The other day I was test driving my newly installed IDX (That’s an app allowing visitors to my company’s website to search for San Diego properties.) when I decided to check out what a duplex goes for in the town in which I live and work, La Mesa. It’s in San Diego’s ‘East County’ and has always been a high demand location for investors in residential income property. Tenants are generally of demonstrably better quality, rents are higher, units easier to rent, and vacancy rates typically lower. Real estate investors have always loved La Mesa.
I found the lowest priced duplex in the zip code (91942), $300,000 — and did some quick, down and dirty numbers. I then compared those bottom line scratchings to what we’re able to offer in various markets in Texas — mostly the Dallas/Fort Worth MetroPlex.
The La Mesa Duplex
It’s 57 years old, not a fixer, and in a neighborhood in which I’d let my only daughter live — which she does. 
There are two 1-Car garages attached to the building, which is two stories. Both units are two bedroom/one bath affairs with 800 square feet. They also sport laundry hookups. The interiors shown in the pics are well painted, and clean. I’m gonna grant them $1,100 rent for each side, which is the most this neighborhood will command. That’s $26,400/yr. Even though the repair & maintenance of this duplex will easily be far more than a new one (Duh), to make things exceedingly ‘fair’ I’m gonna use the same percentage for vacancies/operating expenses on each duplex.
The Texas (MetroPlex) Duplex
Brand new — $255,000 — three bedrooms/two baths a side. 2-Car attached garages for each unit. Current, not projected rents, are $1,275/mo. — $30,600/yr.
We’ll use a 20% down payment, with an 80% loan with 5.375% fixed rate interest, amortized over 30 years.
Note: I’m gonna use vacancy/operating expenses of 40% for each to make the math easy.
La Mesa Duplex
Gross Scheduled Income (GSI) — $26,400
Vacancies & Operating Exp — $10,560
Net Operating Income (NOI) — $15,840
Annual Debt Service (Pmts) — $16,127
Annual Cash Flow — ($287)
Texas (MetroPlex) Duplex
Gross Scheduled Income (GSI) — $30,600
Vacancies & Operating Exp — $12,240
Net Operating Income (NOI) — $18,360
Annual Debt Service (Pmts) — $13,708
Annual Cash Flow — $4,652
It took about $66,000 including closing costs, etc., to close the La Mesa property, and about $55,000 to do the same for the Texas property.
Look at the numbers — look at the pictures. Ask yourself what real estate investor would chose the old duplex with the I Love Lucy kitchen, 1-Car garages, and vastly inferior return. Then ask yourself if you did choose to stay local with the La Mesa duplex, what will your cash flow be as the operating expenses rise due to ever increasing repair and maintenance costs — though that would hafta be about 23rd on the list of reasons you wouldn’t pick La Mesa, right?
Now you know why I keep pounding real estate investment property owners in places like San Diego, Palo Alto, and most of the West Coast, to Get Outa Dodge! Even with the massive market correction the West Coast has endured, you’re payin’ 20-30% more for property half a century older than you could have — for income far below what you could have — and with built-in functional obsolescence from Day 1.
Is the ability to ‘drive by your units’ worth that much to ya? Really?!
But wait!! There’s more!!
Tomorrow I’m gonna lay out a concrete plan for the owner of the La Mesa duplex. We’ll assume they’ve had it since Moses’ son died, and we’ll see what’s possible — comparing the two scenarios — keepin’ it OR trading it to Texas. It’ll be more fun than one BawldGuy should be allowed to have in one post.
Meanwhile, back at the ranch — call me already, will ya? You can reach me at 619 889-7100. Have a good one.
Related posts:
- San Diego Real Estate Investors — Some Reasons to Invest Out of State — Try Texas
- San Diego Income Property Improving — It’s Still No Texas Though
- Durango, San Diego, Texas, KC — Random Thoughts On Real Estate Investing
- How Silly Is San Diego’s Income Property Market? You Decide
- What’s Up In Texas? We Are — It’s Boots On The Ground Time Again + A Seminar
About BawldGuy
I’ve been waiting YEARS for this side by side comparison. Good stuff, Jeff.
