San Diego: The Place to Live and to Invest
By Alex Lisnevsky
I first came to San Diego on a long weekend vacation in 1993. I immediately fell in love with the city, with its natural beauty, rich culture, friendly people, and nearly perfect weather. After graduating from the University of New Mexico, while working as a consultant, I traveled all over the Western United States and had a chance to compare San Diego to many other major metropolitan areas of the country. San Diego was the clear winner in my mind and this is where I moved in 1997. Five years later I am still living, working and investing in San Diego real estate. I have witnessed a tremendous growth and economic changes in the city over the last five years. I hardly recognize the San Diego that I saw back in 1993. For many cities this is too short a time to see any significant changes, but not in San Diego.
As a real estate and mortgage broker I work with or come into contact with numerous real estate investors in this area. Some of them are quite successful, some are just starting, some are in this business on a full-time basis, and some are building their investment portfolio while working in their main jobs or businesses. No matter what category of investor you fall into, there are a number of main factors that will affect your success as a real estate investor in San Diego or any other area for that matter.
UNDERSTAND THE ECONOMY
It’s essential to have a good understanding of the local economy when considering your strategy in the real estate investment game. There are many people who will offer you their free advice as to the direction of the market or how soon the market is going to tank. You should always do your own research and form your own opinion as to the direction or the status of the market, and determine your course of action based on this research.
There are too many economic factors relating to real estate to be fully covered in this article, but many of them are freely available over the Internet, business publications, or other resources. Among these factors are the interest rates, unemployment rates, inflation rates, affordability indexes, and other general economic factors. You also need to familiarize yourself with the latest developments in your local area, such as new developments, new freeway or new industrial complex construction, new large employers moving in or out of the area, and other factors.
After years of heavy reliance on military spending and Navy contracts, San Diego has grown into one of the hottest civilian job markets. It is now home to thousands of small to large companies ranging from industry leaders to mom and pop family businesses that feed the greatly diversified local economy. Such a strong economic foundation has created a steadily growing region that has all the characteristics of a place where a real estate investor has many opportunities for success.
The city of San Diego is one of the most popular destinations for domestic and foreign migration. More than 14,000 foreign nationals move to San Diego every year, which along with much higher but harder to track domestic migration (mostly job-related relocations), creates a higher and higher demand for housing in the area. A majority of the population in San Diego will be Hispanic by the year 2020 due to natural growth and constant migration.
By the year 2020, the average income in the area is estimated to grow by 24-30%, but does this mean that it will make the houses in San Diego more affordable? At this time, the affordability index in San Diego is extremely low and hovers at approximately 25%. So far this year, the average price of a single-family house jumped approximately 15% in some areas of San Diego compared to the same period last year. The City planners estimate that we’ll need over 400,000 new housing units to accommodate this growth by the year 2020. However, there is not enough buildable and affordable land to accommodate this growth, thus the demand is going to continue to outpace supply.
The fastest growing area in San Diego county is projected to be the South Coastal area (Chula Vista, Ottay Mesa, San Isidro). This area is expected to grow by 91% by 2020 according to the City economists. Similarly, the expected growth in the North Coastal area (Oceanside, Carlsbad, San Marcos) is estimated at 46%, and the North County Inland area (Rancho Penasquitos, Rancho Bernardo, Escondido, Poway) is expected to grow by 40%.
With unemployment at around 4% and the interest rates at their lowest levels in decades, we are likely to see fast appreciation of the real estate prices in the San Diego area, as well as growing demand for affordable rental units.
DECIDE ON HOW MUCH MONEY AND TIME YOU WANT TO COMMIT TO THIS PROJECT
Just because you decided to invest into San Diego real estate, doesn’t mean that you are going to buy the first house that you’ll see with a “For Sale” sign in front of it. You need to follow many steps that will lead to your eventual success. Here are some of the essential steps that you will need to take:
Like any other investment, it’s impossible to predict which way your investment portfolio is going to go, and it’s important not to put all your eggs in one basket. Risk can be reduced by diversifying your investments. You may decide to diversify your portfolio by investing in real estate, stock market, trust deeds, or other investment vehicles that you are comfortable with.
