Real Estate: Why We Invest in Income Property
Investing in income property is one of the most reliable ways to build long-term wealth, offering a combination of cash flow, tax benefits, and appreciation that few other asset types can match. In San Diego, where a population of over 5 million and high income density drive demand, appreciation becomes a key metric. Over time, property values naturally rise, providing investors with significant equity growth. San Diego’s unique combination of economic stability and population growth ensures that real estate investments continue to be lucrative.
Income generated from rental properties is vital for maintaining reserves, covering expenses, and creating immediate cash flow. This steady income stream not only offsets the costs of ownership but also strengthens financial stability, allowing investors to weather market fluctuations. Additionally, depreciation acts as a powerful tax-saving tool, enabling high-income earners to save up to 35 cents on every dollar by reducing their taxable income. This makes depreciation a key advantage that significantly boosts the overall return on investment.
Another major benefit of income property is principal pay down. With every mortgage payment, you are building equity and growing your net worth, eventually owning the property outright after 30 years. Once the loan is paid off, the property can provide passive retirement income, offering financial freedom and stability for the long term. This strategy is perfect for investors with a long-term perspective, as it focuses on consistent growth and compounding returns over time.
Income property also allows for strategic reinvestment. By utilizing refinancing, investors can unlock equity and reinvest in new opportunities, increasing returns while minimizing risks. This strategy provides a tax-efficient way to grow your portfolio without the need for a 1031 Exchange, though leveraging the exchange can still be a highly effective method for deferring taxes when selling properties.
Finally, owning real estate offers the unique benefit of sole ownership. As a tangible asset, it provides control, security, and the ability to make decisions that directly impact your investment’s performance. When combined with the power of leverage, real estate also becomes one of the most effective hedges against inflation. As costs rise, property values and rents typically follow, ensuring that your investment retains and grows its value over time.
With these benefits, income property stands out as a versatile and profitable investment vehicle, particularly in dynamic markets like San Diego. Whether you’re looking to generate immediate cash flow, build equity, or secure passive income for retirement, investing in real estate offers unmatched potential for financial success.
San Diego Real Estate and Income Property Market
San Diego’s apartment market has proven to be one of the most resilient and profitable real estate investments over the past 50 years. The city’s thriving rental market is supported by a unique mix of factors, including a non-owner-occupied property rate of nearly 50%, which reflects strong rental demand from a population that values flexibility. Additionally, San Diego attracts a high-quality tenant base thanks to its desirable climate, robust job market, and vibrant cultural scene, making it a hotspot for reliable and consistent rental income.
Shifting demographics, such as the rise in single-person households, have created a sustained demand for rental housing, while market cycles influenced by generational shifts, like baby boomers’ children entering the market continue to drive rental demand. Investors targeting sub-markets categorized as C+ or higher benefit from properties with solid tenant demand, better appreciation potential, and opportunities for value-added upgrades, ensuring their investments remain lucrative in San Diego’s competitive real estate landscape.
Property Basics: Key Factors for Successful Investments
When it comes to real estate, the old adage “location, location, location” still rings true, but in today’s market, parking has become an equally critical factor in determining a property’s value and desirability. Additionally, understanding the major building components, such as the roof, siding, windows, plumbing, and electrical systems, is essential for assessing the property’s condition and planning for future maintenance or upgrades. Up-to-date kitchens and baths are key selling points for attracting quality tenants.
Effective investment decisions rely on a thorough cash flow and investment analysis. Using tools like spreadsheets to evaluate consolidated cash flow helps identify typical expenses and expected returns, ensuring a clear financial picture. Unit types also play a major role in cash flow potential, with properties offering a mix of studio, one-bedroom, and multi-bedroom units providing flexibility for diverse tenant needs.
Successful property ownership also depends on reliable property management and asset management. Building trust with a dependable management team ensures your investment is handled with care, while efficient operations and oversight maximize ROI and tenant satisfaction.
The Benefits of Working with a Buying Broker
A skilled buying broker is invaluable in helping investors navigate the complexities of real estate, starting with avoiding poor sub-locations that can negatively impact tenant demand and property appreciation. Their expertise also ensures you steer clear of maintenance-heavy properties, saving you from costly and time-consuming repairs that eat into your returns.
With extensive experience, including 19 personal acquisitions, 12 successful 1031 exchanges, and over 150 buy/sell transactions for clients—plus 30 additional 1031 exchanges—a seasoned broker brings a proven track record to your investment strategy. Their ownership perspective allows them to evaluate properties with both short-term gains and long-term value in mind, ensuring every purchase aligns with your goals.
Perhaps most importantly, a buying broker enables you to operate as a real estate professional while maintaining a relatively passive role, handling the heavy lifting so you can enjoy the benefits of property ownership without being bogged down by day-to-day complexities.
Downside Protection & Capital Needs
Real estate is inherently capital intensive, requiring adequate reserves to cover unexpected expenses such as repairs, vacancies, or economic shifts. Having a solid financial cushion is essential to navigate challenges and sustain property performance during uncertain times.
