Yes, you can still make money in San Diego real estate and no, I dont know if property prices are going to drop. Here is what I DO know; there is a housing shortage in San Diego and rental rates should keep rising.
This means that, if you buy a property at the right price, and intend to hold it for 7-10 years, you should really make some money. Let me share with you the most recent transaction I handled for an investor. I represented the investor and my wife Debra handled the financing.
I immediately advertised it for rent on Craigslist, Zillow, Trulia, Hotpads, and Cozy at $2095/month. Yesterday (June 14), we signed a multi-year lease with a tenant who has a credit score of over 750. In two days, my investor signed a lease which covers all the debt servicing expenses.
I think rising inflation will double San Diego real estate prices in the next 10-12 years but, with just a 4% inflation rate, this property should sell for $525,000 in 2028. At that point, my investor will walk away with about $300,000, almost triple of what she invested today.
Was this easy?
Absolutely not. I toured over 40 properties for her and only showed her properties which met three criteria:
1- They were "clean", meaning it would cost less than $1500 in cosmetic repairs to move in
2- They were in a San Diego neighborhood which was in demand.
3- They had been on the market for 21 days and could be purchased for a price which produced positive cash flow with 30% down payment.
She spent a 4 hour period with me and saw 7 properties. She offered on three of them, we negotiated with two sellers, and settled on the Mission Valley condo
It wasn't easy for me but I made it easy for her, and now she has a great investment.
Want me to do this for you?
Call me at 858-777-9751. We'll meet for lunch and I'll listen to your investment needs and goals. If they match up with what I am doing, I'll find the perfect investment property for you. If not, we'll have a great time catching up with one another.
My homebuyer clients like that I attend their loan closings but it's not because I do anything. When I attend, I usually review the closing statement, note, and deed of trust and then I drink cofee for an hour while the notary does his/her job.
Three reasons why I attend closings:
1- I want to be there if there are any questions about the closing documents.
It absolutely matters whether or not loan officers attend their closings. Being present to explain rates and fees to the borrower is just one example of where a loan officer can mitigate a potentially negative borrower experience. Add in delayed starts to closings, unresolved problems, and confusion regarding last minute changes and you begin to understand the importance of face-to-face interaction between loan officers and borrowers at the closing table.
3- I ask for referrals at that point because I know buyers are happy. Doing good business results in more good business.
Are San Diego Realtors using VA loans properly in their real estate brokerage business? Most agents don’t fully understand them and their customers are suffering because of it.
Here are four myths, truths, and action items about VA home loans which could help Realtors serve veterans better:
LOAN MYTH 1: You have to be on active duty, in the military service, to use a VA home loan.
FACT: Eligibility is determined by current and past service. Essentially, if a veteran served for at least six months, from 1964 to today, they most likely have VA home loan eligibility. There are 15 million veterans under the age of 65 today; most of them should be eligible. ACTION ITEM: Ask every new homebuyer, regardless of their age if they served. Don’t rule out the ladies; about 10% of those vets are women.
LOAN MYTH 2:Sellers have to pay for the veteran’s closing costs.
FACT: The VA did away with non-allowable closing costs about two years ago. As long as the non-recurring closing costs do not exceed 1% of the loan amount. the veteran buyer can pay them ACTION ITEM: Write “seller not responsible for any VA loan-related costs" and call the listing agent to explain this when presenting an offer.
LOAN MYTH 3: VA loan limits aren’t high enough for the San Diego real estate market.
FACT: The 2018 San Diego County loan limit is $649,750 for ZERO-DOWN loans. Down payment requirements are 25% OF THE DIFFERENCE between the zero-down loan limit and the actual purchase price. ACTION ITEM: Compare jumbo loan financing with a VA home loan for this Carmel Valley home. Assume a $1,400,000 purchase price.
75% conventional loan, at 4.75%, $350,000 down payment. VA loan at 4.25%. Minimum down payment equals $1,400,000 MINUS the VA loan limit of $649,7500) TIMES .25%= $187,500 down payment.
LOAN MYTH 4: The VA charges an expensive funding fee.
FACT: That funding fee is less expensive than the PMI it replaces. The funding fee for a 100% loan is 2.15% (financed on the loan) for first-time users, 3.3% (financed on the loan) for repeat users. For all 5% down loans, the funding fee drops to 1.5%. For 10% down loans, the funding fee drops to 1.25% ACTION ITEM: Compare a 10% down conventio lonalan, with PMI, to its VA alternative:
$300,000 90% conventional loan requires $156.25 in PMI monthly. $300,000 90% VA loan has no monthly PMI but adds $3750 to the loan. That savings is recouped in 24 months. The VA loan then, is less costsly if your customer plans to live in the home for two years or more.
I have been writing these San Diego real estate market outlooks for ten years now. This annual exercise always makes me examine macroeconomic data, talk to local politicians and business owners, and try to spot micro trends in the San Diego residential real estate market. I am generally right about direction (except for last year when I recanted within two months) and sometimes off on timing.
"Buy land, they're not making it anymore"-- Mark Twain
I chose that Twain quote (which is sometimes attributed to Will Rogers) because it reflects the reason why you should buy a home in San Diego County-- we have a housing backlog and it is only getting marginally better. Our state and local governments are the problem because they just won't issue housing permits to keep up with demand. Worse, rather than get out of the way and issue those permits, the California Legislature passed a "Housing Affordablity Plan Tax" which takes effect this year. Yes, in order to make housing more affordable, the government is taxing housing transactions--you just can't make this stuff up.
