Four San Diego Rental Market Trends to Watch in 2021
The 2021 real estate market, much like the 2020 real estate market, has been defined by the coronavirus pandemic. After all, everything has been defined by the coronavirus pandemic, and real estate is no different. But the trends that emerged in real estate didn’t come out of left field; they were pre-existing trends that were heightened and accelerated by the pandemic.
A robust real estate market in 2021 is expected, thanks to low inventory, high demand, and low mortgage rates. And that strong market is more accessible than ever thanks to remote investing opportunities. Remote work changed real estate, with everything from remote property management to self-showings becoming more accessible to investors like you.
Let's look at the national real estate market trends, how they’re expressed in the San Diego housing market, and some strategies and tax deductions that will benefit every real estate investor.
San Diego real estate predictions
Rent increases modestly for some, notably for studios
According to Norada Real Estate Investments, as of March 2nd, 2021, the average rent in San Diego has increased slightly for one and two bedroom apartments, and three bedroom apartments studios have seen a sharper increase.
- One-bedroom: $1,828 (a 4% increase from last year.)
- Two-bedroom: $2,400 (a 3% increase from last year).
- Three-bedroom: $3,340 (a 5% increase from last year).
- Studio: $1,595 (a 9% increase from last year).
San Diego is one of the top 10 most expensive real estate markets in the country, which is why it’s challenging but not impossible to find properties to invest in. The renter/homeowner split is 46.7% and 53.3%, respectively.
Home prices see modest increase
As reported by the San Diego Tribune, the price of real estate in San Diego is expected to increase 8.3% from November 2020 to November 2021. The median house price in San Diego will be roughly $776,000 by the end of the year. Growth will be motivated by limited housing supply and income growth in specific industries. December, for example, had fewer homes on the market than usual, with 3,763 for sale (compared with 5,182 in 2019 and 7,471 in 2018). At the same time, you can see that the downward trend had its roots before the coronavirus pandemic.
Decreased construction exacerbates low inventory
Similarly, the San Diego Tribune reports that part of the low supply is caused by decreased construction. Six thousand six hundred and ninety one homes were built in San Diego as of the third quarter in 2020, which, while more than in 2019, is far less than the construction boom seen in 2004 and 2005 when 17,306 housing units and 15,258 were built, respectively. The number of new units necessary to meet the demands of the growing population of San Diego from 2012 to 2020 also missed the mark by over 35,000 units. The city’s population is expected to increase 500,000 by 2050, with tens of thousands of new residents arriving yearly.
2021 to remain strong seller’s marker
If construction doesn’t keep up with demand, it will remain a strong seller’s market thanks to high demand, low inventory, and low mortgage rates. While budgetary constraints may limit others’ ability to make purchases, existing homeowners can use their equity to finance renovations, purchase a second property, or buy a new property in a more affordable area.
National real estate predictions
Low time on market
As reported by Forbes, homes have been spending less time on the market. By one account, 42% of homes sold in two weeks or less. And in one study, over 50% of respondents said the pandemic accelerated their homebuying. In San Diego, in particular, 55% of homes spend under two weeks on the market. The average is 20 days. The quick turnaround is great for sellers but challenging for buyers who are sometimes outpriced and forced to make quick decisions.
Forbes predicts that the pace will slow somewhat in 2021. In 2020, high demand, low housing inventory, and low-interest rates drove high home sales volume. However, as the pandemic eases up and vaccines are distributed at an increasing pace, expect the seller’s market to cool a little. Emphasis on “a little.”
Zillow still predicts that 2021 will see 6.9 million homes sold nationwide, the highest sales since 2005. And the expected 21.9% one-year gain hasn’t been this big since the early 1980s. Millennial homeownership is growing while Gen Z is approaching home-buying age, so homebuyers’ demographics are expanding.
Due to the coronavirus pandemic, 2020 didn’t adhere to the typical home buying seasons. 2021 is expected to see a return to normalcy, with spring and summer seeing a relative increase in buyers and with fall and winter seeing a decrease.
Amid record unemployment, 63% of homebuyers lowered their budget by $28,000 on average, and 65% of buyers backed out of their purchases. Interest rates are expected to stay low in the first half of 2021, with slight increases after. In some cases, the low-interest rates and reduced budgets encourage buyers to act quickly since they’re hoping to get the most bang for their buck while they can.
The rise in demand has had the overall effect of raising prices nationwide. According to Forbes, roughly one out of four homes sold between April and June 2020 went for $500,000 or more, whereas the nine preceding months saw 14% of homes selling for that amount. Experts are predicting an additional increase of 5.7% in 2021.
Lower budgets and greater demand have inspired growth in some less expensive regions, making states with low property tax and gateway cities more popular destinations than San Francisco, Los Angeles, or Orange County. Gateway cities are known as such because they used to be considered gateways to the American dream because they were hubs of manufacturing and industrial opportunities. But as trends shifted and jobs left, gateway cities were unable to keep up with the change and struggled as a result. This makes gateway cities ripe for revitalization because they often already have the infrastructure to support more commerce and residents.
Leaving urban areas and high taxed areas
There was already a real estate trend of people leaving cities and expensive areas before the coronavirus pandemic, but once remote work became ubiquitous, more people felt hunger pangs for home ownership.
By leaving cities, many would-be homeowners have access to amenities they would otherwise lack.
- Winter sports
- National Parks
- Wide-open spaces
So, if you can’t get into San Diego, consider some neighboring communities: Bonita, Carmel Valley, Del Cerro, La Jolla, Mira Mesa, Mission Hills, Mission Valley, North Park, Otay Ranch, Rancho Santa Fe, Pacific Beach, Point Loma, Rancho Bernardo, and Rancho Penasquitos.
