San Diego Housing Bubble News and Analysis

I wouldn't buy a condo OR condo conversion as an investment, PERIOD.

I believe that LLC's in CA require an $800 annual filing fee.

Income from an LLC should be pass through income straight to your 1040. No corporate tax or separate return to file

2005 prices mean NOTHING as a comparison.
It's like talking about tech stocks at the peak of the bubble, and thinking that $500 a share represented value, they ultimately went to zero, and people who bought all the way down based on the peak were screwed.

Real estate has great potential. Personally, I would rather buy a HOUSE out of state as a rental rather than a condo or conversion around here.

Paying cash would be ultra conservative and not something that I would recommend either.

Have you ever been a landlord before ??

I'd wonder about the following

1) How much of the current complex is owner occupied versus investment?

2) How much of the current owners have been are old versus new? I guess for a condo convert or new complex, that would be a moot question, but probably that should raise a few concerns.

3) Is the HOA underfunded? If so, expect special assessments.

4) Any major repairs coming, like a leaky roof,common areas etc? (Did you check out the HOA meeting minutes/etc)? If so, expect special assessments.

5) What exactly is the occupancy rate. Are there a lot of empty units? If so expect special assessments.

In general , condo's are the last to appreciate and first to depreciate.
Me personally, I don't like condo converts. Because most of them were done in the 2004-06 range, at the time of the bubble. I 'd be suspicious that some of the owners would be on solid financial footing or majority of owners be owner occupied or both. And in a shared community, that to me is a red flag, especially on beaten up but fixed up apartment converts.

But that's just how I feel. Your mileage will vary.

I held each of my properties in its own LLC - don't see any reason to have a parent LLC holding each LLC - I briefly setup a corporation to hold the LLCs but realized that it didn't make sense for my circumstances - perhaps if your net worth is north of $5 mil having the parent LLC / corp might make sense - keep the properties well insured and have umbrella insurance to cover anything not covered in base policy

LLC tax is $800 per year - each LLC has its own tax return and the bottom line from that return flows into your 1040 - no double whammy - tax only paid on your personal return

That was the easy stuff - now, about purchasing the condo conversion

When I did my condo conversion I did everything right - new roof, fresh stucco, new windows, new water heaters, additional insulation in common walls, etc - this let me feel comfortable about selling the condos and also let me set he HOA fee very low

You'll have to assess the quality issue yourself or get inspections done - focus on the common areas I listed above

Now, you'll have to get a copy of the HOA Reserve Review - the review is required at the 2 year point on new condos with an annual follow up - if the condo seller can't (or won't) produce this document run (don't walk) away from the deal - the reserve review will assess the state of the property and then estimate the ongoing expense of maintaining the property - the bottom line on the reserve review is the over/under funding of the HOA - my HOA is currently over funded so we could lower the already low HOA fee if we wanted to

Quality: wow, where to begin - I started with a well constructed 4plex and then did everything right - some of the condo conversions started as poorly constructed apartments and the converter did the minimal amount of work he could get away with and still sell the POS's - you'll have to assess this for yourself - in particular, I would look into noise issues inre common walls and floors/ceilings in multi-story properties (hard to imagine that many converters added insulation to these areas)

Utilities are another issue to consider - I've seen several horror stories where the HOA is out of money and the property has common utilities that are paid by the HOA - you're still paying your HOA fees but don't have utilities because the HOA isn't paying the common bill - similar story with insurance - if the HOA isn't paying the insurance bill you won't get a loan on the property (nor will anyone you want to sell to which means only a cash buyer can purchase)

I've always been negative on condos - and that was before the latest negatives popped up (common utilities and insurance) - I say that there is only one form of housing investment worse than condos and that is mobile homes - be very careful buying condos as an investment and be extra special when the condo is a conversion

What about condo-hotels? i thought those were 2nd from the worst. And timeshares, I think by far are the worst :)

Yooklid I would heed the advice of the people who have posted on this thread and are in the business of owning property rentals.

