Real Estate Investment in San Diego, CA

The Myndful Investor Podcast

Real Estate Investment in San Diego, CA

Rental Investor Starter Kit

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Why Invest in San Diego Real Estate?

Residential real estate properties in San Diego, CA, great for investing!

With warm weather, over 70 miles of coastline, picturesque beaches, and popular attractions like Balboa Park and SeaWorld, San Diego is home to 1.407 million people, being the second largest city in California by population. The population growth rate is 0.91%, which is higher than the 0.7% national average. San Diego's economy is solid and constantly growing, supporting industries such as technology, hospitality, military, biotechnology, and microbrewery. Both population and economy growth lead to a high rental demand in the area.

Even though the median property price in San Diego is rather expensive ($828,000), making it tough for real estate investors to enter this market, investing in properties in San Diego can offer high rental incomes both for single-family homes and vacation rental properties (such as Airbnb). Real estate investors can expect a cash on cash return of 2.3% and a cap rate of 4.8% for traditional rental properties as well as a cash on cash return of 2.5% and a cap rate of 5.1% for vacation rental properties. This makes San Diego a profitable market for real estate investors.

Its booming economy and increasing population growth rate make San Diego's real estate market an optimal place experiencing a high rental property demand. Learn more about rental property data below and even consider the pro's and con's of hiring a property management team to assist with your Sand Diego area rental.

Investment Considerations for San Diego Real Estate

There are a number of factors to consider, including:

  • Job growth – With companies like Qualcomm, Ferrellgas, Bad Boy, Acadia Pharmaceuticals, Illumina, Psyonix and Zesty.io headquartered in San Diego, the city has also been attracting a lot of start-ups and renowned knowledge-based organizations to open key offices in the area. San Diego is one of the country's best cities for job growth and the employment has grown at a 2.6% annual rate in 2016. Thus, the job numbers are growing, especially in the high-paying professional fields, while the unemployment rate has dropped in 2018 to 2.9%. With these great numbers, real estate investors in San Diego can know for sure that the rental demand is growing, and they'll be able to choose from plenty of employed tenants who can pay their rent on time.
  • Growing tech hub - As the 4th place in the United States for startups, the city is often called a tech mecca. Plus, San Diego has actually made it to Forbes' 'Best Cities to Start a Business' top spot. With a lot of promising tech projects being hatched here, many entrepreneurs call America’s Finest City their home sweet home. Therefore, more and more talented people are choosing San Diego as the place where they can expand their careers. Thanks to the city's growing tech scene and newly arrived tenants, real estate investors in single-family rental homes in San Diego can enjoy positive cash flow likelihood.
  • Famous tourist destination - San Diego welcomes approximately 35 million tourists each year. There's an increasing demand for Airbnb-type properties, with high occupancy rates and low vacancy rates. This makes the demand in the city's real estate market increase, which translates into a favorable market for real estate investors. With such a high demand, real estate investors can charge higher rents for vacation rental properties, leading to a growing return on investment and a positive cash flow.

San Diego boasts one of the top high-tech and life science clusters in the country. More than 80 research institutes, from Scripps Research Institute to the Salk Institute for Biological Studies, call the region home. In addition, six universities are located in the San Diego metro, spurring demand for San Diego rental housing. The professional, scientific and technical services sector expanded 3.8% during that time, with over 5,000 positions added to the local economy.

Venture Capitalists Invested $2.5 Billion into San Diego Companies

Venture capital poured into the San Diego area in 2018, the majority of which financed the life sciences and pharmaceutical companies. All told, local companies raised $2.5 billion last year from VCs, twice the amount from last year and the highest level of investment in two decades. The innovation economy contributes approximately $30 billion in GDP locally, and employs 140,000 people, according to the San Diego Regional Economic Development Corp.

Absorption Strengthens as Household Formation Outweighs Supply

Over the short term, San Diego rental housing demand has largely kept up with most of the county’s supply additions, with high levels of net absorption. Currently, the metro’s vacancy rate stands at 4.3%. Firms from Amazon to Apple are expanding in the region this year and next, which will add hundreds of new tech positions to the economy. San Diego boasts one of the heaviest concentrations of millennials in the United States, accounting for 27% of the population, according to the latest U.S. Census Bureau estimates.

On a long-term basis, both single-family homes and multifamily housing growth lags far behind the pace of household formation. The San Diego Housing Commission estimates that San Diego should receive an average of about 18,000 new housing units annually for at least the next decade. Meanwhile, new supply is only about one-third of that level. The City Council has created new policies to address the lack of affordable supply. The City slashed its fees for granny flats in half, and estimates that up to 5,500 units will be built over the next decade. In March 2019, the City also passed legislation overhauling minimum parking requirements for dense, urban housing.

Owner-Occupied Housing Prices Prompting an Exodus

A limited supply of single-family rental () housing will also impact renters as the year progresses. The Case-Shiller Home Price Index increased 30% in the past five years. Renters interested in moving into homeownership must deal with the added burden of limited for-sale inventory. The Greater San Diego Association of Realtors estimates that for-sale housing stock is about half of what is traditionally needed to keep up with demand. A recent study named San Diego the second least affordable metro in the country, trailing only Washington, D.C. According to the U.S. Census Bureau, five-year migratory trends suggest that residents are feeling the pain and moving to the Inland Empire, Texas and Phoenix.

Rent Growth Expected to Moderate by Year’s End  

Quarterly growth rebounded in 2019, but annual rent growth has already moderated. CoStar expects annual rent growth to dip below the long-term average for the first time since 2012. Rent control and tenant protective measures have been floated at the statewide level this year, following on the heels of Oregon passing statewide rent control.

Residents in new high-end properties can expect to receive concessions totaling up to two months of free rent and reduced parking fees, especially downtown and in Mission Valley. Owners of Class C, older buildings; however, are primarily immune to these concessions as demand remains strong for these types of assets.Much like Orange County to the north, San Diego rental housing rates have outgrown local median income levels. Currently, average rents account for more than 40% of the median household income.

What are the Best Neighborhoods to Invest in San Diego

Neighborhoods like East Village (rental income: $2,630, CoC return & cap rate: 3.2%), Pacific Beach (rental income: $2,650, CoC return & cap rate: 2.3%), Point Loma Heights (rental income: $2,740, CoC return & cap rate: 3.1%), and North Park (rental income: $2,140, CoC return & cap rate: 2.1%) are some of the best areas to invest in San Diego. These show the highest potential for rentals and their occupancy rates surpass other neighborhoods'.

The city is a smart call for real estate investors looking for positive cash flow, profitable cap rate, and CoC return. Overall, San Diego is a nice, profitable venture for investors in single-family homes and vacation rental properties.

Popular Streets in San Diego, CA

For more information, refer to our Knowledge Center and visit our Sand Diego, CA Property Management page for local landlord tips and information. Our team has vast knowledge and experience in local San Diego property management and can help you to have a better investment experience. We educate on topics in the San Diego area ranging from repairs and maintenance, leasing and even dealing with emergencies! We look forward to furthering your rental property education.

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