To ensure success, it’s crucial to protect and plan for downside risks, such as market fluctuations or flat rental periods. Strategic planning, including setting aside reserves and monitoring market trends, helps investors remain prepared for these potential setbacks.
In San Diego, downside or flat periods can last anywhere from two to seven years, emphasizing the importance of long-term resilience. By maintaining reserves and a proactive strategy, property owners can weather these periods while positioning themselves to capitalize when the market rebounds.
Examples
Nate: Inherited Property and Multiple 1031 Exchanges
Nate started with an inherited house in Mission Beach, valued at $950,000 at the time but now worth $2 million. Over 20 years, Nate strategically completed multiple 1031 exchanges, moving from the Mission Beach property into an 8-unit building in Copeland, then into a 14-unit in Imperial Beach, and eventually into a 12-unit in La Mesita, including a new 3-unit property. Today, the equity in La Mesita alone is $5 million, and Nate’s total equity across properties has grown to $20 million in just two decades.
Pete: Refinance and Buy Strategy
Pete owned two well-located buildings in Pacific Beach but was initially hesitant to complete a 1031 exchange. Instead, in 2013, Pete refinanced both properties and purchased a third building, based on my recommendation. This decision resulted in a total return of 65.8% to date, broken down into 57.6% from appreciation and 8.2% from cash flow.
Brenda: 1031 Exchanges and Strategic Property Upgrades
Brenda leveraged a combination of 1031 exchanges and strategic property upgrades to continuously move into better locations. Starting with a condo, she moved into a 10-unit building in Hillcrest, which she continues to hold. She also transitioned from a duplex in Fresno into a 5-unit property in La Mesa and then into a 9-unit in North Park. Her ongoing strategy of upgrading locations and increasing unit sizes has steadily built her portfolio’s value and potential.
Decision Matrix: Making the Plunge
Investing can feel overwhelming, whether you’re taking your first step or making a significant leap. We’re here at Cal-Prop Management to guide you through the process, offering support tailored to your needs—whether it’s a steady hand to walk alongside you or a gentle nudge to help you take the plunge. With our expertise, you’ll feel confident in making informed decisions that align with your goals.
Case Studies: Great Results Utilizing a 1031
Below are three case studies of how I assisted Cal-Prop clients in repositioning their equity to gain a great advantage in the long term.
Couple K: Live in Norcal and owned a rapidly aging property at 1842 Grand with a dirt driveway and a kitchen and bath failing and sucking money. I went to them and proposed a 1031 into an SFR based on meeting these goals: Get out of the money pit, get better income and appreciation. The trade-up was small because they did not want to leverage. 1842 sold in 2018 for $800k, value today is $1100k. They acquired 3954 Southview for $965k, the value today $1,650m. Net result: Couple K doubled their income plus 228% more appreciation, and they own a great house in a great neighborhood.
Mr. N: I advised him to sell a 4-plex in Fresno and move that equity to San Diego. He acquired 5 units at 7656 Normal Ave La Mesa and then 12 years later sold Normal and acquired 3744 Bancroft, 8 units in North Park. Result: Took them from a non-appreciating location into better locations and great appreciation.
Mr. & Mrs. Xmas: Xmas sold the house he grew up in at 716 Dover Ct in South Mission and bought 8 units at 4386 Copeland, then did 1031 into 14 units in Imperial Beach at 635 Emory, and then a 1031 into 12 brand new 3/3.5 with double garages at 7378 La Mesita in La Mesa. We did another 1031 out of 18 units at 1767 Torrance into 24 brand new units at 240-60 S Rancho Sante Fe Rd in San Marcos as well. Result: Fulfilled their goal of building a large portfolio while also taking them into newer units for less hassle ownership as they aged.
In addition, for my own account, after a divorce & the 2008 financial crisis set me back, I parlayed 300k into two properties that are now four properties over 100k sq. ft. and with $8m equity using a total of 8 1031’s.
These examples are all clients for whom I analyzed their situation and came up with the reason for 1031, presented that reason, gained approval, and then executed the deals to complete their goals.
Your situation may be different. Perhaps you only need help locating the leg property. I can assist in this area as well:
- I work hard to find the best property in the best location for the equity available and stated goals.
- I have had good success finding areas that hold upside potential.
- I know the San Diego areas to avoid, and this can often be pockets in good areas as well.
All of the clients above remain my client’s 20+ years later and we continue to manage those properties as well. My knowledge of how to operate for the long term is very helpful for the overall process. In addition I find a lot of clients are afraid of the time requirements of a 1031 process. I have a way to make those time arrangements less pressure-filled: Have the Seller require the Buyer to give you a 30-day extension on their relinquished (down leg) property and/or have the Buyer put up non-refundable as early as possible because this expands the shopping time available for the up leg which can be very helpful.
If you want to discuss the 1031 process or your ongoing property management needs, please e-mail or call anytime.
Rick Thornton 858-490-0054 rick@cal-prop.com
