San Diego Housing Bubble News and Analysis

I won't do it. My criterion for buying real estate in today's market is: convincingly positive cash flow for a reasonable horizon (say 5 years).

Not to be dense, but how does that math make any sense? Are there additional costs that you have not mentioned (eg: crazy interest, high HOA's)? I mean the whole reason the 200x rent number exists is because it generally flow close to even. If it is less than 200 you should not be that screwed for flow.
EG:
Property rents for 1000/mth.
Property sells for 175x rent (175,000).
At 6%, thats less than 1050/mth payments.
For 150x rent thats less than 900/mth.

This isn't in El Cortez, is it?

Big difference between 150x and 175x.

I would start to consider buying a SFR for investment purposes at 150x rent. (For a principal residence it makes sense maybe even slightly higher than this) Forget the HELOC. You want the best terms on the mortgage with 20-25% down.
Condos, I would want a bit lower because of HOA.

Example: 350K SFR would be 2333 monthly rent at 150x.

Assume 25% down. 6.5% 30-yr fixed.
monthlies ...
P&I = 1660
Insurance = 100
Taxes = 330

Total PITI = 2090

Assume 233 per month property management, and you roughly break even before maintenance.

Assume maintenance averages $200 per month (typically it's more like $0 per month, then $500-$3000 periodically).

Depreciation is equal to about 150-200 per month in tax benefit depending on your circumstances.

So, after tax this is about break-even cash flow.
Your benefit is that you get principal pay down of about $250 per month.
Your risk is that the value of the home declines, rents decline and vacancies.

Somewhere less than 150x starts to work for me for SFR.

IF annual condo HOA fees are 0.6% or less than the value, it might start to make sense there as well. Also, strength of the specific rental market is key.

Nope not El Cortez. Math makes sense (and means it won't flow) when you consider paying interest on full purchase price rather than 80%, plus taxes, HOA, insurance, maintenance.

Example. I have seen places listed in the $200k to $225k range that rent for around $1300-$1500/mo. $200k is 150x $1300 (roughly) and $225k is 150x $1500. That's a great value for resale someday, but monthly expenses on a $200k place at say 6.5% are upwards of $1700 or $1800 if you're honest with yourself about every likely expense.

Hence my question whether the negative $200 or so per month is worth it if you can buy at 150x rent.

There are still banks doing 100% financing? Good lord. I look forward to subsidizing your investment with my tax dollars.

I do not generally recommend predicating investment based on expectation of future profit (versus current performance). However, if there was something that really seems like it will pop then do it. EG, Acqua Vista has 2br stuff on the 11th floor with a harbor view for less than 300k.
Its absurd. But we really have no way of compensating for the unknown that is future value.

I also don't make it a practice to tell clients, friends, or blog buddies not to buy. I am just saying be careful. A potential economic event could throw even "common sense" about future values out the window. And negative cash flow always sucks. Good luck.

Would I do it??

Heck no.

Ever heard of muni bonds? They positive cash flow immediately, are much more liquid than real estate, and they don't call you in the middle of the night to fix the toilet.

Why would you pay that much? I've already sold properties at 130X rent this year.

I'm with sdrealtor on this one, 150-175x is no deal. 100-125x rent is the parameter you should be looking for. You need to hold back 10% for maintenance/vacancy fund, 100-125 gives you that cushion. It also gives you a cushion if the rental market gets competative and you need to price more aggresively to avoid vacancy. I have looked at 125x's that arent selling, the 100x's are and probably always will. I guess if you think r/e is going to go up in the next year, go for it. Odds are that it will go down and you only need it to go down a little bit to get into safer investment territory. This is a once in a lifetime burst because it was an epic bubble, credit worthy investors with a stomach for r/e will be in short supply, hold out for cash nuetral/cash positive, they will come.

I couldn't agree more with sdrealtor as well. ESPECIALLY if you are considering anywhere in 92101 or 92102. Go look at short sales or foreclosures in Mission Valley. Better yet if you are serious about making money off of rental property why are you considering San Diego at all? I have rental properties here but they have been places I lived in and then grew out of and simply never sold. I did make a purchase of one back in 02 and let it go in 07.

At any rate, there are considerably better opportunities out of state, or even within the county if you do your homework, or better yet have patience and wait.

Thanks for the advice. Any suggestions on other cities to look at, or how to get started? I've thought about that a bit, but don't know how to go about looking into it.

There are some really astute people here who are involved with rental properties. Surveyor is one and FSD also knows his stuff. You need to make a decision of what your goal is, are you looking for cash flow or appreciation? People who do this professionally spend a good deal of time studying demographics of cities for emerging markets. There are areas in the southeast that are fairly robust, however again, doing the homework can be time consuming. You need to look for emerging growth in jobs and certain demographic trends. Try sending a private message to Surveyor or FSD and see if they give you some pointers on cities.

Again, a very very basic exercise you can do is to have a spreadsheet that helps you at least analyze the numbers. It is trivial to do that. If you post your email I can send you one.

Like I said, my advice would be to sit tight if possible, at least here in SD.

lurking

One of our threads, we posted up the ROE calculator that tells you cap rates, cash flow, cash on cash, tax advantages, etc. for specific properties if you enter what information you know.

http://piggington.com/where_is_rent_headed

The Excel spreadsheet is at the bottom of the thread. Download it, take a look, and you can see specifically what the property can do for you.

I put in the spreadsheet what numbers I look at. Nowadays, I really recommend getting properties that cash flow. Regarding appreciation, you're buying near the bottom so it's irrelevant, you're probably in good enough shape there. The calculator itself assumes a 4% appreciation rate over 10 years, so any appreciation rate above that is gravy.

If you have any questions, post up the property numbers and I'm sure we can shoot it to death... :-)

Again, try to go for cash flow properties in GOOD neighborhoods. In this economic climate, having the property cash flow eliminates most of the headaches, and allows you to ride out those periods when you have a vacancy. We are probably a couple of years away from those types of properties. The cash flow negative is probably tolerable if your household income is $200k or more. Unless you fall in that category, stay away...

On a personal note, I had a tenant in Mira Mesa leave San Diego because it was getting too expensive here. He had just gotten a new baby and while the old lifestyle made it tolerable, they could not survive long in San Diego. They moved to Texas. Fortunately, they had friends who needed a place and the friends wanted to move in right after they left. I was able to raise the rent a little and basically got no vacancy. That's the nice thing about a good rental neighborhood like Mira Mesa.

I know that the prices look really good nowadays, especially after being tormented with $500k condos for awhile, but if you are a real estate investor, you really have to wait just a little bit longer. I'm seeing a lot of novices out there right now buying up some properties, but they are I think a little too early. And I'll admit, I fall into that trap as well when I'm looking at how badly Oceanside prices have crashed. I have to really fight hard to remind myself that, hello, it's Oceanside (I think the realtors here know the areas I'm referring to in Oceanside...).

Take your time. Look at 20 properties before you decide to buy one.

I second everything Surveyer just said.
Would add to it that you need to include in your projections ALL the costs involved in owning rental properties. Most often overlooked:
1. Vacancy. Not just the time advertising, showing, and waiting for the tenant you've picked to get around to moving in, but the prep. and fixup time before it is even ready to show.
2. Opportunity cost of your down payment.
3. A monthly reserve set-aside for major repairs.
4. The cost of your own time: maintenance, management, headaches.
5. Transaction costs getting in and getting out.
6. The postponed cap gain taxes due when you sell (CA cap gains tax is, I believe, the steepest in the nation).

Thank you all - very, very informative. Lots to read through here.