By Terry Moore, CCIM, ACI Commercial & San Diego Apartment Broker
Many rental owners aspire to have beach assets. Candidly most of us won’t pay what they are worth. This month I bought a car. I could afford the fancy car that I really, really wanted, but I was not willing to pay as much as it was worth. So instead I bought the best vehicle within the price I was
willing to pay. As a RentalOwner reader, you could afford to buy in the beach, but may have chosen not to use your capital that way.
Some investors put the extra money into the premium zip codes for a variety of reasons: pride of ownership, lowest vacancy risk, ability to rent to higher income, better educated residents and hopes of superior returns.
Pacific Beach is the most active coastal zip code. Its 1,364 apartment parcels more than double all the other north county coastal zip codes combined.
North Coastal Sub-Market
La]olla, Del Mar, Cardiff, Encinitas and Carlsbad- commonly known as north county coastal sub-market has even higher income and better educated residents. Owners claim it is the jewel in the crown of San Diego ownership. Our survey does not include Coronado, because in most years there is not even one sale. Coastal apartments have lowest turnover in the county. Many families retire the capital to coast and then eventually pass the equity to their heirs.
North County Coastal
North County Coastal has high end homes and few apartment parcels. How few? La]olla – 157; Del Mar 29; Encinitas 177; Cardiff 45 and Carlsbad 289. Experts differ about how to classify Oceanside’s coastal strip. What is coastal? … five blocks – two miles? For simplicity I treat all of Oceanside with the rest of the Highway 78 corridor. The coastal strip is so narrow that it only matters to the few fortunate souls who possess Oceanside apartments near the Pacific.
Look at the numbers, on a deeper level. please see the graphs on the following pages.
As usual, we will analyze cost per apartment, cost per square foot of improvement, and gross rent multiple (how many years of rental income the buyer paid for property). From 2010- fall of 2016, our team analyzed 59 Pacific Beach sales and 53 other North County Coastal transactions.
Generally each data point on the graph represents the average of the previous 12 months, a moving average. With small data sets an odd ball transaction, an anomaly, can distort the average. When there are few transactions within a year, we smoothed the data by capturing at least one more sale, even if it meant extending to 13, 14, or 15 months.
Appraisers use all three measures to determine value. You know this series has a short blizzard of numbers. For this period Pacific Beach climbed 50%, which averaged 8.6% annually. The details are 16% climb in GRM, from 14.15 to 16.4; cost per unit increased from $173k to $314k, up 82%; and cost per rentable square foot rose from $284 to $428, 51%.
The other North County Coastal zips have a blended increase 61% over 5.75 years, or an average of 10.5% annually. Details were: 39% bump in GRM, from 12.4 to 17.2; 76% jump from $191k to $337k per apartment and 67% lift for dollar per rental square foot from $232 to $387. Those gains are impressive, but let’s look deeper.
Most households who buy apartments obtain a loan. Lenders demand a financial cushion; the asset must produce $115 of cash flow for every $100 of mortgage payment. In effect that means 50% down to buy in the beach. Imagine in 2010 someone bought a $2 million-dollar Pacific Beach asset, put half, $1,000,000, and borrowed the other $1,000,000. Suppose that the PB property grew by 50%, to be worth $3 million. The loan may have a balance of $925,000. So the owner’s equity has more than doubled from $1,000,000 to $2,025,000, ($3,000,000 value$ 925,000 debt = 2,025,000 equity.) Wahoo!
For North County Coastal the returns are slightly better.
The amazing thing to me is that in most of the zip codes the owners have doubled their equity in most of the county zip codes. So good is not always best. Actually coastal equity grew slower than City Heights, Golden Hill or El Cajon! Coast has fewer choices and the down payments are higher.
So much for history … what do you do now?
Regardless of where your equity spent the last decade, now put your equity where it’s most likely to give you the best result in the next generation. Legacy is not optional. You’re leaving a legacy, whether you plan it or not. You notice I’m routinely reminding you to plan your legacy. Sometime in the next 100 years you and I will be gone. Your inheritance will include the keys, the cash, the property… the stuff. You’ll also leave a legacy. Legacy is more important than material goods; it is what people can do because you were here. It will include the example you set and the stories people tell about you.
So, here’s my question for you:
Is your real estate equity promoting the legacy that you want to build? will people remember you as someone who focused only on your comfort and convenience or as someone who inspired and benefited others, too?
Closing reminder
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About the author: For 20+ years Terry Moore, CCIM, has enjoyed his relationship with other SDCAA members. He has lobbied, written, spoken and taught for SDCAA. He is an owner of ACI, Apartment Consultants Inc, San Diego’s most active apartment brokerage. His bride of 40 years loves the car he bought. Contact Terry at 619-889-1031, tmoore1031@gmail.com or SanDiegoA partmentBroker .com
