Help with RE Analysis on beach house, comparing to stock index

[Glendale]

My family and I go to San Diego a few times annually to vacation.  We've been doing this for a long time and want to keep bringing our kids there.  We rent a condo or SFH there when we go, which ends up being expensive but it's a cost we're ok with and can easily afford.  More recently we've been considering buying a place in San Diego to rent out on AirBNB and other short temr rental sites, but to block the rental schedule when we want to use it ourselves.  There are a few reasons why we want to own the property, but I don't really want to focus on that in this post, rather I'd like help with that math side.  Based on my assumptions below I'd like to see how this 'investment' would compare to keeping/putting money into the stock index.

Stock index return: 10% annually

Rental home cost: $1.175M
Down Payment: 30% ($352,500)
Mortgage: $822,500 @ 7.5%
Home Insurance: $3,600 annually
Property Tax: $12,000 annually

Rental Income: $70,000 Net (after expenses, property management etc)
Rental Assumption: Rent will increase by 3% annually

Home Value: $1.175M
Home Value Assumption: Value will increase by 5% annually

So I'd like to see how the numbers work out each year, and see if/when the rental investment will surpass the stock investment returns.  At what point (if any) am I better off with the home investment than the stock investment?  Keep in mind that the 'return' on the home purchase should include equity as the value increases over time.

NOTES:
1) I do understand not everyone here will think this is a good idea or good investment.  That's ok.  Also folks will not like that the property doesn't cashflow initially.  That's alright too.  I'd really like to focus on the numbers rather than opinions about buying on the coast, opinions about California, etc.
2) I've made some assumptions that not everyone will agree with, but I'd like to keep those assumptions as they are and focus on the analysis.
3) I believe the way this will work out is that initially it will cost me money each month (negative cash flow) but as a longterm investment it will surpass the stock market so long as the assumptions above are taken into account.  We're ok with a negative cashflow initially, since we plan on using this

Any help would be appreciated!

[SeattleCPA]

You need to create a spreadsheet that calculates the cash flows and then estimates either an internal rate of return or a net present value.

Basically that'll be a custom deal, crafted to work for your specific property or situation.

You will impute rental savings. E.g., if you rent to others and earn say $100,000 a year from that AND you guys save $10,000 in AirBnb or VRBO expenses, your total rental income is not $100,000, it's $110,000.

Also, you have a tax law, Section 280A, that basically limits the tax benefits you get here. You're probably not worried about that. But don't count on the property generated gigantic tax benefits if you're using it personally.

This old blog post of mine about analyzing multifamily real estate investments includes a spreadsheet you can look at to get an idea of how you might go about this: https://stephenlnelson.com/articles/multifamily-real-estate-investments/

You might also get ideas from this "home investment" JavaScript calculator at my blog: https://evergreensmallbusiness.com/home-investment-calculator/

This blog post explains some background stuff on how Section 280A limits tax deductions on mixed use dwellings: https://evergreensmallbusiness.com/vacation-home-rental-tax-traps/

This preemptive comment about a vacation property being an investment. Or a home being an investment. You can definitely calculate internal rates of return or net present values earned on a vacation home or personal residence. And we should do this. Further, whether the resulting IRR or NPV is good depends on what the numbers actually look like.

[GilesMM]

It is important to get the rental net income dialed in and the best way is to talk to a property manager who manages a number of similar properties. This way you can get a feel for occupancy rates and fees.  I would start with 30% occupancy and 20% fees on the rent.  You need to also consider probably $5-10k/yr in maintenance costs.  What about utilities - water and electricity can be high SD?  Overall, expect the cash flow to be negative tens of thousands of dollars but possibly equalized by appreciation to net zero.  Who knows how the stock or real estate market will appreciate?


Generally, if the family would like this and you are determined to lock yourself into SD as the family vacation spot and you don't mind turning your vacations into home repair sessions, go for it.  Forget about comparisons to the stock market and just bite the bullet on the cost. 

[Paper Chaser]

Be sure to familiarize yourself with San Diego's laws surrounding Short Term Rentals:

https://www.sandiego.gov/treasurer/short-term-residential-occupancy

You must have a license to operate a STR in San Diego. It sounds like you'd probably fall into Tier 3. This may change your assumptions about operating costs, insurance costs, etc too.

[Villanelle]

Be sure to familiarize yourself with San Diego's laws surrounding Short Term Rentals:

https://www.sandiego.gov/treasurer/short-term-residential-occupancy

You must have a license to operate a STR in San Diego. It sounds like you'd probably fall into Tier 3. This may change your assumptions about operating costs, insurance costs, etc too.

I came to post something similar.  So many places are cracking down on STRs, which adds expense (permits, when they are even available) and also risk, given that the rules could change. I believe Coronado, for example, only allows 30d or longer rentals which means sequencing in your own family trips gets even more difficult as you then potentially end up with significant unusable gaps. OP, make sure you factor this kind of in to your occupancy projections.  Even if it doesn't exist now in the community you are considering, this is how things are trending so it makes sense to account for the possibility. 

[Glendale]

Be sure to familiarize yourself with San Diego's laws surrounding Short Term Rentals:

https://www.sandiego.gov/treasurer/short-term-residential-occupancy

You must have a license to operate a STR in San Diego. It sounds like you'd probably fall into Tier 3. This may change your assumptions about operating costs, insurance costs, etc too.

