This is somewhat of a ‘simulcast’ with my own blog, as I just published a longer piece on the same subject for the second day in a row. I think it’s important.
This is for those investors living in areas like San Diego.
You know, median home price around half a million, and rents for the ‘average’ 2 bedroom rental $1,000-1,300 a month. I’d say if your median home price is over $400K your area probably qualifies.
In San Diego a boring but safely located duplex sells for $480-700K, and a fourplex goes for $750K-1Mil. In the next 10 years those ranges will have climbed, probably significantly. If over the next decade San Diego appreciates at just 3.5% yearly, the top of the range for duplexes will have reached just under $1Mil! And there’s not been a decade in the last four with an average of only 3.5% appreciation in San Diego. Tell me seriously — who is going to consider that a good investment? Unless they flew in from San Francisco they’re going to think the owner is over medicating.
So I see a paradox.
Investors owning rental property in areas like San Diego will see them appreciate, only to find it very difficult locating that last fool who thinks it’s still a solid investment. They’ll get the growth they gambled on, but won’t be able to cash in. Impotent growth. (The name of my new band.):)
The solution?
Get outa Dodge now.
You’ll be happy to know there are a few regions in the country where you can buy property for way less, while also using low down payments. You’ll be back on the growth track, only now you’ll be in control of 2-4 times the property (in terms of value). This will turbo charge your capital growth rate magnificently.
Make use of a tax deferred exchange (1031) to move your equity to one of these lower priced growth areas. Do it now. You’re losing money staying in San Diego or any place like it. And your capital’s future isn’t bright.
Unless of course you think there will be a bull market for million dollar duplexes.
zac says:
How exactly is there growth if they can’t sell? The house has only appreciated if they can sell it for an appreciated price. If no one will buy after factoring in 3.5% a year then the 3.5% a year didn’t really happen. What am I missing?
February 8, 2007 — 2:08 pm
Jeff Brown says:
zac – That’s the paradox. The home market will have appreciated by that much, and so too the small unit market.
However, because there are so many more buyers for homes than units, the homes will continue to sell, albeit to an ever shrinking pool of buyers.
There WILL be buyers for million dollar duplexes – they’ll just be incredibly picky though. What’s the chance they’ll take a fancy to YOUR particular duplex? Pretty small I wager.
So the paradox is this: There will be comps to prove value, but so few crazy, and uninformed buyers, selling those units will be very difficult indeed.
The bottome line is really just common sense. Would YOU pay a million bucks for a duplex as an investment that required at least a third down to break even – maybe? Again, I bet you wouldn’t.
February 8, 2007 — 2:21 pm
Marty Van Diest says:
zac is correct. If there aren’t enough buyers at the higher prices, the prices will have to come down.
The thing is, we buy these investments on margin, so while the total value has been keeping up with inflation, our equity has been multiplying much faster than inflation.
I think, in certain areas like San Diego where prices have reached very high levels, growth in total value will slow down. People will still accept their equity growth even though total value will increase at a slower rate. I don’t believe you will see 3.5 percent appreciation. Not unless rent prices increase with it.
Are building costs that high there? It is cost of building that keeps prices down. It is difficult to sell a property for a million dollars if you can build it down the street for $500,000.
February 8, 2007 — 9:04 pm
Jeff Brown says:
Marty – With respect, I’ve been hearing that for over 30 years. At some point it becomes partially true, much like San Francisco. But in SF selling a duplex for over a million bucks isn’t a walk in the park. Yet they finally do sell. Why haven’t those prices dropped ages ago?
In SD when the median home price hit 100K the sky was falling, and “this just can’t be supported. We’re all going to witness the biggest price correction in history.”
What happened? They went to 200, than 3, than 4, and now 5.
If you’re seriously waiting for prices to fall precipitously, you should pack a lunch and a snack. It could be awhile.
February 9, 2007 — 12:01 pm
Cathleen Collins says:
When you talk about “building it,” do you mean the costs of goods and labor? Certainly, that’s something inflation can affect. But what about the price of land? In coastal areas and areas where there are artificial land-use restrictions, the land itself becomes more and more dear as it becomes attractive to more and more would-be buyers. Inflation has an affect, surely, but not as much so as the land’s scarcity,
This one’s for you, Jeff — What happens to valuable property that’s made less attractive to landlords saddled with rent control? I’m thinking specifically about Santa Monica. I had an office there about 20 years ago, and never could get my mind around the idea of fixed rents in an area that is obviously so precious.
February 10, 2007 — 10:33 am
Jeff Brown says:
Cathy – When folks say ‘build it for…’ they mean turn-key, especially when they’re comparing it to an existing property.
Since the price of vacant land isn’t immune to the market, building duplexes for half of what existing duplexes are worth, is a pipe-dream. Unless of course there’s been a depression like crash.
Every time rent control has been tried, most investors stay away in droves. The problem is, it’s called ‘INCOME PROPERTY’ for a reason. 🙂 When the very thing that gives value to a property is artificially governed, apart from the market, intelligent investors stay away.
It always cracks me up when Marxism is tried, after all its historically recent spectacular failures. The response when asked why they think it will work this time? “The others just didn’t do it right. We know the real secret.”
You’re experience in Santa Monica was predictable. It’s a shame.
February 12, 2007 — 11:22 am
Anthony says:
your missing the point here about duplexes though. well duplex’s and multifamilies alike. Where i’m from (boston but now live in san diego), people buy duplexes as their first home. They do this for obvious reasons, two sources of payment on a mortgage is better than 1. the first 3 properties i owned were duplexes, triplexes and 4 plexes.
i still own these units. in fact i leverage against them all the time to buy the next venture i’m on (maybe a record deal for your band?). the point is, people target duplexes and multifamiles as not a stepping stone but a 1st stone so those kinds of properties will always be hot.
if you think investors who only go after “rent-trapped” clientel, ie people who will never be able to own i think you are mistaken sir!
Anthony
March 5, 2007 — 9:21 pm
Jeff Brown says:
Anthony – I appreciate your enthusiasm, and your investment prowess.
However, San Diego hasn’t reached the point yet where there’s even the hint of a trend where first time buyers are targeting 2-4 unit properties. I wish they were, because as you so correctly point out, it’s a pretty smart way to go. And what you’ve accomplished after you moved out is exactly what’s possible. It’ll no doubt be the difference for you financially the way you’re going.
First time buyers would be doing very well taking your advice. It’s well grounded.
But if you think SD is going that way you are mistaken sir! 🙂
Thanks for the comment.
March 5, 2007 — 9:33 pm