[ctr70]

The numbers are not great on SFR rentals even in the entry level low cost areas. I think a good rule of thumb with buy and hold rentals is a 1% rent-to-price ratio. Meaning if you buy a $200,000 house, it should get $2,000 in rent. Or if you buy a $100,000 house you should get $1,000 in rent. You can’t hit that 1% ratio in San Diego County. So what you are doing is buying on the hope of appreciation. Your cap rate is not going to be great. Also to get a decent deal on a SFR you often have to buy a fixer that needs $20k to make rent ready. But I still think it may not be bad to buy a SFR in a entry level area of SD. I also think Vista and Oceanside are good.

I am in the market for rental property similar to the poster, so I have been thinking a lot about this. One thing about condos is you can get them in better locations than houses. You can get condos right now in very good neighborhoods & locations where you can get very close to the 1% rent to price ratio b/c prices are more depressed on condos b/c the financing on them is so bad right now. SFR’s that would even close to work as rentals are in not nearly as desirable locations. A big unknown with condos is the financing. If the owner occupancy dips below 50% they can become really hard to finance. Sometimes only cash buyers being able to be the next buyer in the complex. That is a negative snowball creating more units as rentals and lowering prices.

I personally think the numbers are very good for SFR’s in some of the further out towns in Riverside and San Bernardino County. Some of the most experienced investors I know that have been doing it 15-30 years are buying rental houses out there for $80k, fixing them up and getting $1,200 in rent. Those are much better numbers than you see in SD County. In this case you are not buying on the “hope” of appreciation, your buying something that has a true positive cash flow of $300+ a month from day 1. And you can apply that to the principle and get them paid off in 10 yrs. But then you have to deal with getting to know those neighborhoods and being an out of area property manager. Which is a challenge. But I have managed a out of state rental for 7 yrs and it hasn’t been that bad. I know of one guy who has bought like 30 rental houses in Palmdale/Lancaster for around $40k-$60k and gets $1,200 in rent mostly to section 8. He bought 100 of those little rental houses in the mid 90’s during the last downturn, sold at the peak in 2005 and made like $10 million. Now he is doing it again!

I’m not so sure buying on the hope of big appreciation down the road in 5-15 yrs is a great bet. There are far more headwinds against real estate this go around than coming out of the 90’s slump. We won’t have the tailwind of easy lending to push prices up. So I am leaning to go more for cash flow right now vs. a break-even house in San Diego. b/c my goal is more to get 10-12 houses paid off so I have a very healthy monthly income to live off and not have to work. If you have a negative cash flow or break-even property in San Diego, it may not produce much cash flow for you to live on for decades.

Anyway, I’ve rambled on long enough. Just my random opinions. Very interesting topic of where and what is the best property to buy for investment right now. Would love to hear more opinions.

[ctr70]

The numbers are not great on SFR rentals even in the entry level low cost areas. I think a good rule of thumb with buy and hold rentals is a 1% rent-to-price ratio. Meaning if you buy a $200,000 house, it should get $2,000 in rent. Or if you buy a $100,000 house you should get $1,000 in rent. You can’t hit that 1% ratio in San Diego County. So what you are doing is buying on the hope of appreciation. Your cap rate is not going to be great. Also to get a decent deal on a SFR you often have to buy a fixer that needs $20k to make rent ready. But I still think it may not be bad to buy a SFR in a entry level area of SD. I also think Vista and Oceanside are good.

I am in the market for rental property similar to the poster, so I have been thinking a lot about this. One thing about condos is you can get them in better locations than houses. You can get condos right now in very good neighborhoods & locations where you can get very close to the 1% rent to price ratio b/c prices are more depressed on condos b/c the financing on them is so bad right now. SFR’s that would even close to work as rentals are in not nearly as desirable locations. A big unknown with condos is the financing. If the owner occupancy dips below 50% they can become really hard to finance. Sometimes only cash buyers being able to be the next buyer in the complex. That is a negative snowball creating more units as rentals and lowering prices.