Grin — San Diego investment property doesn’t stand a chance against even a decent region, much less Texas these days. Unfortunately, I don’t see that changing in my lifetime.
Good comparison!
The reasons someone will buy the La Mesa duplex have nothing to with the cash flow at COE.
The rent in Texas is $1,275. Even with the outrageous Texas property taxes, how much house or condo will that rent payment buy? Now, now much house or condo will that $1,100 San Diego rent payment buy? At these prices, your La Mesa tenants aren’t moving into their own houses anytime soon. If and when they do, there will be plenty more folks needing affordable housing to replace them. That’s only true in Texas during boom times. The stabilized turnover and average vacancy on higher end rentals are pretty high.
Second is appreciation. Price/rent too high in Texas? Drive a little further out. There is no constraint to supply. The government and the geography are always happy to accommodate you. Neither is particularly friendly to new construction in San Diego.
Yes, I know you don’t expect a lot of appreciation, but what does the active, able buyer out there today expect? The buyer of the La Mesa duplex isn’t talking to you. That buyer looks at the history and the experiences of people they know and their own beliefs about investing in real estate.
The other factor in appreciation is the future buyer. The attitudes, beliefs, and financial capability of your exit buyer are critical, especially when the bulk of your return is expected to be from appreciation. That buyer has to see the property in the same positive light as the current buyer does, i.e. no significant cap rate expansion. The current buyer of the La Mesa duplex probably assumes the exit buyer will have attitudes similar to his/her own.
I can’t speak about San Diego in general or La Mesa specifically, but I can tell you up here in the Bay Area, the small residential investment market today is driven by Asian money. Whether it’s first generation immigrants funneling their money and their overseas family’s money into your duplex, or folks overseas diversifying and protecting themselves against the markets and governments at home, that’s your buying pool today and likely to be your exit buying pool.
For the majority of these folks, buying locally and self managing is important. They don’t usually think of the cash flow today. They think of the cash flow 20 or 50 years from now, for their children and grandchildren.
Yes, cap rates are up some, but not to a level that supports much if any cash flow. And everything is selling.
Would I buy that La Mesa duplex today? No. But someone will. I know you think that investors will wake up and see the emperor has no clothes. I may be wrong, but the changing market might mean the able buyers that make up the market now don’t care if the emperor is wearing any clothes, as long as they can join the parade.
AI — As usual you bring up stellar points. Today’s post will clearly demonstrate the folly of holding local SD equity hostage to the ‘I must be able to drive by’ virus.
You talk about Texas and boom times. Those are just as much in their past as monster appreciation is for San Diego real estate. Booms have always been based upon oil in Texas, as the state’s economy has always been a one-trick pony. As we’ve discussed before, it was boom or bust with not much in between for generations in Texas.
Nothing could be further from the truth now, which is why venture capital is flowing like a runaway river in the rainy season to the state. You can’t swing a dead cat there without hitting a VC.
I’m approaching the end of my third year in Texas. Rents have risen, as opposed to San Diego where they’ve fallen. Income properties perform so well there, if they’re well located they sell before the first dirt clod’s feelings are even bruised. Try that in your area and see what happens.
Vacancy rates? The vast majority of the Texas duplexes we like are DELIVERED rented by close of escrow. And as far as the supply of land goes, it’s not relevant to our segment of the market. Why? Simple — land close to major employment centers IS finite in supply. Contrary to what some may believe, most folks don’t crave the life of living on a prairie, and driving forever to their job. They live there so they don’t hafta endure what Californians must. Unlike CA, if they CAN afford to buy, prices aren’t stoopid in the solid locations. Long commutes aren’t a necessary price for TX home buyers.
