent is 2k, and the place is 400k, then your rent to price ratio is out of whack and there is still room for it to fall before investor price support kicks in. Try not to exceed 150x rent for the price, 2k rent x 150=300k, 3k rent x 150= 450. If the rent is 100x the price, jump on it, ie. 4k rent, 400k price.

anything above 150x is a risky play, the lower the multiple the better off you are. Location is irrelevent, beach is irrelevent, the added benefits shoud also translate into added rent. If it doesn't, wait for it, the train is on the way.

tg, wouldn't the 100-150x rent ratio get affected greatly by interest rate? Even in hard hit places like Eastlake, they're barely hitting the 150x mark and they already lost 50+% from peak value. Also, this fixed rent ratio doesn't take into consideration of HOA and MR. A huge deal when some places, those two can add up to 300-500/month easily.

well, that's why there's a 50x spread in the number, the variables you mentioned move the number a little, but not in a pure sense. Hoa fees can be offset, because they sometimes include things you would otherwise pay for in an sfr(structure fire insurance, exterior water, gardener, etc) sometimes the higher hoa fees cover more things, but not always. In many cases m/r is deductable and may be in lieu of higher overall taxes, once again, not always, but yes, they are soft factors, unless it is exceptionally high hoa, like a downtown highrise. Interest rate is a factor but it's another soft one. It lends itself more to the "renter will become an owner at rent nuetral" price floor, not so much with investors who are often not borrowing money, and they compare it to the possible earnings in other investments, another wash really, cause if interest rates are lower, so are the yields. These are all factors to consider but none should be considered a fundamental, don't confuse a factor with a fundamental. You wouldn't ignore a 90x just because of a $200 hoa that amounts to 10x, you still total 100x, another property might be 150x with no hoa, going for the non hoa property costs you net 50x, that's where you have to look at the totality of the situation, that's where savvy comes in.

I can't believe that eastlake isn't below 150x, at least for the smaller houses and condos, many posters have been buying in less hard hit areas and mentioning it being rent nuetral. I found an 65x potential investment the other day, of course I didn't post it cause I'm greedy that way, but 100x is so commonplace it doesn't get my blood flowing anymore. I'll admit that the 65x place was just a list price, which means very little these days as other investors will spot the value and bid it up a little. The thing with the investor pricing floor is they don't care if it is a nice neighborhood or has good schools, that's already priced into the rent, in the case of condo purchasing, you need to look at the rent even harder than with sfr, as places get larger and more expensive, they become less attractive as rentals so it becomes less of an issue as you move up the scale, the investor pricing floor kinda drops off. 3000+ sq fters are less likely to be rentals and less likely to pencil out, but the op was asking about a beach condo, very often they are rentals, so that's the measuring stick I'd start with, plus part of the plan was to eventually convert it to a rental, might as well evaluate like a landlord now if it is part of the plan.

The op also didn't mention it's relationship to peak value or it's price chronologically compared with other years, especially 2001, 2002 and 2003. We are all in different camps on what price year to shoot for, but 90% of us feel one of those three years should be targeted to compare it to pre bubble pricing.

Are you saying big time investors don't leverage? I would think they'd leverage just as much as small time investors, since they can buy even more properties. Do I have a wrong assumption here? Here's one example of a SFR in MM. In 1996 (around the bottom of the last down turn), I know someone who bought a 3/2 1500 sq-ft house in MM for $165k. Rent for such place was around $1200/month. That's ~135x rent multiple. Mortgage was ~$970/month w/ 8% interest rate & 20% down. That means this person is paying 19% less than rent. Fast forward to earlier this year. Such place was going for around $325k and rent was around $1700/month. That's 190x rent multiple. However, their mortgage would be ~$1350/month w/ 4.75% & 20% down. That mean this person is paying ~20% less than rent. So, if one is to leverage to to get a rental property, rates play a huge deal. 135x rent multiple @ 8% is equivalent to 190x rent multiple when rate is around 4.75%. I totally agree with you that if you go in all cash, it's a whole different ball game. One other factor I haven't consider in these equation is the interest rate of a liquid account. In a high interest rate/low price environment, you would also have a very high interest rate for a liquid account too.

temeculaguy,

Out of curiousity, how much money do you need (as an investor) to make tracking RE worthwhile?

It seems like you know your stuff but I am trying to get my head around how much dough / how many properties I need to be able to buy before it is worthwhile.

Thanks

Part of it was my narrow definition of the word "investor," I was thinking of those with money to invest as opposed to those working a strategy and leveraging, you are right, both groups exist. In your example, the 1996 investor wins because they start with 135x and could have refi'd to below 100x, the buyer at 4.75 is kinda stuck at their level. When both sell, 1996 wins again, the profit from the increased equity is more than double. Neither are stupid but an investor today should walk past the 190x opportunity because they can find better rent multipliers elsewhere with the same interest rate. Your example is still a decent investment, but in 2009, as long as you are not investing in S.D., you can find that 1996 scenario.