I personally think the numbers are very good for SFR’s in some of the further out towns in Riverside and San Bernardino County. Some of the most experienced investors I know that have been doing it 15-30 years are buying rental houses out there for $80k, fixing them up and getting $1,200 in rent. Those are much better numbers than you see in SD County. In this case you are not buying on the “hope” of appreciation, your buying something that has a true positive cash flow of $300+ a month from day 1. And you can apply that to the principle and get them paid off in 10 yrs. But then you have to deal with getting to know those neighborhoods and being an out of area property manager. Which is a challenge. But I have managed a out of state rental for 7 yrs and it hasn’t been that bad. I know of one guy who has bought like 30 rental houses in Palmdale/Lancaster for around $40k-$60k and gets $1,200 in rent mostly to section 8. He bought 100 of those little rental houses in the mid 90’s during the last downturn, sold at the peak in 2005 and made like $10 million. Now he is doing it again!

I’m not so sure buying on the hope of big appreciation down the road in 5-15 yrs is a great bet. There are far more headwinds against real estate this go around than coming out of the 90’s slump. We won’t have the tailwind of easy lending to push prices up. So I am leaning to go more for cash flow right now vs. a break-even house in San Diego. b/c my goal is more to get 10-12 houses paid off so I have a very healthy monthly income to live off and not have to work. If you have a negative cash flow or break-even property in San Diego, it may not produce much cash flow for you to live on for decades.

Anyway, I’ve rambled on long enough. Just my random opinions. Very interesting topic of where and what is the best property to buy for investment right now. Would love to hear more opinions.

[ctr70]

There are definitely a lot of dark clouds on the horizon for lending:

1. FHA wants to reduce it’s footprint in the mortgage market so it continues to raise monthly mortgage insurance (it’s twice what it was 6 mos ago)

2. Fannie Mae is making loans really expensive for everyone except 20% down and perfect credit

3. Rates have risen

4. If they ever get private label lending to come back (and that’s what the Gov wants to do), it ain’t going be at 4.5%

5. Fannie is looking to lower the max loan from $729k to $625k…that means super tough lending guidelines and big down payments for over $625k loans

6. The Gov is going to make banks have more skin in the game so they are more on the hook to buy back bad loans…this will make the banks even more conservative on lending

All this will result in making it a lot more expensive to own real estate and reduce the buyer pool. And it has to hit prices hard.

Starting in the late 1990’s California real estate was pushed up by the “tailwind” of easy lending. It will NOT have that same “tailwind” pushing up prices this go around. Appreciation will have to be driven by *income growth*. Which is the way it should be.

[ctr70]

There are definitely a lot of dark clouds on the horizon for lending:

1. FHA wants to reduce it’s footprint in the mortgage market so it continues to raise monthly mortgage insurance (it’s twice what it was 6 mos ago)

2. Fannie Mae is making loans really expensive for everyone except 20% down and perfect credit

3. Rates have risen

4. If they ever get private label lending to come back (and that’s what the Gov wants to do), it ain’t going be at 4.5%

5. Fannie is looking to lower the max loan from $729k to $625k…that means super tough lending guidelines and big down payments for over $625k loans

6. The Gov is going to make banks have more skin in the game so they are more on the hook to buy back bad loans…this will make the banks even more conservative on lending

All this will result in making it a lot more expensive to own real estate and reduce the buyer pool. And it has to hit prices hard.

Starting in the late 1990’s California real estate was pushed up by the “tailwind” of easy lending. It will NOT have that same “tailwind” pushing up prices this go around. Appreciation will have to be driven by *income growth*. Which is the way it should be.

[ctr70]

There are definitely a lot of dark clouds on the horizon for lending:

1. FHA wants to reduce it’s footprint in the mortgage market so it continues to raise monthly mortgage insurance (it’s twice what it was 6 mos ago)

2. Fannie Mae is making loans really expensive for everyone except 20% down and perfect credit

3. Rates have risen

4. If they ever get private label lending to come back (and that’s what the Gov wants to do), it ain’t going be at 4.5%

5. Fannie is looking to lower the max loan from $729k to $625k…that means super tough lending guidelines and big down payments for over $625k loans

6. The Gov is going to make banks have more skin in the game so they are more on the hook to buy back bad loans…this will make the banks even more conservative on lending

All this will result in making it a lot more expensive to own real estate and reduce the buyer pool. And it has to hit prices hard.