If you are looking for cash flow then I am curious as to why you would buy a condo rental in San Diego at all. Don't get me wrong, as prices have fallen there are cash flow opportunities. Yet if you are really serious about making money then you may want to consider out of state.

IMO you should be concerned with the HOA of any complex, regardless of if it is a conversion or not. If the building is a newer building, within 10 years old, then prepare for a possible lawsuit against the builder due to construction defects. This may or may not affect the HOA but it is commonplace for large developments.

You should definitely have all of expenses and anticipated costs mapped out in a spreadsheet and ahead of even looking at a property you should be able to give accurate cash flow forecasts based on your estimates of occupancy, and all other factors.

How you hold the rental, LLC or SCORP, in or out of a trust etc, are important factors but in essence these are necessary expenses that you will need to log and keep track of.

"What about condo-hotels? i thought those were 2nd from the worst. And timeshares, I think by far are the worst :)"

I don't consider those to be investments

An investment sends you a check every month (generalization) - not the other way around

It always amuses me when my brother-in-law tells me what a great investment his timeshare is

If you are buying a condo, please, even for investment, read the threads on here about HOAs and the threads on SDLookup.

As a quick recent example. My girlfriend and her husband bought a condo in a complex. They were told the balcony is their responsibility. Last year their neighbor redid their balcony.

Many balconys in this older complex are seeing wear and tear. The condo board decided to change the rules. Now it is part of the complex. They are contemplating assessing 10k to each owner to redo the balconies throughout the entire complex. (insanely, even the neighbor who redid theirs)

My friend pretty much told the HOA to file a lien. They don't have 10k for a balcony.

The most disturbing part is originally the balcony was the owner's premises. They change the rules along the way.

Paying the monthly HOAs are bad enough, but you can almost justify it if you are not the type of person that, for example, likes to do yard work, or if you enjoy a pool, etc.

But the CC&RS are the deal breaker for me. It is like living in a Nazi regime. They make up rules as they go along. I mentioned once about a lawsuit regarding a palm tree that was planted that did not conform w/the other palm trees in a community. Or the lawsuit over the color of a window trim.

If there are foreclosures in the complex, expect HOAs to be underfunded, hence special assessments.

If there are any lawsuits, expect special assessments. See Villa Vicenza, as an example. I could go on and on. Needless to say, do your homework.

I know some of the condos in UTC are seeing some major declines and it is tempting b/c they are easy rentals especially w/the proximity to UCSD.

"you may want to consider out of state"

to each their own - surveyor (haven't heard from him lately) owns multiple properties out of the state

I would never own rental property out of the state - too easy to be screwed by tenants or local management that knows you aren't around

I managed my properties myself and found that 45 minutes away was too far to own a property if you are also working full time (one of my beach properties was 45 minutes away with no traffic and as much as 1 1/2 hours in work or weekend traffic - not much fun dealing with tenants or doing turnovers / showings when a visit to the property meant 1 1/2 to 3 hours of driving)

I add I also agree. Don't put all your money down. You don't know what the future holds. May be hard to get the money out of it if/when you need it. As long as the rent covers the mortgage and a little extra just in case, that's probably safer. JMO.

i've been busy! mostly lurking. been doing a lot of business traveling actually. my frequent flyer miles are through the roof.

as for out of state, as 4plex as said before, it can be a huge hassle. it does provide better cash flow opportunities than san diego, but for beginning investors, all the information can seem daunting. i don't know if i can recommend it for beginning investors...

but with any real estate investment, you should not concentrate on how much the property has fallen in value but instead see if it can profitable to you. you should run the numbers and make your decision from all the information you are able to get.

back to work!

JP, I have a friend in the exact same situation. Is this complex in Linda Vista? I actually tagged along and went to the HOA meeting where they proposed the assessment. Pretty interesting.

Yes, it is in Linda Vista. World is shrinking.

Very enlighting write-up 4PlexOwner...

Thanks,

CE