Why I Like Real Estate in an Expensive City Like San Diego

by | Aug 30, 2021 | Money

In honor of today being National Beach Day, I have to give a shout-out to my home city. San Diego has so many miles of coastline that we have three beaches just for dogs! According to a poll on NationalToday, nearly 75% of Americans only visit the beach once a year or less. This alone is a good reason to consider making the move to San Diego, named the 4thbest beach city in America.

chart showing how often American's visit the beach

I know what you’re probably thinking. “But how can anyone afford to live there? And how can any investor find a decent real estate deal in an expensive city like San Diego?”

For starters, you need to be prepared to be scrappy when you first move here (also known as Hustle.) If you, too, love the idea of someday calling yourself a San Diegan, I’ll tell you how I got started and why I still love to buy real estate here.

For the last 10 years in San Diego, I chose to rent a room of a 3-bedroom apartment. The Bigger Pockets community would call this “househacking,” to find ways to reduce expenses in the short-term and create a way to save money as fast as possible. Once I had enough cash saved to level up to the stage of being able to Own, I was careful not to become house-poor too soon. So instead, my first purchase was a 1-BR condo that I felt confident could be a stable rental property, whether it was a short-term rental on Airbnb or, as a backup, needed to become a long-term rental.

For this Plan A with backup Plan B, I chose a condo in College Area. This is an area 15 minutes east of downtown San Diego with slightly more affordable prices and a steady rental demand from the local students attending San Diego State University. After I closed on the condo and got it rent-ready, I continued renting where I was living myself.

While most Americans would make a new purchase their primary residence, I was apprehensive about doing that right away. See, I had already been through the ringer by losing everything in the housing crash of 2008, so I’m still very careful to take calculated risks, choose wisely with contingency plans in place, and never over-leverage myself with too much debt. I also didn’t want to give up my low rent of $600/month by moving in to the condo myself and increasing my housing expenses to $1600 or more.

So, in my quest to rebuild after the 2008 crash, I chose for the simplicity of a maintaining a low cost of living. I’d been house-poor in the past, and I wanted to avoid that again at all costs.

Meditating man

Robert Kiyosaki, famously known for his book Rich Dad Poor Dad, has a philosophy about real estate that’s often quoted in financial circles: your primary residence is not an asset, it’s a liability. As he says, anything you own that takes money out of your pocket each month is a liability, requiring that you continue working to make the payments.

A cash-flow-positive rental property, on the other hand, would be an asset. By definition, an asset is putting money into your pocket each month. Keep this distinction in mind. It’ll come in handy later.

Asset vs. Liability graphic

I’ll admit, the cash flow in sunny San Diego is not nearly as good as you’ll find in many midwestern cities. When I’ve looked into syndicated real estate groups that pool their money to buy huge apartment complexes in areas that will maximize profits, they don’t usually target expensive cities like San Diego. But that’s okay. Even though the high prices make it hard to get your foot in the door (literally), there are a few benefits that I believe balance that out.

No Vacancy neon sign

Amazingly High Occupancy Rates

Because there’s never a concern about whether a house or condo will stay rented, a person’s primary residence can easily become a rental property when you upgrade to a new place. My 2ndcondo I bought was a splurge purchase, but proved to be a good investment when I got an unexpected call to do a 10-month work assignment in DC. Because there’s so much demand for both short-term and long-term housing, my property manager was able to quickly get my primary residence rented to a variety of travel nurses with it only sitting vacant for 10 days of the entire 10 months.

Two lounge chairs and umbrella at the beach

It’s a Vacation Rental Goldmine

My first condo is in a college area 15 minutes outside of downtown San Diego, and yet, because it’s within San Diego Metro, there’s still enough demand for travelers from around to world to keep my listing booked over 90% of the year. If you own a home in a resort area of San Diego, like a beach neighborhood, you can do even better. I’ve heard homeowners in Coronado renting out their multi-million-dollar homes in the peak season of summer for about three months and it will nearly cover their mortgage for the entire year! Meanwhile, they just spend that time living on their boat at the local yacht club or travelling to other cities in the meantime.

When I retire, I plan to do a lot of slow travel around the world where the cost of living is much lower, so my buy-and-hold rental properties will easily pay for my jet setting. This is called geographic arbitrage and can be put to good use especially if vacationing for a month or longer in low cost areas like Thailand, Costa Rica, or Mexico. So, while my primary residence may be a liability right now, once I leave town it instantly transforms into an asset, with a line of eager renters ready and waiting.

Sign that reads "Worry Less"

Less Doors to Manage

When I listen to podcast interviews with real estate investors, they usually talk about having 5, 10, 20, or more properties that each give them $100/month or more in cash flow. I don’t know about you, but I don’t want to have that many properties to juggle. I’d much rather have a modest portfolio of 2-3 properties in an expensive city that will eventually return the equivalent amount of cash flow. I just have to run the numbers on a property to be sure the rental estimates from rentometer.com and craigslist.org show potential to at least break even initially after putting 20% down.

Palm trees with blue skies above them

The City’s Desirability is Trending Up

With climate change creating new problems in a many regions of the world, San Diego is blessed with moderate weather in the low-70s nearly all year. Wildfires are becoming problematic in the northern part of California, but luckily not so much when you stay closer to the center of San Diego. Droughts and rising temperatures are predicted to worsen in desert cities like Palm Springs and Las Vegas. Hurricanes and flooding threaten low-sea-level coastlines like Florida more and more every year.

They say a car is a horrible investment, because it’s a depreciating asset. As soon as you drive it off the lot, it’s losing value. Similarly, is your home city on the upswing or downswing? If the trends are on the downswing, your home could be a depreciating asset also.

On a closing note, I should add that I tend to be very cautious when reviewing real estate in San Diego. I’ve worked with a lot of realtors and they don’t usually analyze the cash flow; they rely on their clients to do that. Because the city has been discussing new restrictions on how many Airbnb units a single person can own, I’ve been careful to diversify my rental portfolio. I already have one listing on Airbnb, one listing on FurnishedFinder.com(for travel nurses), and for my next property, I’ll most likely target a totally new community as renters… maybe flight crews using a site like CrashPads.com or military renters using a site like AHRN.

Do you own investment property in an expensive city? If so, I’d love to hear the best practices of how you’ve been able to make the cash flow work for you.

Surf’s up, Moneymakers!

San Diego ocean surf at sunset

2 Comments

  1. MikE

    I’ll give you credit, SD real estate makes me nervous that I’ll be house poor again. It’s an interesting thought to buy and rent in a cheaper part of town 🤔

    What made you decide to rent? Was it a hard decision to make?

    Reply
    • H.M.

      Good question! After getting burned in the 2008 housing crash, I swore to myself I would be never let myself be house-poor again. Because my rent was so cheap renting a bedroom with two other roommates, I decided I would enjoy that low cost-of-living as long as possible. Then, after testing out Airbnb for a three-month trial, I felt comfortable that there was enough rental demand to make that condo in College Area a full-time rental.

      Reply

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