San Diego Housing Bubble News and Analysis

Unclear question. Please define your terms.

Condo developments which allow daily and weekly rentals vs those that require long term leases.

This can be stipulated in the CC&R's.

Two schools of thought.
1) Makes the property more desirable to investors since they can rent their units or occupy it themselves. In this case vacation rental income potential.

2) Some buyers that will want to occupy their units may view this as a negative since vacation renters tend to be rowdier and less considerate than owner/occupants and long term leasee's. (Public opinion, not mine.)

It has been my experience that buyers in the beach area want to have the option to rent short term. And consider it as a way to pay for the place. FWIW.
I would let the market dictate this. In other words, if these condo's are in an area that has many vacation rentals, the damage is already done and there's a kind of standard in place. Kinda like Mission Beach. But if it is the an area that's not really got many vacation rentals, then I would go with the flow. It can be dangerous to be the odd one out in an area. IMO.

A condo complex that would allow short-term vacation rentals in a beach or bay area sounds like a recipe for deterioration in the long run. The type of tenants renting there would drive out the good owner-occupiers, spelling doom for hopes of long-term appreciation. Plus, financing would become less likely, which would really hurt values.
In short, if they would take vacation renters, I wouldn't buy.
I think it was Groucho Marx who said of a Country Club "If they would take someone like me, I wouldn't want to join them."

Aye caramba

"A condo complex that would allow short-term vacation rentals in a beach or bay area sounds like a recipe for deterioration in the long run"

EconProf with all due respect I have to ask you if you really know what the heck you are talking about on this particular thread.

Show me a condo on Sail Bay that doesn't have weekly rentals from Memorial Day to Labor day? In fact it is quite difficult to get any long term lease in any of these properties because they make tremendous sums of money when the zonies come.

Come on now, let's try to stick with the real situation that the poster brought up okay? The fact of the matter.

How many times do we have to harp on the regional importance of real estate. Know your market, know your goals, know the prevailing conditions of THAT LOCAL SUBMARKET.

Josh, what I have seen is that indeed there is deterioration for the condos on Sail Bay that are used primarly as rental properties. I do not see any strong deviations from the secular conditions that affect PB as a whole. Simply stated, if you are looking for a possible investment property I would not treat the exercise any different then any other rental property exercise with respect to your goals of cash flow, verses long term appreciation. The only difference is that your income model will vary. You should assume two models, the 8-9 month fall/winter/spring timeframe where you either rent to students or professionals and the 3 month model where you rent to zonies. In order to get the best exposure you should list the rental with a local MB prop manager that has a large client base of Zonie renters.

The biggest challenge would be to project the returns which to be accurate should be largely based on prior years returns (good luck getting those from the prior owner).

Again though, at these prices even with some depreciation I doubt that the numbers will pencil out anywhere close to being a good investment. So I would not, not buy because of vacation renters, because if you know Sail Bay, that is EXACTLY what you want in the summer; I would not buy because I don't think price levels are anywhere near what they need to be for cash flow. Cash flow numbers are much more realizable in other San Diego properties right now but even for those it is very tight.

EconProf

I think you are off the mark. Look at many of the major golf tournaments and many residents rent there homes to large corporations and the area do not deteriorate.
The benefit of beach front property in San Diego is that you have student who are paying during the school year and high paying summer rentals for vacationers June to August.

Many people pay the years mortgage by renting beach front homes for a few months.

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Any thoughts on the pros/cons of the short term rental of condos downtown in the vicinity the convention center? This would seem to be more of a year round market vs the Mission Bay summer zonies.

This is not an area of expertise for me but it seems like the hotels fill that niche better than a short term rental?

Seeing this debate, I have to chime in with some "real world" experience.
I bought and sold several homes and condo in two really different place from 2003 to 2007. San Francisco and Mission Beach. One thing that I learned about Mission Beach was that it's a huge vacation desitination where people stay in vacation rentals at or very near the beach. For good or bad, this in the quite common. Turns out it is common in many beach communities all over the world. Who knew? Anyway, I had the opportunity to create CC&R's and one the decisions concerned "should vacation rentals of a short term nature be allowed?" Well, I thought that rather than me guess about this and blow it, I should wait and see what the buyers wanted. Simple enough.
Well, come to find out, almost everyone who considered buying any of the units wanted the option to rent them as vacation rentals. I mean virtually everyone I talk to about it!! So, that's the way I made them and they sold.
In SF, I considered buying into a TIC...they are about 30% less than the market for a std condo. But the draw back is that they are loaded with legal issues that prevent almost any options to the owner. That's one big reason they sell at such a discount.
So my experience is that having options that allow for economic gain of the purchaser increases the value of the property to the purchaser. Wow, kinda like something outta Econ 101. Maybe that sheepskin wasnt a complete waste. If only I listened the first time!!!