If you're trying to buy a home in San Diego County, do it in 2018. I can't guarantee that price appreciation will be a straight line up but, the supply demand imbalance tells me that prices will be as much as 50% higher in 2028 than they are in 2018. If you put $100,000 down on a $500,000 house, you can expect to pay about the same amount for your mortgage as you would for monthly rent and, in ten years, should get three times your original down payment back when you sell. That's an annual ROI north of 11%. Mortgage rates will probably rise in 2018 (not as badly as you might think) but that shouldn't blunt the steady march up in home prices.
Can you just buy any property in San Diego County and make money?
Probably but I want to focus on two themes to improve your chances: the rise of the suburban, single-family home and the 78 and 94 corridors.
Buy a single family home
Millennials are moving to the suburbs and that trend will get stronger in the next 10 years. Since 2008, millennials predictably flocked to the traditional beach towns of Pacific Beach and Ocean Beach but, because there are so many of them, helped to repopulate the I-8 San Diego neighborhoods of Hillcrest, Mission Hills, North Park, South Park, and Normal Heights. Five years ago, a late-20s man might want to live in an area where he could walk to a craft brewery, take a bus to his job, and go running in Balboa Park. Today, our leading-edge millennial man is in his early 30s, married, and has plans to build a family. The two-bedroom condo he bought in 2012 has substantial equity and he and his wife are going to want a house with a yard.
While millennials will cycle from the I-8 neighborhoods to the suburbs, those I-8 neighborhoods will be populated by the next generation; the centennials. The centennial generation is almost as large as the millennials and considered to be more serious and grounded. I won't be surprised if our millennial homeowners aren't selling their condos to 22-year old centennials (that's an early age for San Diego homebuyers). Today's teenagers are just that darned pragmatic.
I talk about the housing backlog easing up a bit but, within the San Diego County housing permit data is an interesting statistic; three times the permits are issued for multifamily housing than are issued for single-family homes. What this means is that the suburban, single family home will be in VERY high demand in ten years. If you can afford to buy one (even if it means compromising your desired location), do it.
The 78 and 94 corridors
One thing I always watch is our military's footprint. San Diego County is home to the largest concentration of veterans and active-duty service members in the world. Traditionally, service members buy single-family homes in Oceanside or Clairemont but I've seen a shift this past year. As the county's job growth moves north, the 78 corridor has become popular. Carlsbad and Oceanside have seen significant price appreciation and Vista was popular last year. Our pick for the 78 corridor is Escondido. City government is fiscally responsible, NIMBY-friendly, and offers great opportunities to own a 1600 sq foot, single-family home with a yard, for under $500,000. Escondido is less than 30 minutes from the back gate at Camp Pendleton and MCAS Miramar. Don't be surprised if you start seeing these flags in front of more Escondido homes.
The 94 corridor includes the popular I-8 neighborhoods (already mentioned) but has two hidden gems where someone can purchase a single-family home for less than $500,000: Skyline Hills and Spring Valley. Skyline Hills in the City of San Diego, has a 77% homeownership rate, is 20 minutes to 32nd Street Naval Base and Downtown San Diego, and offers nice views. Spring Valley is 30 minutes from Downtown San Diego and offers different but equally as nice views. These foothills, suburban style neighborhoods are poised for better than average price appreciation as millennials start looking for affordable suburban homes in the next 5-10 years. Don't be surprised if you see more of these flags in front of Skyline Hills and Spring Valley homes.
What areas might decline in San Diego County?
Probably none of them but, on a relative basis, price appreciation might not be as great in the over $900,000 market as it should be in the under $600,00 market. I talk about this in detail in my article about tax reform (read the full article).
The luxury market (over $2,000,000) is strong today but that market is tied more to the stock market than mortgage rates. The stock market was up 140% under President Obama and up another 25% under President Trump. Tax reform should help most of these buyers but, if the stock market cools down there could be some weakness in the luxury market. This is somewhat relative. If the stock market cools down, you might get a chance to buy a single-family home in Rancho Santa Fe's Whispering Palms for under $1,000,000 or a Del Mar beach front home might drop from $20 million to $15 million. Generally speaking, I don't care too much about those markets because we typically don't advise, broker, nor fund those transactions.
In summary, 2018 should continue to be what 2017 was. Mortgage rates will increase a bit, home appreciation should outpace inflation, and new opportunities will emerge in markets which have been underappreciated before.
Call me at 858-777-9751 if you ever want to discuss my thoughts.
Both NAR and CAR have been apoplectic about the tax reform bill which is moving its way to the President's desk. The bill passed the House today, should pass the Senate later this week, and is expected to be signed by the President by Christmas.
Will the tax reform bill really hurt San Diego real estate, though ?
The mortgage interest deduction is going to be capped at $750,000 instead of $1,000,000. That could cost some people as much $3000 in extra taxes. Those people though, would see a tax rate lowered by 2% on all of their income; that could be as much as $6,000 in tax savings.
The deduction for property taxes and state income taxes will be capped at $10,000. While there is a trade off for the lower tax rates, this could hurt the buyers over $800,000.
Californians earning over $300,000 and San Diego home buyers over $900,000 may feel a pinch from tax reform but, all in all, most home buyers won't be dissuaded from buying a home up to $800,000. Some of them will actually have MORE money to spend now since their tax bills should be lower.
Call me at 858-777-9751 if you want to discuss this or have a home buyer worried about how tax reform will help or hurt them. I'm pretty good at running numbers and might just be able to help you save a deal