With interest rates rising from a norm that has spoiled investors the question is constantly asked; Is it a good time to invest in real estate? At our weekly brokerage meeting this topic came up and the round table discussion ensued. In this conversation we have multi millionaire brokers and investors next to “new in the game” cold callers. The main concern from the newest members of our team is “why would someone buy right now”? This question leaves them without confidence on the phone and lacking a stable answer when they get in front of a client. As a marketer, investor, and partner of a commercial agent I sit in on this meeting to learn from veterans in commercial real estate. Our most senior member said a phrase that struck me the hardest and truly put 2023’s real estate market into a better view for me. Here is the discussion:
The question:
Is it a good time to buy an investment property?
His answer:
Say I had a time machine and you had the opportunity to buy 3 properties in 2007. You KNEW the market was going to crash in 2008, would you still purchase those properties? The room echoed with an absolute and that we’d all buy as much as we could. In this room are investors, not residential home flippers where a 6 month swing can make or break your profit margin. This room understands that multi family real estate is not a 1 year investment.
San Diego Real Estate Market
Interest rates have gone up which means my mortgage payment will be higher, simple math. Let’s look at the facts.
The Southern California Rental Housing Association did their spring 2022 vacancy and rental rate report (no fall report will be done) and it bodes well for higher rental prices. The study showed a dramatic decline in the vacancy rate, dropping from 2.91% in Spring 2021 to 1.25% in Spring 2022. San Diego itself dropped from 3.3% to a 22 year low of .92%. Currently we are seeing this rate at 3.44% which still shows demand outweighs available units. The most surprising increase comes from 2 bedroom rentals which had an average price increase of 19%.
Another influence that will help bolster the San Diego multifamily market is interest rate increases. Sounds counter intuitive right? But with higher interest rates single family home buyers are forced to wait. Not being able to purchase is great for rental markets. Renters come in all forms; transplants, traveling nurses, students, and now more families waiting to purchase will be added to this mix.
Lastly, let's look at historic interest rates. Long time investors seem unfazed and unruffled by (the current) rate for 2-4 units at 6.375% (1/19/23). They remember doing deals closer to 18% and remind us that buying in the 6’s is still 1% under the 50 year average. Hindsight is always 2020. Wait until next year and it’s 7%, do you wait another year and lose a year of rent and appreciation? Not convinced? Let’s look at the path of an investment.
Cash on Cash return
In real estate you’ll have 4 ways that OPM (other people's money) works for you. First is cash flow. Your tenants are paying your mortgage if you’ve done your homework (or let San Diego Apartment Brokerage do it for you) you’ll be in a property that at minimum covers all your costs. The goal for most starting out is a stabilized asset, but don’t be nervous your first year. With 10% rent increases, stabilization will come.
With every payment also comes more equity. You are gaining equity because your tenant is paying down your loan. Your rental property also will give you tax benefits you get nowhere else. We see millionaires paying no taxes, how can this be? Depreciation, operating expenses, mortgage interest deductions, owner expenses, and FICA tax avoidance are all tools used by investors to pay less, and done right, no taxes.
Lastly, while your tenants build your equity your property appreciates. San Diego is in the top 20% nationally for property appreciation. According to Neighborhoodscout.com’s report from Q2 2021 through Q2 2022 San Diego’s appreciation rate was an incredible 15.83%.
To go back to our primary question: Is it a good time to invest in real estate, particularly in San Diego? The answer is yes. You always buy in what is considered a “downturn” because when interest rates are low and the economy is booming that is when everyone else is investing and you’ll have a stabilized property ready to exchange out of.
References:
Southern California Rental Housing Assocation (download the report for $100 or become a member. Free memberships for San Diego Apartment Brokerage clients)
Stessa.com for tax benefit information
Neighborhoodscout.com for appreciation information
Sdhc.com for vacancy information