Investing in San Diego Income Property

For all intents and purposes, investment property appreciates in value. If someone asked me the single best reason to own investment property in San Diego I would say APPRECIATION. What is appreciation? Appreciation is the increase of value of property over time due to inflation, supply and demand, capital improvements and other factors. Increase of value adds to your net worth.

The beauty of appreciation is that if you buy low and sell high, you can make money while you sleep.

What does this mean? It means that if you buy a property for below market value (poor condition, short sale, desperate owner) and you sell it at a future point in time for above market value (nicely upgraded, strong Seller’s market, above average location) than you have just hit the jackpot!

The timing of a property purchase is everything, kind of like the stock market. Holiday time is easier to find a bargain than Spring time. If you find a property on the market in mid-December, you can be assured you have a very motivated owner. (and motivated owners tend to negotiate more).

If you buy low and sell high, you have nothing to gain but money.  

Yes, but you may be thinking that you will then have to pay taxes on all that money. Well, yes, you will but you could always do a 1031Tax-Deferred Exchange and roll over the gain tax free……as long as you follow some I.R.S. guidelines.

Regulations published in 1991 allow for construction/improvement exchanges and since then they have become a very valuable tool for the real estate investor.  A few simple facts about what they are and how they work:

What is a Construction/Improvement Exchange?

·         A construction/improvement exchange is an exchange in which the replacement property will have improvements made to it before it is acquired by the exchanger.

·         The construction/improvement exchange is often used to acquire a ‘fixer’ and do improvements on the existing structure. However it can also be used to construct a new building on bare land.

Why do a Construction/Improvement Exchange?
There are generally two reasons for this type of exchange:

·         The replacement property requires less funds than what is being held in the exchange account.  The ‘left over funds’ are then used to improve the building.

·         The ideal replacement property does not exist, so the exchanger decides to build it.
Important Issues with a Construction/Improvement Exchange

·         The entire project does not necessarily have to be completed by the 180 day exchange deadline; however the value needed to satisfy the 1031 Exchange requirements should be completed by the 180 day deadline.

·         Exchange funds can not be used to prepay for work or services to be preformed after the 180 deadline.

Identification of Replacement Property

·         In a construction/improvement exchange it is still necessary to abide by the 45 day identification requirement. When identifying, the description of the property should contain as much information as possible at the time of identification.

When I was growing up, saving money was a top priority. We had a fairly large family, and although I don’t remember ever doing without anything of importance, I always knew that “extras” were a treat. I have taken that experience with me into the investing/ property management part of my businss and learned a “few tricks of the trade“ in renovating a space. I especially like kitchens and baths. Here is a project I consulted on when the owners told me they had gotten a contractor’s bid of $10K to redo a very dated ’70′s bathroom in a $100K condo. 

Before:

After:

Total Cost Including labor: $1800

Kohler Toilet: $250   Tub and wall insert by Kohler: $450.  Shower Head: $200    Instead of replacing the vanity, it was painted.  Ikea Hardware: $75 Mirror: $60   Lighting:$75    Backsplash Tile: $20    Wall and Vanity Paint: $100. The existing tile flooring and faucet were still serviceable and were kept.

Voila! A project that took 4 days and increased the value of their condo, all on a dime!

I have always liked to photograph food, and spend many an hour rustling around the stalls at farmer’s markets around the world scoping out my next shot. I get curious looks from the merchants, wondering why I am taking pictures and not buying.
Since I had to be in NYC for family business this past week-end I decided to use the little free time I had to shoot some photos. I noticed that food (and trash) were just about everywhere, and I did find some surprises…. like an entire container of French Fries on a subway grate and the 8 varieties of potatoes at the farmer’s market in Union Square.  From fresh lobsters to sesame covered Chinese treats, shiitake mushrooms and unusual radishes with a pinwheel design, here’s some food for thought.

