Dear Landlords and Investors,
Merry Christmas and Happy Holidays to you and your family! The principles of leverage, supply, demand, and ROI still push appreciation. San Diego has proven to be a wise location for your investment dollars. But, don’t become complacent. Don’t lose track of why you are investing, regardless of how successful you are. Dealing with unexpected issues can make or break your business. So of course, you’re right to want to understand how the current market affects your property values. You deserve expert guidance. Here are details on what you need to know now:
FIRST-TIME BUYER AND MULTI-UNITS
Let’s say you or someone you know are starting out. You want to buy your first place or… you haven’t owned a home in the past three years. Good news! You meet the first-time buyer qualifications because you don’t own a property yet.
Here’s some SOLID advice:
DO NOT go out and buy a condo, townhome, or even a single-family house. What we’re talking about this month is an absolute game-changer! For most, it is a life changer!
As a first-time buyer, you can buy a 2-4 unit property. A duplex, triplex, or even a fourplex as an owner occupant. Meaning, you move into one of the units and rent out the others. This does a couple of almost magic things. Offsetting your mortgage with rental income from the other units is a good start. That’s helpful, right? But, that’s just the start! It also does some other pretty incredible things for you.
Part of this strategy is you can get owner-occupant residential financing. This comes with some very low down payment options. Guys, financing for 2-4 units is classified as Residential financing. It is different than commercial financing.
When you buy 5 or more units, that’s classified as Commercial financing. With higher costs, worse terms, and different qualifying.
For 2-4 units, FHA owner-occupant loans are at 3.5 % down. Conventional loans are now as little as 5% down. And if you’re a vet with VA eligibility. Thank you for your service to our country. 🇺🇸 You get the sweetest deal possible. ZERO Down payment!
With all three of these loan options, you’re still going to need funds to buy a property. This isn’t one of those CRAZY buy property with no money out of pocket kind of things. You’ll need to cover the cost of your home inspection, and appraisal, and cover your closing cost. Plus you’ll need some reserves left over. Your mortgage lender certainly doesn’t want you to be broke by the time you close the sale.
BUT, the important takeaway here is you are leveraging your purchase dollars. You can buy and control a larger property with a small down payment. And the rental income from the additional units helps cover your mortgage. And that extra rental income also helps you qualify. Lenders count that income as part of your earnings. Helping you to go into a higher loan amount and purchase price.
Let’s focus on the leverage principle. Because there’s a big difference between 20% down for non-owner occupant loans. And those 3.5% and 5% down options for owner-occupant buyers. Plus remember, active duty and vets still have the zero-down loan program. It is still available to you for buying units.
Now, if you’re focused on getting richer quicker. Leverage is an amazing benefit when first starting out. It allows you to get your foot in the door to owning investment property. It’s also a plus if you do have more money available to put down… Some lender programs even allow gift funds from a family member. You’re going to want to speak with a mortgage lender ASAP. Simple reason. When you are looking at buying units instead of a single-family house as your first place. It’s all about the numbers!
Here’s a real-life example we were recently working with a client. Our buyer is approved for a mortgage for up to $1.3M. And found a 4-plex listed for $1,275,000. With 15% down his monthly payment is ballpark around $9,300. Now, this particular building is currently bringing in $8,585. He plans to move into the smallest unit to keep his upfront out-of-pocket cost low. Which is now rented at $1,500. That is under-market for this particular neighborhood. At the end of the day, he’d be paying $2,215 for his mortgage. All because the rest of the rental income from the other three, larger units. They would offset his mortgage payment. Including taxes, and insurance for this property.
So, his out-of-pocket cost for his mortgage would be $2,215. To control a 4-plex building worth nearly $1.3M in San Diego. He’d be an owner-occupant buyer of an apartment building in San Diego. With his portion for the payment at ONLY $2,215 a month! Do you know how high rents are in San Diego right now? You’re hard-pressed to find any kind of apartment for rent. Let alone a condo payment. If you opted to buy that instead of units, at that price here in San Diego! Now let’s take it a step further.
This building needs to have some rehabbing and the rents need to be brought up to current market rents. An excellent opportunity for sweat equity. Especially good for our client. Because he’s handy! So, he plans to go in and rehab the unit he moves into first. And stay there at least one year. Since he is buying owner-occupied.