A few weeks ago I posted on another thread a bunch of 1k rentals for 100k, I just found a 900 rental for 60k. At todays rates, they start out cash flowing far better than the MM example, if you find a 50x example in Florida, you'd buy that before my 65x example. There are a bunch of post bubble busted places seeing intense investor activity, often times money coming from outside the area or state that the property is in. When that MM place hits 225k, investors will scoop them up by the dozens and provide a price floor, but at 325k, just locals will be there, it will still support prices but not in the same furious way that sub 150x will.

I am making this stuff up as I go along, but a few months ago, when my area began to regularly see 100x, buyers poured in, Forbes ran a story and declared Murietta and Temecula as the #1 and #3 hottest markets in the country, I tried to figure out why, and I think that when the rent multiplier gets so low, money shows up. If they ran that story today, it probably moved to whatever area that just hit that rent multiplier, perhaps florida or northern/central cal will be next. As prices fall in S.D., there will come a point that the sideliners will need to buy before the investors show up in large order, that range will vary between 100 and 150x

tg, I totally agree with you the investor who bough in 1996 is in a much better position than the one who bought in 2009. Although, like you said, both are still decent investments. I definitely don't think MM is in the same league as TV in term of investment. I don't think TV is in the same league as Fresno in term of investment either. I know people who have been buying some for about 6-12 months now. The price point was around 60-70k and the rents were around 850-1000. So, you're right, there are much more lucrative areas out there. I just don't think some are will ever be a good investment area. Considering even at the bottom of the last cycle, MM only got as low as ~130x. I'm sure more coastal (more desired) areas was even higher.

If you talk to experienced investor/landlords, many will tell you that they go by the 50% rule (or 40% if they don't use a property manager). Simply put, they allocate 40% of a property's gross rent for long-term operating expenses NOT including the mortgage, HOA, and property taxes. This number apparently ends up being very accurate when you're talking about decades.

There are 100x properties in Temecula right now, and on the face of it they cash flow $500+/month with 30% down. However, applying the 40% rule, in reality, they BARELY cash flow over the very long term and are actually in the negative if you pay someone to manage them for you. In my opinion that is why it's so important to buy close to the bottom of an area, and the reason buying on the coast as an "investment" at current prices is such a big mistake. Worst case, you'll never see most of your down payment again, and expenses will eat away the rest of your wallet over the years.

Ren, it wouldn't surprise me if the coastal areas never was and never will be a good place to buy an investment property based on those criterias.

I don't think I have an answer. I don't think you need much to track and learn, for me it's just a hobby, one that I got into a few years ago after being frustrated with the market and the fundamentals, I read and read, watched and watched, I enjoyed it and kept doing it. It was all about buying my primary residence, I sold somewhere around 2005, got back in a few months ago, now my attention is on my first rental. My family trust has a few rentals and has for decades, but they aren't mine really and I don't manage them, one day I will but that day may be a long ways out, in the meantime, I'd like to pick one up during this downturn, just for me. That makes me small time, but that doesn't mean I have to make avoidable mistakes or bank on appreciation. My goal is to get one cheap enough and with a nice rent multiplier that I can accelerate the payoff before retirement, just stay with one and avoid leveraging. My pops is retired and has a couple of paid off rentals that he thoroughly enjoys. For me, one would be worthile, something small enough that I can pay it off in short order. Let's take my example of a 65k place that brings in $900 in rent. 20k down, 45k loan for 5 years at 5.5 is just uner $900, equal to rent. I'd eat the hoa and taxes of a few hundred a month and all vacancy time and maintenance. In five years it flows $700 a month forever, has a potential of appreciating at some point in the next 20 years, rent should track inflation and I can sit tight and enjoy the monthly stipend or if finances and the market allow for it, go for another one on the next downturn, using the flow from the first to accelerate the next one, lather rinse, repeat and you find yourself in your sixties with a few cash cows all paid off. This I learned from my father, and I learned the most important part of making it work is selecting the time to do it. Flipping requires an appreciating market and an expanding economy, cash cow hunting requires fire and brimstone in the wall street journal, pick one up today and that's what you'll read. The short answer to your question is that I don't have suitcases full of money and it has already been worthwhile, plus what else am I going to track until football season starts.

Ren, you are quite right to plug in generous allowances for fixup, maintenance, replacement of major systems like roofs, W/H, carpets, etc. The biggest mistake of beginning landlords is to underestimate these expenses, along with vacancy downtime, in projecting future whether a property will run a positive or negative cash flow.

Back to the original subject of this thread, condo living close to neighbors:
Whether you will live next to angels or devils in your beach area condo is absolutely crucial to whether you will be happy there or not. So...go and meet them. Put on your happy face, knock on their door, tell them you are considering the next door unit, and ask them questions about the complex, the neighborhood, dogs, the HOA, parking, party problems, vacation rentals, etc. You will get far more useful information than from your broker. Of course, all the time you are carefully evaluating THEM, and gaining valuable information about your likely future neighbors.