We've got Natalie from San Diego.
She goes, "Hello.
My brother and I have property for sale in Pacific Beach and we have an interested buyer.
After all is said and done, we'll have just under $600,000 in hand and want to do
a 1031 exchange.
I can get a multi-family that has high cash flow.
It's a priority for me because I depend on this monthly income, but I don't want to deal
with constant hurricane damage."
All right.
"I've been told I could get a property 10 or 15 miles inland in San Diego, upgrade it,
and it will yield higher cash flow than something on the beach.
I have a hard time believing that if I were to take out a million dollar loan I would
get any cash flow after paying off the loan and possibly upgrades.
The other option I was thinking is a triple net lease, but I'm aware of the risk associated
with those - not getting a good location, not backed by corporate, if the tenant goes
bankrupt, etc, etc, etc."
So let's talk about a couple of things.
Alan, you've been a real estate investor for quite some time.
And when you're looking at a property for cash flow, I guess one of the things that
you have to look at is just what's the market value in the particular area
that you're looking at?
In my opinion - and my opinion it is only gauged on the information that you have given
me over the years -
Yeah let's see if you've remembered it correctly.
But San Diego is not really great for rentals, because the market values are so high and
especially if you're looking to get a single family residence or something like that?
Maybe a duplex on the beach?
I don't know, that's going to cost you a couple million bucks and I don't know if the rents
are going to cover that.
So she's right on, she's like, "You know what?
I don't believe it.
I don't see how I gotta put in more money into this thing.
I got $600,000 from this, I can exchange that, buy this place, have a large note.
How's this thing going to cash flow?"
Yeah.
And I agree with that, but I will add some more tidbits.
Because single family homes and condos in San Diego - I'm just talking San Diego right
now - they're gonna have probably, in general, the worst cash flow of any real estate.
A duplex tends to have a little better cash flow, triplex even better, fourplex even better.
You get to five units and up, it's a commercial property.
Now you're buying a property more based on cash flow than you are market value.
And so, you tend to get better cash flow on units.
Five units and up.
Part of the reason is, it's harder for people to buy, because they have to get commercial
loans, they have to put a lot more down payment.
And then another factor is, and this might sound kind of weird, but the lesser the neighborhood,
in general, the better the cash flow.
So if you've got a place in Pacific Beach, you probably don't have very good cash flow
relative to, let's say, a place in El Cajon.
And no disrespect to El Cajon, but it's just that, closer to the beach you generally have
lesser cash flow.
Inland, you have better cash flow.
So that's kind of some general things to be aware of.
Now, within that framework, every single property stands on its own, and you've got to look
at the neighborhood, you've got to look at the financials, you've got to look at, "can
I increase the rents if I do some little improvements."
In a lot of cases in San Diego, you can get a decent cash flow with units if you get a
good enough deal and you put a little bit of money in and you can raise the rents and
kind of turn this thing around, kind of put a little bit better active management in it.
It can work, but it is a lot of work.
Triple net lease?
Triple net leases, I agree with her concerns.
I mean, if you triple net lease the Starbucks you're home free because Starbucks, they don't
franchise, it's a corporate guarantee, but you don't get a very good cash flow.
And in fact I just saw a client that had a triple net lease with Starbucks in Texas,
and the cash-on-cash was 4%.
And Texas usually is 6 or 8 or 10 even.
So a Starbucks in San Diego would be, I don't even know, probably two and a half?
I'm just guessing, I don't really know, but yeah, I'm not a huge fan of triple net leases
just because you've got one tenant and if they leave, if they vacate, probably it's
a franchise, it's based upon the strength of the franchise.
You might have a vacant property for a year or longer.