And last but not least on the subway steps, a sad testament to NYC life:

I was at my bank the other day——–San Diego County Credit Union——- and they have a new “App” where you can deposit your checks via your iPhone. Now I know this technology has been around for a year or so, but I didn’t really think it made sense—I was  thinking it would be next to impossible to stuff a paper check into my iPhone!!   But then I learned that you just take a picture of the check and it is then treated as a paperless transaction. 

My office is in my home and my Brokerage is about 10 miles away, in downtown San Diego. My clients could be anywhere all over SD County and my meeting places are often Starbucks located just about everywhere. My mail goes to a PO Box yet most of my communications are by e-mail or text. My bank has a few branches scattered throughout metro SD, but now with a paperless iPhone deposit, I seldom have to go there. I could live on the moon and no one would know, as long there was WiFi!!

When a Buyer is looking for a home, “location, location, location” are the first 3 things on their mind. Of course…who doesn’t want to be close to services and with the price of gas, convenience is everything. Let’s stop here and think about technology.

My trips to the office are seldom, and my trips to the bank now, are never. Clients (especially investors)  do alot of footwork, and you don’t have to drive them from place to place. You can have a conference via Skype or “Facetime” on iPhone. I write up a list of items and order them from Drugstore.com, eliminating the need to drive all over the place.This opens up alot of possible locations for me to live—many more than it did even 5 years ago. Does it matter that my bank/pharmacy/supermarket are even “bricks and mortar”? Heck, my office doesn’t even have to be “bricks and mortar”. So how does this affect not only me but our industry?

Locations that are further away from city services may start to take on a whole other dimension. If I don’t have to worry about my commute or getting to the bank or drugstore, I just may opt to live further from metro city center and purchase a larger, less expensive house……or tap the better priced suburban condo market which is still floundering 15-20 miles outside of metro San Diego. 15 years ago, condos in East County were not considered as desirable as metro condos, but if you look at the vast price differential, they may be the next best buy. If I can save $500-$750/month by living in a “less convenient” area (and “convenience” is now a moot point), I can save that money and purchase another property, or investing it—–all the while, adding to my net worth.

Technology has not only changed our business model BUT the needs of our Buyers have changed as well. Don’t lose Buyers because they can’t afford the “chic urban areas”————which may just see a decline in pricing due to our everchanging technology. Largely forgotten inventory in suburban/rural/fringe areas may just be on the upswing!

I just finished reading The Power of Charm by Brian Tracy.

This was an easy read, and although it did not hold any earth shattering revelations, I thought the chapter on eye contact was worth mentioning.

Did you know that eye contact projects to your speaker (client, partner, boss) that you are involved? it is a basic way that people will know if you are listening. Flicking is an act of shifting your gaze from one of the person’s eyes to the other. It is a process of engaging with your speaker. I know a business colleague who never, ever gives me eye contact and is always looking around the room.  This is dismissive and I don’t trust her. Now think of what your clients may feel.

Intense eye contact with no gaze shifting may signal sexual interest or threatening behaviour, so as to avoid this, shift your gaze to the sides of the speakers face for just a brief moment. Never gaze at their mouth or nose (they will think they have some food on their face or worse) or above or beside their heads (they will think you are showing disinterest).

Head tilts make you look very attentive and involved. it is a simple move, tilting your head slightly from side to side. (think of how endearing it is when your pet dog or cat does this).

Try using direct eye contact, flicking and the tilt and this will communicate: “I am totally focused on what you are saying”.

When I tell my friends I work with small to mid-sized San Diego income property investors, mostly everyone thinks I am talking about these guys—– but in fact I am talking about the small investor: the at home mom, the student who has a few extra dollars to invest, the young college grad who wants to buy an owner occupied duplex or “2 on 1″.

Nowadays, you don’t have to be a multi-millionaire to be a real estate investor BUT you do have to do a little homework, pavement pounding and research.

