With its ideal climate, stunning beaches, and laid-back vibe, San Diego has long been one of the most desirable places to live in California. It should come as no surprise that real estate investing in San Diego has been highly lucrative over the years. Home prices consistently rise over time, and rental demand remains strong due to factors like a sizable military presence and growing biotech industry. However, investing in San Diego real estate is not without its challenges. San Diego has less room to expand than other major metros, so supply is constrained. There is also intense competition from other investors. This article will provide an overview of the key opportunities as well as risks for real estate investors considering the San Diego market.
San Diego offers high home price and rent growth potential
Over the past decade, home values in San Diego have increased by over 70%, handily outpacing the national average. This strong appreciation is driven by high demand and limited new construction. With San Diego hemmed in by the ocean, Mexico, Camp Pendleton and other natural barriers, the city simply can’t expand its boundaries very easily. Regional planning agencies estimate San Diego will add just 11 new housing units for every 100 new residents moving in. Other major metros are adding upwards of 30 units per 100 new residents. This supply-demand imbalance pushes prices up. Rental rates have also climbed steadily in San Diego. As of January 2023, the average apartment in San Diego rented for $2,335 per month, up over 15% from five years ago. Landlords can raise rents aggressively because vacancy rates hover around just 3% in most submarkets.
Investors compete intensely for properties in San Diego
Because the San Diego housing market is so strong, real estate investors flock here. Over 20% of home purchases involve investors, compared to just 15% nationally. When bidding on properties, investors often lose out to second home buyers or owner-occupants making all cash offers. Some investors try to gain an edge by focusing on emerging neighborhood opportunities, like City Heights and Stockton. However, buying in transitioning areas comes with more risk, especially if relying on appreciation. Established neighborhoods like North Park and South Park offer a more balanced risk-return profile. Overall, being flexible on location while also moving quickly on listings can help investors compete in San Diego’s cutthroat market.
Military presence and biotech sector support rental demand
Two major drivers of rental demand in San Diego are the substantial military presence and large biotech workforce. San Diego has the largest concentration of military personnel in the country, with over 100,000 active duty service members plus tens of thousands more civilians working on bases like Camp Pendleton. These individuals often rent either on base or in surrounding communities. Many are younger and single. The biotech sector is also huge in San Diego, employing over 44,000. Biotech workers drawn by high salaries can afford elevated rents. However, they are also more transient since companies fail frequently. Real estate investors should screen biotech tenants carefully, as job loss is common.
Natural disasters like wildfires pose risks to properties
While the weather is pleasant most of the time, San Diego is situated in a wildfire-prone region. Destructive blazes have become more frequent, fueled by hotter temperatures and rampant development in the Wildland-Urban Interface. Over 3600 homes have burned in San Diego wildfires just since 2003. Fires can cause extensive damage and lead to huge losses for property owners and insurers. However, new building codes and proactive vegetation management are helping to fireproof communities. Investors should strongly consider buying properties built to modern fire standards or upgrading older properties with fire-resistant materials.
San Diego offers high returns for real estate investors who can compete
San Diego provides savvy real estate investors with opportunities to profit from exceptional home price and rent growth driven by extremely high demand paired with restricted housing supply. However, finding good deals takes work as investors compete fiercely for limited inventory. Focusing on value-add properties in promising neighborhoods can yield better returns. Overall, San Diego offers one of the most appealing real estate investing environments in the country – if investors have the skills and resources to thrive in an ultra-competitive marketplace.
In summary, San Diego real estate offers very high upside potential thanks to rising home values and rents fueled by strong economic fundamentals and growth constraints. However, the market also carries risks ranging from high purchase prices to natural disasters. Investors may find the greatest opportunities for high returns on assets located in well-positioned neighborhoods amenable to light renovations.