I personally prefer to invest in real estate and trust deeds because this is the market that I know and I can control my investments with a high degree of certainty. This is not the case in the stock market. No matter how attractive a particular stock may be, unless you are very close to the decision chain in the subject company, you have no control over the stock movements. This lack of control makes today’s volatile stock market a very risky gamble in my book. In real estate, you can see and “touch” your investment. You know all the players, you can control the negotiations for when to buy, rent, or sell the property, and if you apply sound financial strategies and do your due diligence research, your investment should pay off.
Depending on what kind of real estate investment you are considering, you need to decide how much time you will dedicate to this business. If you are a serious investor and you are putting a substantial amount of money into this business, you can’t take it lightly. You should spend a significant amount of time implementing your strategy, or alternatively you should hire a team of professionals that will do your work on your behalf. The latter is especially applicable if all you want to do is to be a “passive” investor who just holds several break-even properties for future appreciation and possible tax deductions.
DECIDE WHAT TYPES OF PROPERTIES YOU WANT IN YOUR PORTFOLIO
There are many types of properties available for investment. Depending on your investment experience, amount of investment money, personal preferences, or other factors, you might focus on one type of property or several.
Single family properties or SFRs
Traditionally, SFRs (both single family houses and apartments or condos) offer excellent opportunities for appreciation and for resell. What makes them such great choices for real estate investors is they offer the best liquidity among other types of real estate. SFRs are the easiest to sell, have faster appreciation opportunities, have comparative ease of financing, and are easier to rent out.
The best opportunities in San Diego, in my opinion, are the properties priced between 200,000 and 350,000. These are considered “affordable” prices in San Diego and the demand for them continues to grow with no end in sight. For some other regions, these prices would mean near-luxury houses, but not for San Diego. Finding SFRs in this price range is not that easy, they can fly off the market in a matter of hours sometimes. Because these hot properties move quickly, you have to be ready to act fast if you find a house that you like. Some of the resources to use for finding your property include the Multiple Listing Service (MLS) with your Realtor, For Sale By Owner (FSBO) listings, contacting the owners of rental houses directly, and new construction projects. Some investors prefer homes that need some fixing up, and then can be resold at a profit or rented with a positive cash flow. Others prefer to buy new construction homes that they believe can be bought at wholesale price, especially in early phases of a development.
It is important to know the values of homes in the area that you are investing in. Find out everything that is happening in the neighborhood, talk to neighbors, get their feeling, in other words, do your due diligence before you jump.
Multi-unit properties
Renting a single-family home can come with potential problems. One of the biggest problems is the potential for vacancy after the current tenant moves out. Since you still have to make a mortgage payment, this becomes a drain on your disposable income until a new tenant is found. This is one reason I personally prefer to invest into multi-family properties, such as duplexes, triplexes, four-plexes and larger apartment buildings. Properties that have five or more units require “commercial” financing as opposed to “residential” financing for properties with four or less units. With the issue of decreasing affordability squeezing so many potential homeowners out of the market, rental units offer an excellent investment opportunity for both short-term profitability and long-term appreciation. Rental rates are climbing in all parts of San Diego, vacancy rates in most areas of the county are close to zero, and there aren’t too many quality multi-unit buildings for sale. Since the demand for rental housing is so high, some cities might offer special assistance programs to help developers build rental apartment buildings. Other options could include rebuilding existing multi-unit buildings to increase the square footage and rents, or adding units to a smaller property, provided that you can get permits (and sometime zoning changes) from the city.
Commercial Real Estate
Office buildings, retail store properties, and industrial buildings offer excellent opportunities especially in areas of fast business growth with limited floor space availability to lease. Some of the advantages of investing in these types of properties are that you deal with long-term tenants with multi-year leases, your tenants are business owners instead of individual renters, and your property financials are a little easier to forecast than with the residential housing. On the other hand, these types of properties tend to me more expensive, business tenants can be harder to deal with, and if the business goes bankrupt, your long-term lease might not give you much protection in the long line of creditors and vendors of the failing business.