Invariably when I get an e-mail from a client looking for “cash flow” on a 2 unit property it sets off a small red flag—–either one who has significant cash to put down on the property or one who is fairly new at investing. “Cash flow” is a buzz word, but it means very little in the San Diego small to mid-sized income property market. Why? Because cash flow is probably the least important of all the benefits of owning smaller properties and I’ll tell you why. A 2 unit property is best owner occupied, thus allowing you, the owner (investor) a well priced place to live. Although you will be renting out the 2nd unit, the “cash flow” will help pay for mortgage, taxes, maintenance and utilities. Are you running to the ATM to deposit extra cash every month? No——–but it allows (or should allow) you to have a well-priced primary residence, thus adding to your monthly “cash flow”.

Example: If you bought a $300K SFR home with a downpayment of $60K, your P & I would be about $1430. If you bought a duplex (or 2 on 1) for $400K with the same $60K downpayment your P & I would be about $2025. Assume a $1200/monthly rental income, and your monthly “rent” is $825. That’s a $605/month savings, for not inconveniencing yourself a heck of a lot. You would not have to give up the idea of a SFR, because you could certainly save for it very quickly with almost $8K annual “savings” before tax write-offs of 50%! And then keep the duplex as property #1 in your investment portfolio.

In uncertain economic times it is always prudent to save for a rainy day. Starting out as a small to mid-sized real estate investor in San Diego is smart, smart, smart and a great way to get ahead of the game!

Have questions about being a newbie San Diego small income property Investor? Tenant issues? I have the answers!

1.  Impersonation of the true owner of the land

2.   Forged deeds, releases, etc.

3.   Instruments executed under fabricated or expired power of attorney

4.   Deeds delivered after death of grantor/grantee, or without consent of grantor

5.   Deeds to or from defunct corporation

6.   Undisclosed or missing heirs

7.    Misinterpretation of wills

8.    Deeds by persons of unsound mind

9.   Deeds by minors

10.   Deeds by illegal aliens

11.   Deeds by persons supposedly single but secretly married

12.    Birth or adoption of children after date of will

13.     Surviving children omitted from will

14.     Mistakes in recording legal documents

15.     Want of jurisdiction of persons in judicial proceedings

16.     Discovery of will of apparent intestate

17.     Falsification of records

18.     Claims of creditors against property sold by heirs or devisees

19.     Deeds in lieu of foreclosure given under duress

20.     Easements by prescription not discovered by a survey

21.     Deed of community property recited to be separate property

22.     Errors in tax records, e.g., listing payment against wrong property

23.     Deed from a bigamous couple

24.     Defective acknowledgements

25.     Federal condemnation without filing notice

26.     Corporation franchise taxes, a lien on all corporate assets

27.     Erroneous reports furnished by tax officials

28.     Administration of estates of persons absent but not deceased

29.     Undisclosed divorce of spouse who conveys as consort’s heir

30.     Marital rights of spouse purportedly, but not legally, divorced

REO Lender CANNOT Require Buyer To Purchase Title Insurance From Any Particular Company

Ever seen REO and Short Sale listings with the disclaimer, “Seller to choose escrow/title company.”  Is this legal?  Actually, it’s a violation of RESPA. Lenders selling properties, as well as the seller’s agent representing those lenders, should be aware that while the Lender/Seller can select the escrow company, the buyer is free to use any title company he or she chooses. If speaking up jeopardizes an offer, remember this: Buyers’ agents have a responsibility to inform their clients of their right to choose a title company. Sellers’ agents representing lenders have a responsibility to act in accordance with RESPA. It’s that simple.

According to the California Association of Realtors:

No seller can require that the buyer purchase title insurance from any particular title insurance company. This rule pertains to transactions involving a federally-related mortgage loan for one-to-four residential units as defined under the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. section 2608). Although this is a well-established rule under RESPA, it bears repeating given the recent upsurge in REO transactions.

REO transactions are not exempt from RESPA requirements:

If an REO lender chooses the title insurance company, as is often the case, it cannot require directly or indirectly, as a condition to selling the property, that the buyer purchase the title insurance policy. An REO lender that violates this RESPA requirement can be, among other things, held liable to the buyer in the amount equal to three times all charges made for such title insurance. Moreover, anyone who believes that RESPA has been violated may file a complaint (and may request confidentiality) to the U.S. Department of Housing and Urban Development (HUD).