So much of the country hasn’t experienced the 15-40% annual appreciation rates places like San Diego have experienced several times. Regardless of the down times, we’ve learned she always comes back smiling. The market? In the end, she would always love us. She always has. Though at times she could lash out, she always made up for it with lavish gifts of abundant appreciation. That may still be the case in regions like SoCal, but it’s my belief it won’t include the vast majority of residential income property.
There are several reasons allowing investors to conclude this. I wrote about many of those reasons in over at my place, adding a video for fun.
First and foremost, developers paid attention in eighth grade math class. They can make $X building duplexes or fourplexes and the like OR $X+ building condos/townhomes OR $X+++ building single family residences — and all on the same piece of dirt. Go figure, they chose to build where they found the most profit. This has been happening in places like San Diego since the ’80′s.
The only residential income product built since then has been recently. It’s been concentrated on the coast and upper income locations with rents that are incredibly high. These newish projects are not competition, nor do they have any positive affect on the values, rents, or vacancy rates of 35 year old duplexes. Duh.
An example is a new place offering 1 bedroom apartments for twice the rent of competition half a mile away. Twice as much. They also offer their tenants everything but a Friday night date — something I’m sure they’ll correct upon reading this.
The point is that the market? She’s left you. And she ain’t coming back no matter how much you turn on the old charm. When investors have the choice of putting less than 35-50% down just to break even, they’ll do it. The party’s over. Capital flows to the best returns. Duh. So why do folks in places like uh, the west coast for instance, insist things will revert to the status quo they’ve relied upon for so many decades?
They’re spoiled. I speak as one of them, who admittedly came late to this fundamental reality. I’ve been shouting from the mountain top ever since. (around late ’03)
Their true love has never let them down. She’s never made them actually work for the profits from which they’ve benefitted. In San Diego, buy something in ’76, exchange it in ’78 for a substantial profit and more magic property. Recession. She turns her back on you, miffed. Buy again in ’83-84 and exchange all your stuff in ’87 and again in ’89. S & L Crisis — she’s really upset at you this time. But she’ll get over it, she always does.
It takes her longer that time, but she comes around just as you knew she would. Lord she’s gorgeous. You tax defer everything again in 2000, and find yourself feeling pretty special. Then you do it again in ’02 and once more in ’04. In the the five years 2000-2004 you’ve literally made gains requiring two commas, and all in San Diego.
You’re thinking she still loves you.
Then she decides it’s over in ’05. Without warning, (at least that’s your story) she’s been seeing others. Turns out she’s been planning this for quite some time. While you’ve been making all this money, she’s cut you off — and you may not realize it’s permanent. She doesn’t care anymore, yet you insist on sending flowers.
Counting on her loyalty isn’t a bet I’d make, considering your retirement is what’s at stake.
Forget her, and realize what’s she’s done with you. She’s allowed you to keep thinking she was your true love, when in fact she’s allowed your properties to become very unattractive to investors. They’re old, require much maintenance, are many times functionally obsolete, and frankly are becoming the default for those with poor credit, and the inability to live anywhere else.
Sure, you retort, but that last bit describes rental property almost everywhere. True enough. But would you rather have a well employed tenant on their way up, who has chosen to live in your unit and in that neighborhood? Or deal with your tenants, lifetime renters who hate living in your units because they now realize the dream of home ownership is probably not gonna happen, at least not in San Diego. They’ll either join the folks leaving places like SoCal for Arizona, Idaho, Colorado, Texas, and Kansas City, or remain in San Diego until the choice simply isn’t theirs any longer.
She’s not coming back. There are some pretty sexy markets out there doing there best to get your attention. Go where you’re wanted.
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