what is a reasonable expectation

[jficquette]

Good Luck!!

John

[Ex-SD]

Lot’s of good advice in this thread.

The unknown variable is how many condo’s will be tossed into the rental market? There is an absolute glut of new, unsold condo’s with more being built because the projects were already too far underway when the housing market crashed. Someone posted a list from SD Lookup yesterday that showed 85 newly foreclosed condo’s, with the overwhelming majority being in downtown. With the huge number of ARM’s resetting to much higher payments for the owners over the next two years and with ever-decreasing values of their properties, the foreclosures will grow at a tremendous rate and you’re going to have a lot of competition for available, qualified renters. This problem will not go away quickly. The bottom line is that you’d better factor in all of these problems when you calculate how much you can realistically get for rent on a condo if you want to attract and keep a paying renter. This could severely affect your R.O.I.

[want a good deal]

Finally, thanks for some intelligent input on my scenario, that is exactly what I need. This is also why I think this is a healthy correction that will lead to an excellent long term opportunity. The market will go down forcing foreclosures and new renters who most likely will stay in San Diego. Lets face it there is a reason people pay this much to live here. It is one of the best places to live imo. It will also give people on the sidelines and those who would like to live here but could not afford it before to move and either rent or buy creating a nice future rebound in the market. It is a necessary cycle to create opportunity for those brave enough to step in when nobody else wants to. When is the only question. IMO it will take ten years before the bottom feeders are rewarded. Manage your money well and try not to become a casualty along the way. Geronimo!!!!!

[want a good deal]

Another good thing is this market sucked up a lot of the good land to build on so next time there will be less to start with possibly making the next boom even better.

[Bloat]

Having had SFR’s for 20 years,

It used to be a single family rental was a good deal if it was priced at 10-12 times annual rent, multi-unit (+4) low rent buildings needed to be priced at 8-10 times rent, but condos have always had the worst ratio due to hoa fees and less appreciation.

Even if prices were stable for the next few years rentals don’t make sense with current ratios. SFR’s currently are over 20x annual rent. Likely it will take at least 5 years of a combination of declining prices and increasing rents before investment numbers pencil out.

[patientlywaiting]

Great post bugs.

It was irrational on the way up… What’s to say that it’s going be rational on the way down. It’s simply supply and demand.

[Bugs]

At this point I am not assuming the 2005 peak is going to come back in the next 10 years. Maybe it will, maybe it won’t.

[SD Realtor]

want a good deal – Those that are particularly astute rental property owners treat the investment very seriously and do much more then focus on the numbers. By that I mean they spend more time finding markets that are conducive for their investment to appreciate AND pencil out, they move in and out of those markets appropriately. These are people who bought in communities like Phoenix for instance several years ago and sold in 04, or bought in Austin in 02 and have recently sold. These are the same people who may have bought in places like North Carolina or Seattle in 04/05 and will be selling in the near future.

I am a landlord but these are properties I used to own and have never sold. I treat them like IRA’s as well and there are possibilities that relatives on either side of the family may use them in the future. They are both slightly negative cash flow wise but I am much more content with my steady tenants who care for the properties. I did purchase a condo in Mission Valley a few years back primarly as a rental but with a possibility of a relative moving in and that was recently sold.

I guess what I am saying is that if you really are considering purchasing a rental then you may want to consider finding more robust markets then San Diego, or buy a primary residence, live in it awhile and then move out and make it a rental.

SD Realtor

[NotCranky]

Good Post SDR,

Some one had to say it. Your’s truly was on the verge of it. I don’t think the majority of people talking about rentals have a clue how much goes into identifying or manufacturing workable deals even in a good market. Snap’em up and run an add doesn’t do it most of the time.I and some of my clients have had some success at this and I must say racking your brains and busting your ass is the key(for small time investor)…

[want a good deal]

SD Realtor – Thanks so much for the info. I already own a McMansion and I am very happy with it. Of course I own it at half what it is worth today. Which even if it had gone up double again I wouldnt sell it because I dont want to move around, its not worth it to me. I am looking to diversify my assets now and have been thinking about downtown condos. I know they have to go down quite a bit more before they are worth investing in but I think downtown will eventually be a great market and good investment. Also, because I live in North County when one of my condos is not rented I will use it for a change of pace or let friends and family use it. My main question is do I have to wait before it is a positive cash flow situation, which seems doubtful, or are there situations that make sense to be slightly negative. I am going to buy outright or put a large amount down on the properties so I will have little risk of carrying costs overwhelming me if things go bad. What is the downside of downtown condos that you might know about. Thanks again.

[SD Realtor]

Hi wagd…

I think real estate is a good addition to a diversified portfolio. Given the situation you described it would absolutely make sense to keep on the course of letting this depreciation cycle run through the motions prior to purchase. I do agree that downtown will show some good investment potential once the bottom (or at least once we get close the bottom) is reached. For the higher end units downtown the only downside is HOA fees. Discovery for instance charges close to 600 a month for HOA. Definitely non trivial.

Do you have to wait for a positive cash flow situation? Well again, even in a diversified portfolio I think you want either an appreciating asset or an income generating asset. Buying anything right now in San Diego would neither produce income or be an appreciating asset. Sticking the money in a CD would at least dribble you out a little bit of income.

With that said, I would hold off until one of the two criteria is met. There are also more sophisticated ways to invest regarding real estate, REITs and consortiums and such that will return income. Again, I am not professing to know much about them, nor am I a financial professional advocating them. Ray Lucia advocates non tradeable REITs as one of his buckets…

Anyways to be honest, if it were me, I would keep the cash liquid and hang on a few more years and then purchase the property. Again, even if it doesn’t cash flow it has much better appreciation potential.

SD Realtor

[want a good deal]

A big factor for me would be the tax write offs for rental property. Do you know how much you can write it down every year. I am in a high tax bracket and thats why I would treat it like an IRA. Its a way to save money tax free and then when I retire I can take the income either by a sale or continuing to rent at a lower tax bracket. The problem with the REIT is that I dont get to stay downtown when my property is empty, which is a big plus for me. I will get value out of my place either rented or not to some degree. I plan to buy multiple downtown condos in different price ranges and areas but I plan to stay away from the high end. Does it make sense to buy in the middle of the building with some view but not so much I have to pay the big premium. Seems like these are the best because the rental price would still be reasonable but someone will not get the bottom of the barrel place. I dont want renters who are just looking for the cheapest place they can find. Also want buildings with reasonable ammenities but not so much that the HOA is over $600.
Thanks again!

[Author]

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