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La Jolla home sellers have long enjoyed one of the best real estate markets in the country, not to mention one of the most beautiful enclaves in which to live in the entire United States. Foreclosures and shorts sales have been sparse here, running at a rate of more than 50% less than the average San Diego community. However, home sellers are now facing a new question within the market, and one that is very difficult to quantify.
More than any other time in recent history, luxury home sellers are deciding to rent their homes and hold out for the market to rebound rather than sell at current depressed prices. Because this is an affluent community, loan to values are lower, incomes are higher, and reserves in the bank have made the distressed property market much less impactful than in many first time homebuyer and newly developed communities.
Because more people than ever are making the choice to rent rather than sell, an entirely new classification of "shadow inventory" in La Jolla has been created. Dozens of homes each year are now entering the rental pool, though the owner really wants to sell.
In fact, from 2001-2007 only one home was listed as a long term rental in La Jolla. In 2008, 29 properties were listed, 2009 had 66, 2010 had 51, and through December 21st of 2011, 59 more properties were listed for long term rental. These are staggering numbers, and to take things one step further, these numbers are ONLY for the La Jolla sub-market of Bird Rock! With a dozen other neighborhoods, the shadow inventory continues to get larger and larger.
When a property goes from being a personal residence to an income-producing vehicle, it should only be looked upon as an asset. As a real estate rental asset, there are two ways to reap profits: value appreciation and rental income. Not every property is built the same, as a luxury asset historically has had greater appreciation potential than has a multi-family rental project. However, that same multi-family rental has far greater income potential.
As an example of the rental income difference, let's take two pieces of identically valued real estate assets, one being a luxury home and the other being a small apartment building. Both have the same value of 1.5mm and are in quality and similar markets. Without boring you to death, the net operating income on the luxury property is approximately $20,419 and the apartment building NOI is approximately $76,402. (**Note: if you'd like the actual spreadsheet numbers I've used, feel free to email me and I'll send over the nitty gritty numbers.)
That's a (round number) difference of $50,000 per year in free cash, or a difference of 16.6% of current market value virtually guaranteed over the next 5 years. If rents rise for both properties at the same percentage, the difference is even greater based upon the fact that the gross rents are higher on the apartments. Sure, a luxury La Jolla home has a greater potential for appreciation, but with the numbers as they are, it is extremely difficult to think there will be a consistent and sustained price appreciation any time soon.
Of course, every individual situation is different and requires personal attention by a trusted professional. But, all things being equal, the answer is quite clear.
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Though it's been clear that real estate isn't what it use to be when it comes to considering an investment in a property. Those numbers are more then staggering to me being they are coming from La Jolla, CA - That place has got to be one of the most beautifulest places to live in the US. I personally have rented homes there and they aren't that easy to come by. For most owners who now are wanting to sell out in that area surely does make me raise an eyebrow to whats happening all around us.