San Diego Real Estate Investors — Some Reasons to Invest Out of State — Try Texas

Posted @ 12:12 am - Filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Check This Out, Neg-Am Loans, San Diego Property Owners, Buying Income Property, Depreciation, Capital Growth, Dallas

San Diego real estate investors have never had so many opportunities in so many different regions than now. I know, I know, the last 40 years, right? San Diego income properties have been their own best reward — no argument there from me. Any local investor can tell you stories outsiders would question. In San Diego though, they’re routine. How ’bout more than tripling your money in 13 months? Or year after year of microscopic vacancy rates with only a couple exceptions?

Face it — we’ve been spoiled. We also need to face the most recent sea change in our market.

San Diego is no longer a place experienced investors see as attractive — not by a long shot.

Do you think I spend so much time going to other regions cuz I like Southwest and ExpressJet so much? Or is it the nights at the Holiday Express that’s so alluring? Could it be I couldn’t look clients in the eye and tell them to keep investing in San Diego?

Pick the last one. I like the other places, but anyone who lives in San Diego knows flat out — there’s simply not a better place to live, hands down, don’t embarrass yourself trying to debate it. No bias here.

Let’s compare what options an investor with $100,000 plus closing costs has on his menu these days.

In San Diego he can buy a duplex for half a million bucks that’ll rent for roughly $1,200 a side.

If he acquires it using a hybrid neg/am loan, (his only real choice, unless he wishes to put about 40% down) with a 2.5% payment rate, his annual debt service (total yearly payments) will be just under $21,000 including mortgage insurance. His rent is $2,400 and his expenses (he self manages) are roughly $8,700 a year — his cash flow will be negative — about $900 a year. That assumes he won’t tire of managing it himself. (There are three chances of that not happening — slim, fat, and none.)

He does have another financing option. He can choose a 5-7 year interest only loan, which today will run around 7% or so. That’s $28,000 a year for those of you keeping your own scorecard. Unfortunately, that leaves just $800 for annual operating expenses. On second thought, maybe that’s not really an option. Never mind.

If he goes to Texas he can buy four brand new duplexes about 20-30 minutes south of the Dallas-Fort Worth Metroplex. He’ll pay an average of $225,000 a duplex. Each side will rent for around $1,150 or $27,600 yearly. At 35% expenses, he’ll net around $17,940 or so. If he puts 10% down apiece, using an interest only loan, at 7% interest, he’ll have a positive annual cash flow of just under $2,000.

Uh, that’s just under $8,000 positive cash flow, cuz he bought four.

Tax Shelter

Depending upon the approach taken, the depreciation for the San Diego duplex will land in the range of $18-25,000 a year.

The duplexes in Texas will get him, (same parameters used) in the range of $32-45,000 yearly. Oh my.

I’ve heard so many San Diegans ask me what my point was.

This is an unfair comparison is what I’m hearing San Diego investors saying.

THAT’S THE POINT.

I met today with one of my all time cool clients. She’s a single, (although that appears it might be coming to an end) kindergarten teacher, making some pretty good money. She came into quite a bit of cash recently, as a result of the first leg of her Purposeful Plan. What are the chances she’s investing any of that capital in San Diego?

Don’t answer — it’s a trick question.

She’s goin’ to two different states — Colorado and Texas. Why? Look at the above comparison. She had to be thinking, ‘Why are we having a meeting about this? If it wasn’t for the $5 coffee he bought me, it would’ve been better just to have done this on the phone.’ (Our meeting was at my satellite office. I let them put their Starbucks sign up front — but everyone knows it’s my branch office.)

Between Thanksgiving and late spring ‘08 she’ll own roughly $1.35 Million in investment properties in two states. She’ll have at least $50,000+ tax shelter yearly. (Only $25,000 of which she can use each year.) She’ll have accomplished this with a total capital outlay of about $135,000 — including closing costs.

Oh yeah, speaking of those pesky closing costs…

Her settlement statements will look a lot different. She won’t have to much in the way of closing costs.

She’ll be able to acquire a bonus (fifth) Texas property. Seems she’ll have so many of her closing costs paid for by sellers — plus plain old buyer credits — the fifth property is easily doable. Imagine that.

So I say to San Diego investors, whether you live here or not — convert your equity to cash and get the heck outa Dodge. You’re losing out on capital growth big time. You already know this, right? Right.

I’m easy to talk to. Ask anybody. Email me, call me, send your favorite carrier pigeon. But find me and discover what yer missin’ out on — cuz you are missing out.

The problem is the timing of your realization of this fact. If you’re like most investors holding San Diego investment property, you’ll understand what I’m talking about the first month after you retire.

Your income, relatively speaking, will be puny when compared to those who moved their equities out of San Diego via a tax deferred (1031) exchange, or through refinancing. I gotta say here, the refinancing route, though better than nothing, just means your capital invested out of San Diego will kick major butt. The property you refinanced? It’ll be the same overpriced property it was before you pulled the cash out — only now it’s got a much bigger loan on it. You’d do that on purpose because…?

Oh — I saw you roll your eyes. Give me a break, please. You know your small unit rental properties are overpriced. No? Then I guess it’s a safe assumption you’d buy them today for their current market value? What? Can’t hear you.

OK, I won’t insist you answer that question — but we both know the answer, don’t we? I bet we do.

Your retirement depends upon, in large part, the investment decisions you make now.

The San Diego real estate investment gravy train has made its last run. Face it, and get out.

You’ll feel retire much better for having done it.

This entry was posted on Saturday, October 20th, 2007 at 12:12 am and is filed under 1031 Exchanges, Real Estate Investing, Purposeful Planning, Check This Out, Neg-Am Loans, San Diego Property Owners, Buying Income Property, Depreciation, Capital Growth, Dallas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.