If you're thinking about buying an individual home or condo in San Diego as a long-term investment, you're thinking smart and you're not alone.

Perhaps, you're moving from a San Diego residence, but want to hold onto what has been the best wealth-building investment in your portfolio. Maybe you rent it out for now and augment your retirement on the appreciated equity later. Perhaps you move back into the property down the road when you can spend time to improve it for greater profits including substantial tax-saving advantages. You might have college-age children that will use it until they graduate, then you'll rent it out at full future rental value. How about an excuse to visit San Diego several times a year and write off your expenses? There are a variety of ways to mix business with pleasure; getting a top-notch investment return while enjoying the perks of a San Diego getaway.

Recent research indicates that second house and condo purchases are on the upswing - especially among investors that see a second home as a safer, higher yielding investment than stocks, bonds, savings or mutual funds. According to a study by the National Association of Realtors, 37 percent of second homes were bought as investments in 2003 compared with 20 percent in 1999. Twenty percent of second homes were purchased specifically to generate rental income, while 28 percent of buyers anticipated property being converted to their retirement home at some point in the future. These statistics are from public records posted on SignOnSanDiego.com. The Federal Reserve estimates that much of this purchasing activity has been made possible by cash-out refinances on existing residences which is at an all time high. Although the interest rates have been edging up during 2006 and 2007, the current concern about a recession will bring mortgage rates back down in 2008.

Part of what is so attractive about second home purchases, is the greater appreciation compared to other investment alternatives. Many stock portfolios and investment accounts have lost value during the current economic swings.¹ Though median home prices in San Diego have receded from the peaks in 2005 (see Example A), rental homes will demonstrate a superior return for San Diego investors. Fewer home purchases by wary first-time buyers will shore up the rental market while a large inventory of unsold houses and condos will allow better investor purchases.

Example A: Let's do a financial analysis using historic data from SignOnSanDiego: a 5-year hold (2003-2008) shows an average San Diego home enjoyed an average annual appreciation of 7.6 percent. Let's say that you utilized your savings to put down 25 percent of the original purchase price; the remaining 75 percent of the purchase price was provided through a low-interest home mortgage. Rents collected from tenants over the 5-year holding period along with income tax savings reserved for rental owners allowed you to own the property without substantial additional financial investment beyond your original down payment. Therefore, at the end of five years the actual return on your investment is four times the increase in property value. Why? Because appreciation is based on the entire purchase price, but your investment is only your down payment. That means that you have experienced a solid return of 152 percent over the five years for an average annual return on investment of over 30 percent. The best part is that you own it and you never have to sell it. Why would you? Now, you understand why books on real estate investing keep selling.

Rental near SDSU: Let's say you purchased a median-priced detached home in a 92115 neighborhood at the end of 2002 ($342,000) and now at the end of 2007 its value is $414,000. Note: this is a conservative example. If I had looked at the 5-year period starting one year earlier, I would be looking at an increase from $255,000 to $499,000. There's no doubt that some 5-year periods enjoy a lot more price appreciation as do some neighborhoods. A realistic cycle is one where the investor didn't get in at the lowest price and at least 1-2 years during this period were flat or negative. You pick your holding period and the neighborhood.

¹ Note: Please remember that an investment in an REIT is a stock investment even though real estate is involved.