Come on SD Realtor, you should know by now, I'm not a real estate investor. You've hit the nail on the head these units will probably never turn over at a price level that makes that kind of sense. I'm looking at it from the perspective of a resident. Of course since that type of condo is never cheap relatively speaking I just wanted to start a discussion on as aspect that I have no real insight into.

I would buy one to live in. I might rent it out in the summer if I keep the lifestyle I have now (single and able to move quickly.)

Josh

Again, having lived this experience...if you want to occupy this place most of the time, I hope you like loud and late night partying. Because it does seem common to vacation rentals. So if you're CC&R's allow them, you'll probably get this. At least some of the time. Of course, you could be the biggest perpetrator of the parties. :)
But from a sellers piont of view, I think having that option is valuable to buyers. IMO

OT: I loathe load parties
OT2: I love pillow fights by lingerie clad models, Brazilian or otherwise.

Josh

I thought all parties were "load parties", dont know if you meant that, but it's good.

I guess the investment decision between beachfront condos that permit short-term rentals vs. buildings that require longer-term tenancies hinges on whether the investor is short term oriented or long term, plus whether they can tolerate the hassle factor.
To me, the big money is in long-run appreciation, so I look at existing and future trends: age and condition of building, direction of the neighborhood, HOA quality, and especially percentage of owner-occupiers. I suspect the only thing worse than buying into a complex with a lot of tenants is to pick one with weekly rentals at the beach to students and vacationers. Talk about management intensive.
I once served on the Board at La Jolla Vista Townhomes, a well-located older complex at Genesee and I 805. Bought 3 units there in the early and mid-1990s and rented them out, mainly to UCSD students. It was then 1/3 tenants and very well-maintained.
I quickly learned that a virtual state of war existed between the owner-occupiers and the students and their lackadaisical amateur landlords. I sided with the owner-occupiers who tried conscientiously to pick up the trash, enforce CC&R rules, plan and execute deferred maintenance projects, and keep values up for the long run. It was a losing battle, and owner-occupiers steadily gave up and left, despite the superb location. Seeing the trends, and the now-two-thirds tenant occupied rate, I sold out in about 2000-1.
Interestingly, I never had tenant problems because I put the fear of God into beginning tenants, got their (usually) rich parents to co-sign, and got everyone to sign a separate CC&R "rules summary" in an addendum to the lease. Tried but failed to get other landlords to do the same...it would have saved them a lot of grief.
The complex now looks awful, and values have really fallen lately. While I made great capital gains, I couldn't fight the trends, and am glad I'm out. Sorry for the long-winded discourse.
As far as becoming a landlord to weekly tenants at a beach location, that's fine if you look at it as a new occupation. To do it right, and profitably, there is a whole new learning curve for you to master: maintenance, furniture rental, weekly window washing (its the beach), cleaning, CC&R compliance, HOA relations, marketing on an ongoing basis (fielding calls, meeting people, taking apps, credit checks, turn-downs, checking references, etc.), evictions, recognizing druggies vs. non-druggies, etc. Your applicants won't be golf tournament or Del Mar race types, so brace yourself. As to those tempting-sounding weekly rents, be sure to plug in 25% - 35% vacancy rates for the summer season--talk to existing practicioners to confirm this.
Above all, go to these complexes and talk informally with residents, especially owner-occupiers. Attend a HOA meeting, and arrive early to chat with attendees. Of course ask various lenders if there is a differential in LTV and interest rates for this type of project. Can any lenders or realtors enlighten us on this?
The one type of summer beach rental that makes some economic sense, and has stood the test of time, is students during the academic year and vacationers during the summer. Downtimes are minimized, but still surprisingly high during prime vacation times--50% not uncommon. I know Mission Beach landlords who do this who simply keep the students year around since turnover is so frequent among vacationers. Penny Realtors in Mission Beach has long been the company to find these tenants, but they take a big bite out of rent--1/4 or 1/3 I believe.
Let's hear from Piggs who have beach rentals...

The Reader (love it or hate it) published a story recently about short-term vacation rentals and efforts to curb them:

http://www.sandiegoreader.com/news/2008/...

That's a great article. Anyone considering buying into a complex that allows weekly rentals (or even buying a property next to one) should read it.

I understand where you are coming from Josh. However like myself, what you buy to live in now, may become a rental for you some day in the future.

Certainly though the valuation of homes there in no way is detracted by the short term rental nature of that particular area because that is exactly what that area is suited for. As for living in that location year round, that is another story because being surrounded by zonies for 3 months out of the year is kind of tough.

I can attest to vacation renters being a pain and having vacancies up to half the season. But again, as an exit strategy, you should always consider what your market will think is valuable. At the beach, all the prospective buyers that I spoke with, and there were many, told me that they wanted to rent to zonies in the lucrative summer season to help "pay-off the property".

As a side note: When I was younger, I bought my first couple of homes thinking that I was going to stay for a long time, etc...
The stats say the average time is 7 years in a home. I've learned there is wisdom in statistics and this is one of them.