San Diego Housing Bubble News and Analysis

I don't have a lot of experience with rentals, but here's what I've learned. I have a rental house (3/2) in San Jose and a condo (2/2) in Santa Ana. The 2/2 is in a complex with about 300units. HOA's are a pain in the ass. It's my first experience with them and it's been non-stop aggravation. If you can afford a multi unit that you own the whole thing.... that's the way to go. Otherwise, Id stick to SFH's. That said, I'm making about $400/month (not including vacancy) on it. It took me 3 months to rent it at first. The tenant is good, but still has to be called every other month to remind them to pay the rent.

The 3/2 in SJ was my house for 5 years before I moved south. It's been rented for 2 years with a new tenant after year one. I loose about $100 a month, including paying a property manager up there. Again, tenants have issues here and there, and checks "get lost in the mail" so it's a little bit of work, but nothing serious.

The one thing you need to think about is most non-owner occupied loans will require 25% down. I'm not a broker, so I could be wrong, but I was told that you can get hit hard or not get loans if you can't come up with that. Also, form an LLC. It can help in many ways. It protects your personal assets from a suit related to the property and it also allows you to be the "manager" instead of the "owner" to tenants. They write checks to Acme LLC and your just following Acme's policies. I think I'm a very reasonable landlord, but it makes a difference in dealing with tenants.

I'm not sure how useful any of that was... but best of luck.

I can speak to financing of apartment properties, as we do quite a bit here at the Bank where I work. Most banks underwrite to the cash flow of the property - they'll want to see the appraiser's estimate of NOI be sufficient to cover the required P&I payment with a 30Y amortization by a margin of at least 1.25x. This typically limits your LTV to 60-70% depending on the cap rate of the property. A personal guaranty is almost always required, and holding the property in a single-asset LLC is preferred.

Back in the loosey goosey days banks were going much more aggressive, but they've all imploded now and credit is much tighter, at least from my POV.

I was into investment property until about 4 years ago, now all I've got are some small commercial props and a little strip mall. I just don't think that anything now makes economic sense. All my props I've had for a long time. There is no way that you can buy something today especially multifamily and make money.

Yeah, you'll hear from "experts" that say look at he numbers, if you buy for a GRM of 10 with a 5% vacancy factor, etc, etc, etc. Real world, something always comes along to screw up those numbers. Especially if you need a decent cash flow. It only takes a unit to be vacant for one month to really screw things up.

Hate to be a downer, but until investment properties get back to something approaching realworld values, my money is in CDs.

It depends on the area. Check out Riverside county. Using the 50% rule, there are a lot of profitable properties out there, in decent neighborhoods.

The biggest mistake I've seen residential landlords make (over and over and over again) is to get greedy with rent. They charge over market because they're convinced they have the nicest house on the block, but the only people willing to pay that are the ones with questionable credit. Three months later, they wonder why they always end up with an eviction and damage.

If you pay the right amount for a property, you can charge below market, get well-qualified tenants, and still have very positive cash flow.

I think the number one rule of investment property is don't buy something that you don't drive past on your way to work. If you are going to purchase investment property, you have to visit it frequently.

I guess I'm showing my inexperience, what is the 50% rule?

It's not inexperience, I don't think many people go by it. It's just this - as a general rule, long-term maintenance costs (including vacancies, property management, and major expenses like flooring and roof) run about 40-50% of rental income, not counting the mortgage. If you manage your own property, it's closer to 40%.

Excellent posts. I have some comments:

1. Regarding LLC. Can it be based in, say, Delaware if the property is in California? I ask because the LLC annual fee alone is $800 in CA. If the property I buy is only $100K (an older SFH in San Bernardino), the annual LLC fee is almost one full month of rent!

2. Regarding LTV and financing, it's interesting for me to learn that banks prefer to deal with a single-asset LLC. A follow-up question: do banks consider interest-only loans for this type of mortgage? (That is, a SFH purchased to generate rental income.)

3. How about property management companies? Do they charge 7% or 8% of rent? Do they charge the same when the unit is vacant? Do they help finding tenants in exchange for a commission? Do they have plumbers, handymen to do any repairs at reasonable cost to me (the owner)?

4. I aqree with the opinion that it's best to charge below-market rent, but you need to be super strict with FICO scores and checking references.

5. I'm very tempted to buy SFHs in Riverside, San Bernardino, Fontana, etc., places where probably monthly rent is close to 1% of the value of the house. Problem is, this ratio works only in the very cheap, entry-level houses. Say, a 2/1 built in the 1960s with less than 1000 sf. I'd consider buying 20 or 25 of houses like that (putting 20%-25% down in each). Would that be too much work, even if I hire a Property Management company? If I set up an LLC for each house, the State of Calif would be making a fortune in LLC renewal fees alone!

6. As an unrelated example, I just found a 10-unit building in Oxnard for sale. Asking price is $2.3 to $2.5 million range. The units are apparently 2-BD, and the building is very close to the ocean. Built in 1972, and looks ugly/plain from outside. Some windows may even have an ocean view. The ad claims that gross income is $130K/year, but an ad on Craigslist lists one apartment in that very same building for only $1095/month. Is the seller being completely irrational? Compared to the potential income, this building should be listed for half of what they are asking! Or am I missing something? Who would buy this?

I know someone who's trying to sell a 16-unit building in Wilmington (San Pedro area -- not a good area, but that's where you find the good rentals). A mix of 1 and 2 bedrooms. He's asking $1.57MM. Each unit has a one-car garage plus one outside parking space. It nets about $4,500-$5,000/month after all expenses.

Let me know if you're interested.

Delaware LLC is fine. The reason we prefer LLCs is most of our deals are here in California where the 'single-action rule' can apply. If you lend to an individual or trust and take real property as collateral, the Bank may only be able to go after one or the other (borrower or collateral) if default occurs. Typically, the real property is held in an LLC and the individual or trust provides a personal guaranty of the loan to the LLC.

I can't speak to lending against SFRs...there are much more consumer protection regulations in that arena, so our group sticks to 5+ multi-family financing (as well as all other types of commercial property and business lending). We have a traditional mortgage group that does SFR financing for primary residences and rentals.

They charge anywhere from 7-12% of rent, usually somewhere in the middle. A few charge 5%, but if you find one like that, I'd carefully examine their services and get references. I think most don't charge the monthly fee when it's vacant, because then there's nothing for them to do. They have different fee structures, but there's usually a separate charge for finding a tenant, although they may waive that if the tenant they originally found breaks the lease (you can also hire them to just find/qualify a tenant while doing the monthly chores yourself). Many have maintenance people they work with exclusively and can get you a discount.