Starting in the late 1990’s California real estate was pushed up by the “tailwind” of easy lending. It will NOT have that same “tailwind” pushing up prices this go around. Appreciation will have to be driven by *income growth*. Which is the way it should be.

[ctr70]

There are definitely a lot of dark clouds on the horizon for lending:

1. FHA wants to reduce it’s footprint in the mortgage market so it continues to raise monthly mortgage insurance (it’s twice what it was 6 mos ago)

2. Fannie Mae is making loans really expensive for everyone except 20% down and perfect credit

3. Rates have risen

4. If they ever get private label lending to come back (and that’s what the Gov wants to do), it ain’t going be at 4.5%

5. Fannie is looking to lower the max loan from $729k to $625k…that means super tough lending guidelines and big down payments for over $625k loans

6. The Gov is going to make banks have more skin in the game so they are more on the hook to buy back bad loans…this will make the banks even more conservative on lending

All this will result in making it a lot more expensive to own real estate and reduce the buyer pool. And it has to hit prices hard.

Starting in the late 1990’s California real estate was pushed up by the “tailwind” of easy lending. It will NOT have that same “tailwind” pushing up prices this go around. Appreciation will have to be driven by *income growth*. Which is the way it should be.

[ctr70]

There are definitely a lot of dark clouds on the horizon for lending:

1. FHA wants to reduce it’s footprint in the mortgage market so it continues to raise monthly mortgage insurance (it’s twice what it was 6 mos ago)

2. Fannie Mae is making loans really expensive for everyone except 20% down and perfect credit

3. Rates have risen

4. If they ever get private label lending to come back (and that’s what the Gov wants to do), it ain’t going be at 4.5%

5. Fannie is looking to lower the max loan from $729k to $625k…that means super tough lending guidelines and big down payments for over $625k loans

6. The Gov is going to make banks have more skin in the game so they are more on the hook to buy back bad loans…this will make the banks even more conservative on lending

All this will result in making it a lot more expensive to own real estate and reduce the buyer pool. And it has to hit prices hard.

Starting in the late 1990’s California real estate was pushed up by the “tailwind” of easy lending. It will NOT have that same “tailwind” pushing up prices this go around. Appreciation will have to be driven by *income growth*. Which is the way it should be.

[ctr70]

I’m in agreement in general with the larger down payments and tighter lending guidelines. But we just have to be OK with the consequences:

1. home prices continuing to fall
2. the homeownership rate in America will continue to fall
3. in the lower end neighborhoods of SD most buyers will never be able to save up the 10% down unless house prices fall to say $100k in those areas (b/c you don’t just need 10% down, you need reserves on top of that 10%, closing costs,… what if the roof leaks? furnace breaks? Job loss?)
4. this may cause lower end neighborhoods to deteriorate further b/c more investors will own houses and less owner occupied, and neighborhoods will become mostly renters

[ctr70]

I’m in agreement in general with the larger down payments and tighter lending guidelines. But we just have to be OK with the consequences:

1. home prices continuing to fall
2. the homeownership rate in America will continue to fall
3. in the lower end neighborhoods of SD most buyers will never be able to save up the 10% down unless house prices fall to say $100k in those areas (b/c you don’t just need 10% down, you need reserves on top of that 10%, closing costs,… what if the roof leaks? furnace breaks? Job loss?)
4. this may cause lower end neighborhoods to deteriorate further b/c more investors will own houses and less owner occupied, and neighborhoods will become mostly renters

[ctr70]

I’m in agreement in general with the larger down payments and tighter lending guidelines. But we just have to be OK with the consequences:

1. home prices continuing to fall
2. the homeownership rate in America will continue to fall
3. in the lower end neighborhoods of SD most buyers will never be able to save up the 10% down unless house prices fall to say $100k in those areas (b/c you don’t just need 10% down, you need reserves on top of that 10%, closing costs,… what if the roof leaks? furnace breaks? Job loss?)
4. this may cause lower end neighborhoods to deteriorate further b/c more investors will own houses and less owner occupied, and neighborhoods will become mostly renters