Trust Deeds
If you don’t want to deal with tenants, leases, and other time consuming factors of this business, you might consider investing in private trust deeds either directly or through private trust deed brokers, like our company. These are investments in notes secured by real estate that are given to individuals or companies by private individuals. These are not necessarily “hard money” loans in the traditional sense of the word, but rather loans that are provided by individuals as opposed to the banks. We will discuss this market and many other opportunities in one of our next articles.
KNOW YOUR NUMBERS
Since any type of investment has the goal of making you money, you need to decide on the return that you want from your investment, different options for financing your real estate holdings, your expectations of short-term profitability vs. long-term gains, your tax liabilities or tax savings from the project, and many other factors that would allow you to judge your real estate investment as a success. Smart investors have several golden rules they always follow. First of all, you make money not when you sell your investment, but when you BUY it. Don’t buy a property that you fell in love with, but doesn’t make good financial sense. Reasoning that the property will probably appreciate and make you money in four years or so is dangerous because nobody can guarantee the direction of the economy or the market. Don’t buy the properties that will give you “negative cash flow”, unless this is part of your tax strategy.
Stay focused on your goals, don’t jump off or on the wagon with every little bump in the market. Markets go up and down, and if you understand how the numbers work in this game, you can make money in both the high market and low market.
When you buy an investment property of any kind, you need to make sure that you understand the basic terms of the investment game, such as the cap rate, cash-on-cash return, debt coverage ratio, rent multipliers, and other factors. If emotional appeal plays huge role in your decision to buy a single-family house, when it comes to the multi-unit segment, there is no place for an emotional purchase. The purchase must be all about the numbers, and whether they work for you or not.
Join a real estate investment club, there are plenty of such clubs around your area and they are a great place for networking, exchanging ideas, finding partners for your projects, or finding a mentor. If you need help with locating such a club, please feel free to contact me directly. I’ll be happy to assist you.
FOREIGN INVESTORS
An important consideration to keep in mind for foreign investors is that some real estate investments, such as multi-unit residential as well as commercial properties, might also help a person qualify for a special visa status such as an E-2 visa. This program allows a person from a qualified Treaty country to invest relatively small amounts of money into a US-based business (owning and MANAGING properties is one such businesses) and to obtain this “Treaty Investor” visa that gives you the right to legally come and work in this country. As long as the business is continuing its operations, and as long as you stay “in status”, you shouldn’t have any problems extending your visa every two years. In addition, your business may be able to employ your other family members who can obtain their E-2 visas as well. Over the years, this legal status could lead to a “green card” and eventually to a US citizenship. This is a serious issue that needs serious consultation with a qualified immigration attorney. Call us for a referral to immigration professionals.
BUILD YOUR TEAM
Like any other serious business, it’s very hard to do it all yourself. Those investors who are successful in any business know how to build a team of specialists around them, while they concentrate on managing this team, and developing and implementing the business strategy.
At a minimum, your team should consist of a qualified realtor, mortgage lender, tax advisor, and a real estate attorney. If you plan to do a lot of remodeling or construction, you should have a trusted contractor as one of your main advisors. If you are a foreign national, make sure that you have an immigration attorney onboard. The bottom line is that even if you are a small investor just starting out in this field, you need to look at yourself as a business. Remember, any business is only as strong as its advisers, partners and vendors.
CONCLUSION
Historically, real estate has been the primary wealth-building method of the American rich. Like any other business, investing in real estate takes hard work, learning, and team building to succeed, and San Diego offers great opportunities for serious investors. Don’t expect the path to success to be an easy one. It will be full of surprises, unexpected turns, seemingly dead ends, and disappointments, however, if you keep your goal in front of you, and if you put all your patience, desire for knowledge and perseverance into your efforts, you too can enjoy the benefits of the wealth and financial freedom of a successful real estate investor.
Alex Lisnevsky, MBA, is a real estate and mortgage broker with Mercury Capital Group in San Diego, CA. Mercury Capital Group (www.HouseOfLoans.com) has presence across Southern California, and specializes in all types of real estate transactions, as well as business sales, financing and consulting. Mr. Lisnevsky can be reached at 760-757-5070 or via e-mail alex@HouseOfLoans.com.
The Article was written for Sister Cities magazine and published in it's December 2002 Issue.