Appreciation is a dead horse — period. Beliefs of CA investors? Today and next Monday or Tuesday I’ll be showing what’s easily doable when moving CA equity to Texas. The comparison is laughable, and that’s being kind. Investors who own San Diego income property stay here mostly cuz they haven’t been shown, first hand, what’s on their menu in real life. That said, I deal with those who prefer empirical evidence, prudent analysis, and bottom line results. Those who wish to keep their heads in the sand don’t match my client profile.
My buying pool? They’re regular folks all over the country. Your point about buying vs renting doesn’t apply nearly as much in TX as the rest of the country. Why? Again, simple — their prices never inflated artificially, so those who could buy, have already done so. Unemployment there is far below the rest of the country, and new employers are moving in daily, competing with companies there who’re expanding operations themselves.
For the Californian, comparing benefits/results of owning CA income property to owning TX income property is a Lose/Lose proposition — if they’re tryin’ to prove CA is a better place for ROI. Again, today’s post will eliminate any doubt about that.
You said,
“Would I buy that La Mesa duplex today? No. But someone will. I know you think that investors will wake up and see the emperor has no clothes. I may be wrong, but the changing market might mean the able buyers that make up the market now don’t care if the emperor is wearing any clothes, as long as they can join the parade.”
You’re right about a large portion of San Diego investors. Changing market? You saw the numbers comparison, right?
Now, due to the market correction, more of which is coming to CA, btw, instead of being absolutely shameful, SD (CA) income property numbers are now only completely embarrassing.
Frankly, I’ve tired of west coast investors (obviously not you) who insist the Emperor is merely being stylish. As time passes and they continue reaping their pitiful returns, the investors who emerge from the river of denial will be ecstatic they finally Got Outa Dodge.
The ‘Greater Sucker’ theory has come and gone. Those relying upon that for their exit strategy from today’s CA real estate investments are in for a very rude and painful awakening.
Just wanted to point out that for a TX property property taxes are typically ~3% of market value of the property whereas in CA it is typically much less.
So the assumption that the two properties have similar total operating expenses may not be as off as you suggested.
Another factor is that the San Diego metro area is pretty much fully built out whereas TX in general has near unlimited sprawl potential. This *might* result in San Diego having more appreciation potential based on scarcity then do TX cities.
All that said I’d still go with the TX property in your particular comparison.
Hey Greg — welcome.
You’re correct on the taxes there, although these duplexes are taxed at roughly 2.58-2.8%. WooHoo!
I refer you to part of my answer to AI’s comment. Most Texans simply don’t wanna live out in ‘PrairieVille’. Why do ya think the MetroPlex enjoys such strong rental demand? They’d rather pay $1,275/mo and drive 10-30 minutes to work than $900/mo and drive an hour.
The operating expenses of the two props used in the post would likely be fairly similar, as there’s nothing like a functionally obsolescent 57 year old rental to gobble up cash.
If you’d still go to TX after that comparison, wait ’till ya see today’s post. It should be titled, “Case closed! Next!”
Don’t be a stranger, OK?
BawldGuy,
This all makes perfect sense, but haven’t you forgotten to account for the 10% of gross rent the management company in Texas will collect from you to manage the property?
That seems like a material expense that you don’t have with self-managed “you can drive by them” rentals.
Perhaps that is built into your 40% operating expenses number, but that isn’t immediately apparent to me.
Welcome Brent — You pose an excellent question.
First, management is indeed included in the TX props’ operating expenses. Second, Brown and Brown clients get a nice discount on the normal 8-10% fee you so correctly quoted. They pay 5.5% — thank you very much.
Last, but certainly not least — What would you guess might be the real life difference between the two props when it comes to repair & maintenance? 57 year old properties are a giant pain in the money clip. You see the pic in the post, right? They’re ALWAYS fixin’ something, if not outright replacing something.
Read today’s post and come on back.
Thanks for another great post.
What do you think about using a double/duplex as a vehicle to save for your children college fund? I hate the stock market and I would love to invest in something I sorta understand. I believe I could purchase a double/duplex in the next year or two and have it paid off when my children are ready to go to college in 16 – 18 year. Any comment on this subject would be greatly appreciated.
Thanks again for sharing.