Millennials are shaping the real estate market. To accommodate millennial wants, many suburbs are becoming more walkable, bikeable, and encouraging mixed-use housing where the first floor is commercial real estate and the above floors are residential.
How will we recover?
2020 saw many industries prosper, while other industries suffered from layoffs, reduced pay, and reduced hours. The result is that many predict a K-shaped recovery, where people who were already doing well will continue to do well while those who were not will be doing even worse.
These trends historically reinforce pre-existing inequalities, which often fall along racial and gender lines. As reported by US media, December 2020 saw 144,000 jobs lost, and all of them were held by women. The Brookings Institute reported that, as of January 2020, “The median white family, she notes, has eight times the wealth of the median Black family, and five times that of the median Latino or Hispanic family.” How the federal government handles the recovery, and the pandemic will largely impact the real estate investment market in 2021. As of March 1st, 2021, the Biden Administration’s handling of the pandemic and the recovery seems to be going well. The US expects to have enough vaccines for every adult by the end of May, 2021 and a $1.9 trillion recovery package has passed the House and is currently awaiting Senate approval. These developments should boost consumer confidence. According to the Pew Research center, 79% of U.S. adults support more stimulus from the federal government as of January 19, 2021.
Alternatives to San Diego
If you can’t get your foot in the door in San Diego, consider its suburbs. That will allow you to benefit from the metropolitan area’s allure while dealing with a lower barrier to entry. Additionally, you may want to consider some of the other best places to invest in 2021.
- Housing availability is high.
- Rental rates are high relative to housing prices.
- Employment opportunities are available at every income level thanks to a diverse economy.
- It’s more affordable to rent than to own, leading to the lowest homeownership rates in the U.S.
- Over the past five years, home values increased by roughly 26% and are expected to increase 9.9% more in 2021.
- Houston’s population is expected to grow by 1.24 million residents from 2020 to 2029.
- From 2020 to 2029, Houston is expecting a population growth of 1.24 million residents.
- Lots of industry! Houston is home to the busiest port in the U.S. in terms of foreign trade; Amazon is building a one-million-square-foot distribution center there in 2021.
- Over the next 30 years, Atlantia is expected to add 1.2 million jobs and 2.9 million new residents.
- The median home price went up 15% between November 2019 and November 2020.
- Homes priced under $200k are selling “6 or 7 times faster” than homes greater than $350k
- One of the most landlord-friendly states.
- Has a diverse economy offering employment at every income level. Serves the health, tech, tourism niches, and more.
- While the cost of homes is not expected to be as high throughout 2021, the cost of homes was up 10.2% between January 2020 and January 2021.
- Many people have moved to Las Vegas from more expensive areas, such as Southern California, thanks to remote work.
- Builders sign contracts for over 10,000 new homes in 2020.
- Nevada has no income tax.
Real estate investing strategies to consider
Given limited supply and rising prices, you can use several investment strategies that lean into a strong demand.
Selling homes using assignment of contract, also known as wholesaling, entails finding a good deal, writing a contract for it, and then finding a buyer who will take over the responsibilities outlined in the contract so that you can collect an assignment fee. This strategy is particularly useful when you have a network of eager buyers, making San Diego an ideal place to give wholesaling a shot.
House flipping isn’t house rehabbing. Flipping entails finding a house below market value, repairing it just enough to be sold at a profit, and then quickly selling it. While it may be challenging for you to get a home below market value in San Diego, if you can and can fix one up, there will be plenty of buyers eager to snap it up. Or, you can always set an appropriate rent price and find tenants.
A live-in flip makes use of a Section 121 Exclusion, which also pairs well with a 1031 Exchange. Simply put, so long as you live in a home for 24 out of 60 months before you sell it, Section 121 allows you to exclude upwards of $250,000 (if single) or $500,000 (if married filing jointly) from the profits made at the time of sale. A live-in flip will allow you to make your improvements at a more leisurely pace.
A 1031 Exchange allows you to use the profits from your property’s sale to purchase one or more properties of equal or greater value. 1031 Exchange requires that you sell your property in 45 days and find a replacement property in 180 days or by the due date of your tax return, whichever comes sooner. With San Diego being a buyers’ market, selling a property should be easy enough to leave you ample time to find a replacement property. And, luckily, you’re not limited by geography.
Buy, rehab, rent, refinance, repeat (BRR) is one of the most popular investment strategies. You buy a home at, ideally, below market value, rehab it just enough that you can rent it, conduct a cash-out refinance once it's got tenants, and then repeat. A cash-out refinance is when you refinance for more than your home is worth so that you get a considerable cash sum to use as you please. In this case, the cash is used to put a down payment on a new house. One benefit of a cash-out refinance is that the money isn’t taxed since it’s not income.
Running a business from a rental property
In the same way that allowing pets is a gesture that shows tenant appreciation and encourages lease resigning, so too is allowing a business to be run out of your rental property. As with pets, you should have rules clearly outlined in your lease agreement. You should define what sort of businesses are allowed, and stipulate that your tenant should take out insurance to offset your liability.
You should also consider having your tenant answer a questionnaire to help you decide if you want to permit their business. Running a business out of a rental property has grown in popularity given the rise of remote work, so it's wise to include language about it in your lease agreements.
- What sort of business is it?
- Does it have inventory needs?
- What are its hours of operation?
- Will clients be on the rental property to receive goods or services?
- Will additional parking be necessary?
- How many employees will be working out of the rental unit?
- Where will the work be done?
- What tools or equipment does the business need?
With San Diego experiencing a strong seller's market, 2021 is a great time to invest in the area. Consider surrounding areas if San Diego rental property is too difficult to purchase so that you can still benefit from the strong market. It’s an excellent opportunity to scale your investment portfolio!
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In the meantime, learn more about ways to start with a smaller downpayment here.