[ctr70]

I’m in agreement in general with the larger down payments and tighter lending guidelines. But we just have to be OK with the consequences:

1. home prices continuing to fall
2. the homeownership rate in America will continue to fall
3. in the lower end neighborhoods of SD most buyers will never be able to save up the 10% down unless house prices fall to say $100k in those areas (b/c you don’t just need 10% down, you need reserves on top of that 10%, closing costs,… what if the roof leaks? furnace breaks? Job loss?)
4. this may cause lower end neighborhoods to deteriorate further b/c more investors will own houses and less owner occupied, and neighborhoods will become mostly renters

[ctr70]

I’m in agreement in general with the larger down payments and tighter lending guidelines. But we just have to be OK with the consequences:

1. home prices continuing to fall
2. the homeownership rate in America will continue to fall
3. in the lower end neighborhoods of SD most buyers will never be able to save up the 10% down unless house prices fall to say $100k in those areas (b/c you don’t just need 10% down, you need reserves on top of that 10%, closing costs,… what if the roof leaks? furnace breaks? Job loss?)
4. this may cause lower end neighborhoods to deteriorate further b/c more investors will own houses and less owner occupied, and neighborhoods will become mostly renters

[ctr70]

FHA already upped it’s monthly mortgage insurance to 1.15% of the loan amount starting in April. Less than 6 mos ago it was only .55%! They more that doubled it! So if you are getting a $350,000 FHA loan you have $335/mo just in mortgage insurance. They are trying to reduce FHA’s footprint in the mortgage market and one way to do that is to keep jacking up mortgage insurance.

Fannie Mae loans have also recently got a lot more expensive if you have anything less than perfect credit and 20% down. We are headed towards very expensive mortgages unless you have 20% down and perfect credit. This will all impact prices. Maybe even more so in the blue collar areas where FHA loans are more popular. It is getting REALLY expensive to get a 3.5% down FHA loan. And add higher rates into that cocktail too. I can’t see how that doesn’t put a lot more downward pressure on prices for years to come, unless this is offset by a job/income boom.

Saying we will not have the “tailwind” of accommodative lending pushing prices this go around (like we did starting in the late 1990’s) is an understatement.

[ctr70]

FHA already upped it’s monthly mortgage insurance to 1.15% of the loan amount starting in April. Less than 6 mos ago it was only .55%! They more that doubled it! So if you are getting a $350,000 FHA loan you have $335/mo just in mortgage insurance. They are trying to reduce FHA’s footprint in the mortgage market and one way to do that is to keep jacking up mortgage insurance.

Fannie Mae loans have also recently got a lot more expensive if you have anything less than perfect credit and 20% down. We are headed towards very expensive mortgages unless you have 20% down and perfect credit. This will all impact prices. Maybe even more so in the blue collar areas where FHA loans are more popular. It is getting REALLY expensive to get a 3.5% down FHA loan. And add higher rates into that cocktail too. I can’t see how that doesn’t put a lot more downward pressure on prices for years to come, unless this is offset by a job/income boom.

Saying we will not have the “tailwind” of accommodative lending pushing prices this go around (like we did starting in the late 1990’s) is an understatement.

[ctr70]

FHA already upped it’s monthly mortgage insurance to 1.15% of the loan amount starting in April. Less than 6 mos ago it was only .55%! They more that doubled it! So if you are getting a $350,000 FHA loan you have $335/mo just in mortgage insurance. They are trying to reduce FHA’s footprint in the mortgage market and one way to do that is to keep jacking up mortgage insurance.

Fannie Mae loans have also recently got a lot more expensive if you have anything less than perfect credit and 20% down. We are headed towards very expensive mortgages unless you have 20% down and perfect credit. This will all impact prices. Maybe even more so in the blue collar areas where FHA loans are more popular. It is getting REALLY expensive to get a 3.5% down FHA loan. And add higher rates into that cocktail too. I can’t see how that doesn’t put a lot more downward pressure on prices for years to come, unless this is offset by a job/income boom.

Saying we will not have the “tailwind” of accommodative lending pushing prices this go around (like we did starting in the late 1990’s) is an understatement.

[Author]

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