Understanding Real Differences — Real Estate Investors Sometimes Gloss Over ‘Difference Makers’

In a conversation the other day, I was talking with a local retired investor, about how folks will analyze properties into submission while missing the basic reason why one is easily the better choice. I used to believe it was merely an indicator of human nature — folks will use analysis sometimes to back up their bias for one property over others. But now? Not so much.

It’s not that investors don’t want the best possible results for their capital. It’s almost always the meshing of objective and subjective gears — easier said than done, right? In areas like San Diego, Palo Alto, San Mateo, San Francisco, and much of L.A. and Orange County, the bias for local property over clearly superior options is still present. I’ll use San Diego as an example.

Prices for income property here have been slaughtered the last almost four years. A stone’s throw from my own office is a case in point. At the top of the boom it would’ve sold in days for closer to $600,000 than $550,000. Today? It’s on the market for about $400,000 and breathlessly awaiting offers. Assuming the numbers compare favorably with other properties out of state (not a supportable assumption more times than not), what would make the decision simpler?

For 90% of San Diego real estate investors, one factor alone should make their decisions far easier. I’ve been selling and/or exchanging income property here since the end of 1976. Property built that year in San Diego is now considered young. It’s not uncommon to see listings in some well located parts of town with ‘built dates’ preceding the end of the Korean War. Only 35 years old? A puppy in San Diego.

Most reading this aren’t from around here so I’ll ask you — everything else being equal, do you want the new to 10 year old property, or the one that’s older than you are? This doesn’t take into account another huge factor. Most of the properties we see and like in other states have offered what we consider to be superior product in terms of attracting better quality tenants.

A 45 year old duplex with a couple 2 bedroom 1 bath units sporting ‘I Love Lucy’ kitchens simply don’t measure up to the duplex elsewhere, built this year, offering 3 bedroom 2 bath units with modern kitchens and attached garages — usually 2-car garages. San Diego? If a duplex here offers garages, they’re almost guaranteed to be 1-car affairs and many times not only detached, but located in an alley.

So I pose the question: Why would an objective investor, armed with cogent, well done analysis opt for ancient units when the alternative is so obviously superior? Think about selling/exchanging those antique units years down the road. By then the investing public will have adjusted to out of state options to a much larger degree than they currently do — and a huge minority of investors around the country have adjusted just fine, thank you. What will it be like trying to find a buyer for property ‘less than half a century old’?

It gets worse when you’re nearing the end game — retirement. Do you seriously wanna be the owner of a bunch of income property which at one time could’ve housed sailors returning home from WWII? Do ya think that’ll impact your net income? Do ya think it’ll have a dampening affect on the quality of tenant and the rents those tenants will pay?

Staying local in the face of overwhelming empirical evidence of predictably inferior results will ultimately come home to roost at the worst possible time. Don’t let your personal biases guide you when analyzing your next move. It can and will cost you huge amounts of future retirement income and capital gains — not to mention the time and money spent on management requirements and maintenance/repair on the way there.

This is a serious problem facing hundreds of investors all over the country, but especially in California. Overcoming your bias for local property in the face of the hugely modified field on which we all must now operate, is imperative to the success of your retirement.

I implore you — take a step back and see what’s right in front of you.

Call me to chat about what you should be doing about now. 619 889-7100 will get you to me. Besides, I need a fix. Have a good one.

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5. How Can San Diego Real Estate Investors Improve Their Current Strategy?