Now he has choices. 😁 He can either move out of the property altogether after the rehab. Then put a new tenant in his remodeled vacant unit… at the current market rent. Which should be closer to $1,700 a month or more. And then he can do it all over again. Move into another unit in the building and rehab it. Wash, rinse, and repeat! Until he has all the units updated and at current market rents. Imagine what that building’s cash flow position is at that point. Oh, and imagine what the value of that building is with the units all at current market rents. And the units are rehabbed? This folks is what sweat equity is all about! After just a few short years, he’ll have an updated building. With all the rents at current market rents. And that building will be a cash-flowing investment property for him. In the highly appreciating marketplace of San Diego.
Now here’s where things get extra sweet. As that property appreciates through the years. He keeps his units at current market rents. By doing annual rent raises. His monthly cash flow increases.
We recommended that he needs to go find himself a seasoned accountant. One knows the rules when it comes to investment property. And preferably one who owns income property too. That way he’s got an expert! And they’ll explain how he can depreciate that property on your taxes for up to 27 ½ years of your ownership. All the while his building is appreciating like crazy.
We told him to get into the habit of holding on to any and all receipts. The reason is, that each unit that he rehabs, and each repair that he makes helps in a couple of ways. Number one is all those items are write-offs. And number 2, he will attract and keep better tenants. Good tenants take pride in their homes. There you have it, a Self-Amortizing Asset! Which is a fancy way of saying an investment property that pays for itself through the rental income.
This is a sure-fire way of creating a cash-flowing investment property. An asset that appreciates in value, at the same time, depreciates on your taxes. Remember, we told you buying an investment property as your first place is a game changer. Actually, we’re going with LIFE CHANGER! Creating family wealth in a way your job can’t do for you.
If you are a parent, you can help your child do this exact thing! By co-mortgaging or providing gift funds. Please share this concept with them. And reach out to us for a one-on-one consultation to go over your options.
RECENT FAQ’s FROM CLIENTS LIKE YOU
- Why do you guys like 2-4 units over 5+ units, or single-family/condos/or homes?#1 Residential Financing- You as the buyer can use residential financing instead of commercial financing. Much easier to qualify, less down, and a fixed interest rate. #2 Parents can co-mortgage or provide gift funds for this type of purchase. #3 These 2-4 units are a scarcity in San Diego. They just are not building them anymore. Making them valuable to you as an owner. #4 If you find a single building that has 2-4 units in it. You have one structure, mortgage, insurance policy, and location. You get rent, landscape, roof and make repairs, on only one location. Much easier than owning 4 condos or homes all over town.
#5 They are a solid “VALUE ADD” type of property. Buy ones that need work and do exactly what our client is working on in the story above. 👆
KEEP YOUR QUESTIONS COMING! We love hearing from you. And we plan on answering your questions monthly moving forward. It’s important that you’re informed and educated about what you buy and why you’re buying it.
AND WHEN YOU’RE AT THE END OF THE GAME… READY TO RETIRE FROM LAND LORDING?
Let’s face it. Being a landlord has its ups and downs. If we had to point you in one direction it would be the Delaware Statutory Trust folks. And here’s why. With the DST, you get all the benefits of ownership. Without the hands-on day-to-day dealings of tenants and property management/maintenance. Plus it provides you with cash flow. And in a lot of instances, it’s even more than the relinquished property provided. Second of all, you’ve got professional management and bookkeeping. It’s automatically done for you. We’ve touched on DST options in the past. Don’t be shy, contact us.
Bookmark-Worthy Links
San Diego Real Estate YouTube-Weekly Videos Keep You Connected
Rentometer-House and Apartment Rental Rate Comps
HomeBot-Personalized Home Finance Tool
ALTOS Reports -Powerful Data-Driven Real-Time Zip Code Market Updates
MLS Access for Investment Property -Custom Searches For Investment Property
San Diego Apartment Investors Market Report Archives-Access Past Market Reports
IT’S TIME FOR YOU TO GET THE ROI YOU DESERVE
You’ve worked hard for what you’ve earned, and you’re right to want the best experience. Be confident you have professionals on your side. We use ROI-based marketing. Rest easy knowing we use an organized system to market your property. Employing our highly targeted and proven approach like no one else is what you deserve!
Thinking of selling your property in the next 12 months? Call us today for your strategic marketing consultation at 858-218-4511.
