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Given our turbulent real estate market, a question lingers on the minds of many San Diegan investors: "How can I invest my money and still make a healthy return?"

 

Investors often pose this question to me after having been misinformed by someone attempting to provide sound investment advice. As a result, I have been able to identify several distinct real estate myths developed over time, which provide the foundation for investors to make less-than-sound investment decisions. 

 

Since we pride ourselves on being the one real estate investment company that collects the cold hard data to assist our investors in making fact-based investment decisions, I will use facts to attempt to dispel these myths.

 

Myth No. 1 - The Southern California real estate market is down 

This myth was most likely spawned by the recent abrupt deceleration from double-digit appreciation in the single-family home and condo segment. We have probably all heard this phrase at one time or another and took it at face value, without sufficiently exploring the implications of this extremely broad generalization.

 

According to the San Diego Association of Realtors, the average year-to-date sales price for single family attached properties in San Diego County is $437,121—down 2.9% from the average of $450,351 over the same period last year. Other categories of San Diego real estate, however, have continued to march upward:

 

-Single family detached - $719,783; up 1.2% from $711,459 last year

 

-Two to four family - $739,006; up 5.3% from $701,530 last year

 

-Multi-family (5 units+) - $1,730,086; up 18.3% from $1,462,558 last year

 

Myth No. 2 - An investor needs to go out of state to locate the best investments 

The investment potential inherent within Southern California is second to only a select few other localities—primarily due to the lower market cap rates associated with local income-producing property in Southern California. The value of an income-producing property is determined by the net operating income (NOI) that the property produces in conjunction with the market capitalization rate, and is described by the following equation:

 

Value = NOI/Cap rate, where NOI = Income - Expenses.

If an investor's objective is to acquire income property and increase the value of that property over a short holding period, you can see from the above equation that it is easier for an investor to accomplish this in a low cap rate market than in a high cap rate market. For example, a $1 increase in NOI over the holding period in a 5% cap rate market equates to a $20 increase in building value (versus a $10 increase in building value in a 10% cap rate market).

 

Myth No. 3 - An investor can only get 70% loan-to-value (LTV) on commercial investment property.

Though I have heard this myth uttered by even the most experienced commercial real estate investors, it is most certainly not true. Let me start off by saying that there are literally thousands of lenders out there with even more variations of loan products that investors can access. After all, a lender is merely an investor who is willing to accept a smaller return for less risk. The terms of a loan they will make is dependent upon what he or she will accept.

 

In fact, I have seen Fannie Mae loans on residential income properties up to 80% LTV, sellers carry up to as high as 90% LTV, and hard money bridge loans as high as 95% LTV. When push comes to shove, I have also assisted clients in purchasing a fractional interest in commercial investment property by syndicating funds with as little as 2% of the gross purchase price.

 

Myth No. 4 - An investor cannot get good cash flow from investment property in Southern California. 

Our company provides all of the services that commercial property investors require, including buyer's representation, property management, sales, and syndication. Our focus is on assisting investors to acquire and operate performing investments that meet their cash flow and return objectives—as opposed to simply selling properties.

 

Because of the services we provide, we are also able to structure investments to meet a very diverse range of requirements. We have been able to structure multi-family investments in San Diego for our clients with as high as a 21% first-year cash-on-cash return (COCR) and a 25% average annual internal rate of return (IRR) over a 2-Year holding period, and we have current projects that we are looking to fill immediately with very similar characteristics.

 

Please contact Rich St. Rose at Epifany Properties to find out more.