Welcome to San Diego Blog | April 12, 2011

Investment Condos Downtown San Diego

One bedroom condos vs. two bedroom condos…

…which is a better investment and why?  Downtown San Diego has one of the most optimistic real estate markets in the nation right now according to Cash Schiller .  We have been seeing more and more investors looking to purchase condos Downtown San Diego.  The questions we frequently hear about investing in condos downtown San Diego include:

  1. Which is a better investment, a one bedroom or two bedroom condo?
  2. What will my return on investment be?
  3. How can I be sure that the market will go up and I will be able to sell 3-7 years out for a profit?

I will touch mainly on these three questions although there certainly are more than these 3 principles that go into choosing a great investment property.  First of all, make sure you work with somebody that specializes in the location you want to buy.  For the purpose of this article, let’s start with question #3 – Which is the best investment, a 1 bedroom or 2 bedroom condo?  

In a previous condo investment blog, we proved that condos with more amenities and lower monthly HOA dues tend to pencil out the best for investment purposes.   Given those findings, I am going to use examples with these characteristics.

Are 1 bedroom condos or 2 bedroom condos better investments?

One Bedroom Condo Investments

One Bedroom Condos La Vita 404  Treo 1305
Purchase Price  $     243,000  $     220,000
25% down payment  $       60,750  $       55,000
Mortgage Amount  $       182,250  $      165,000
Est. mortgage at 5%  $            978  $            886
Property taxes  $             229  $            207
Home Owner Association  $            402  $            389
Total Monthly Obligation  $          1,609  $           1,482
Rent on identical condos  $           1,750  $           1,750
Gross Monthly Profit  $              141  $            268
property management 6%  $             105  $             105
Net Monthly Profit  $              36  $             163
Annual Return on Investment 0.71% 3.55%

 

Two Bedroom Condo Investments

Two Bedroom Condos La Vita 1708  Treo 807
Purchase Price  $     420,000  $     375,000
25% down payment  $      105,000  $        93,750
Mortgage Amount  $      315,000  $       281,250
Est. mortgage at 5%  $           1,691  $           1,510
Property taxes  $            396  $             353
Home Owner Association  $             452  $            443
Total Monthly Obligation  $          2,538  $          2,306
Rent on identical condos  $         2,600  $         2,500
Gross Monthly Profit  $              62  $             194
property management 6%  $             156  $             150
Net Monthly Profit  $             (94)  $              44
Annual Return on Investment -1.07% 0.56%

As you can see in the above charts, one bedroom investment condos actually pencil out very similarly to the two bedroom investment condos.  The difference where the investor may make up their profit is at the point of exit.  It is arguable that 2 bedroom investment condos will have a better resale value than one bedroom investment condos. 

With 25% down, investment condos downtown San Diego generally yield an immediate ROI of  approximately 1% including tenant placement property management.  The same scenario for a cash investor would yield approximately 5-6% for one bedroom investment condos…

Cash Investor    
One Bedroom Condos La Vita 404  Treo 1305
Purchase Price  $     243,000  $     220,000
100% down payment  $     243,000  $     220,000
Mortgage Amount  $               –    $               –  
Est. mortgage at 5%  $               –    $               –  
Property taxes  $             229  $            207
Home Owner Association  $            402  $            389
Total Monthly Obligation  $             631  $            596
Rent on identical condos  $           1,750  $           1,750
Gross Monthly Profit  $            1,119  $            1,154
property management 6%  $             105  $             105
Net Monthly Profit  $           1,014  $          1,049
Annual Return on Investment 5.01% 5.72%

…and about 4.5-5% for two bedroom condo investments (below).  Again, the numbers for investing in condos downtown San Diego aren’t dramatically different for a one or two bedroom condo as far as immediate return on investment.  This being said, it is probably best to decide how much money you are looking to invest and find the best property in that particular price range.  This is where we can really help you make a great purchase for an investment property in Downtown San Diego.

Cash Investor    
Two Bedroom Condos La Vita 1708  Treo 807
Purchase Price  $     420,000  $     375,000
100% down payment  $     420,000  $     375,000
Mortgage Amount  $               –    $               –  
Est. mortgage at 5%  $               –    $               –  
Property taxes  $            396  $             353
Home Owner Association  $             452  $            443
Total Monthly Obligation  $            847  $            796
Rent on identical condos  $         2,600  $         2,500
Gross Monthly Profit  $           1,753  $          1,704
property management 6%  $             156  $             150
Net Monthly Profit  $           1,597  $           1,554
Annual Return on Investment 4.56% 4.97%

As we illustrated in the charts, the immediate ROI is going to be low yielding for investors requiring financing and moderate for cash investors, but 5% is better than anything you’re going to find in a CD or Money Market Account so it’s a good option for those with cash.   The real return would be made at the time of sale which leads us to question number 3. 

How Can I be Sure the Downtown San Diego Property Values will go up?

Of course there are no guarantees with any investment in life, but as long as the world stays relatively stable and there are not any major occurrences that send the world economy sideways, then we (plus Bloomberg and the Case Schiller Index) really, really expect that San Diego real estate is a great place to park your cash.  First of all, simple economic principles are involved…supply & demand paint an interesting picture for Downtown San Diego Real Estate.

Today, there are actually only 281 properties for sale on the San Diego MLS.  There are about another 150 new condos for sale across downtown for a total of 431 properties for sale. We are selling 93.3 condos per month over the past 12 months so we are looking at about a 4.5 month supply of condos with no new developments coming for 3 years best case scenario.  If condo sales stay stable, and they have for the past 3 years…

  • 2008 – 1108 condos sold
  • 2009 – 1164 condos sold
  • 2010 – 1120 condos sold

…then we are going to have a serious shortage of downtown condos come 2012-2013.  With the demand staying constant, this will drive prices up.  New developers won’t start to build again until prices for high-rise condos can sustain a minimum of $500 per square foot as that is the absolute lowest cost to build a new concrete, steel and glass condo building. 

With the above one bedrooms selling at $354 and $324 per square foot and the two bedrooms selling at $371 and $299 per square foot, sales prices have a large gap to span before developers will start taking the risk of building new condos.

This essentially ensures that values will hit $500 per sq ft again because let’s face it…San Diego’s weather and great lifestyle are going to attract more people that just get tired of dealing with extreme weather conditions.  If you take the highest price per square foot above at $371 and assume you can get a $500 future value out of it, then you leave yourself a worst case gain of 26% over x number of years.  If you are a cash buyer realizing 5% annual ROI, then even with a 5 year hold, you would still have made 10% on your investment annually over the 5 year period.

For more information about intelligent condo investment choices, please give us a call:  619-309-8011


Written by: chad

Categories: Buyers, Downtown San Diego, San Diego Real Estate

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