I came to post something similar.  So many places are cracking down on STRs, which adds expense (permits, when they are even available) and also risk, given that the rules could change. I believe Coronado, for example, only allows 30d or longer rentals which means sequencing in your own family trips gets even more difficult as you then potentially end up with significant unusable gaps. OP, make sure you factor this kind of in to your occupancy projections.  Even if it doesn't exist now in the community you are considering, this is how things are trending so it makes sense to account for the possibility.

Good points. We did look into this and the area we're looking to buy has lots of STR permits available.  It's $250/year for the permit.

[Glendale]

You need to create a spreadsheet that calculates the cash flows and then estimates either an internal rate of return or a net present value.

Basically that'll be a custom deal, crafted to work for your specific property or situation.

You will impute rental savings. E.g., if you rent to others and earn say $100,000 a year from that AND you guys save $10,000 in AirBnb or VRBO expenses, your total rental income is not $100,000, it's $110,000.

Also, you have a tax law, Section 280A, that basically limits the tax benefits you get here. You're probably not worried about that. But don't count on the property generated gigantic tax benefits if you're using it personally.

This old blog post of mine about analyzing multifamily real estate investments includes a spreadsheet you can look at to get an idea of how you might go about this: https://stephenlnelson.com/articles/multifamily-real-estate-investments/

You might also get ideas from this "home investment" JavaScript calculator at my blog: https://evergreensmallbusiness.com/home-investment-calculator/

This blog post explains some background stuff on how Section 280A limits tax deductions on mixed use dwellings: https://evergreensmallbusiness.com/vacation-home-rental-tax-traps/

This preemptive comment about a vacation property being an investment. Or a home being an investment. You can definitely calculate internal rates of return or net present values earned on a vacation home or personal residence. And we should do this. Further, whether the resulting IRR or NPV is good depends on what the numbers actually look like.

I appreciate the info and links - I'll look into this

[SeattleCPA]

It is important to get the rental net income dialed in and the best way is to talk to a property manager who manages a number of similar properties. This way you can get a feel for occupancy rates and fees.  I would start with 30% occupancy and 20% fees on the rent.  You need to also consider probably $5-10k/yr in maintenance costs.  What about utilities - water and electricity can be high SD?  Overall, expect the cash flow to be negative tens of thousands of dollars but possibly equalized by appreciation to net zero.  Who knows how the stock or real estate market will appreciate?


Generally, if the family would like this and you are determined to lock yourself into SD as the family vacation spot and you don't mind turning your vacations into home repair sessions, go for it.  Forget about comparisons to the stock market and just bite the bullet on the cost.

I'd think the best way to come up with some numbers is to use AirDNA. (You subscribe for the area you'll look in or buy in.)

BTW based on observing many, many, many clients some of whom have built substantial highly profitable portfolios of STR properties, I would not expect your cash flow to negative. If you're doing this right, you're making money and generating cash flows. Also you've got a real asset that's protecting your other nonreal assets from inflation.

Er, you also have a small business.

I don't want to pile on with criticism but the one thing I'd say you want consider (you meaning @Glendale and not @GilesMM just to be clear) are the tax benefits. Something like a IRA or 401(k) allows you to save pre-tax and invest a few thousand dollars into mutual funds and ETFs. That's a great approach. Probably the first tax-advantaged investment option any of us should consider. Especially if we get matching from an employer.

But real estate and especially STRs also let you invest pre-tax but for most investors there are not practical limits. You can shelter all of your business income and if married another $626,000 annually. (So for contrast about 30 times what you can save into a 401(k). If I was doing one of these, therefore, I'd consider working that STR tax angle the first few years to grab and optimize those benefits.

[Jon Bon]

I have rental, and some STR experience. A group of investors and I have been looking from places to invest in. Beach house, Lake house, Ski house, Cabin. We have made several offers and never gotten any of them. Because none of them are profitable at current prices and interest rates. To be fair, I have not looked at the west coast. Which leads me to my quest question: a beach house, in California, in San Diego no less is only 1.2 million? Is this a 1 bedroom condo 5 miles from the beach?

Cash, your going to spend $400,000 to make zero return? You said this place is not going to cash flow right?

You need to make 100k a year in revenues for this place to break even, I would say over 150k a year to make it a worth while investment.  How much do you currently pay to rent one of these places out? It feels like your 400k could buy a lot of vacation.

My experience with these house is you really only have 10 weeks a year to "make it" so to speak. The summer season when kids are out of school is really the only time when revenues are high enough to make it worth while. The rest of the year you might to do rentals, but mostly you are trying to cover costs. STR take a ton of upkeep and eat a fair amount of cash. You cant really compare them to normal housing stock. Were you managing this property? One of my requirements in looking at STR is one of our investors was looking after management, not me. It is a lot of work and a pretty thankless job. You get to deal with all kinds of people. Many who are breaking rules and trying to jam as many people/pets into your property as possible. You have to manage check ins and check outs as well as cleaners, handymen etc etc.

If nothing else do not go this alone, partner with someone who has some experience in this. I don't want to throw too much cold water on you but please share more numbers and we will be able to give you more targeted feedback.

[SilentC]

I’m not a pro but 70k net revenue sounds really aggressive.  We rent a house routinely in SoCal that Zillow says is worth 1.2mn as a rough benchmark.  They get $300/night July+August and less (220-280) the rest of the year.  Maybe $90k gross revenue per year assuming 100% occupancy.

[Glendale]

I’m not a pro but 70k net revenue sounds really aggressive.  We rent a house routinely in SoCal that Zillow says is worth 1.2mn as a rough benchmark.  They get $300/night July+August and less (220-280) the rest of the year.  Maybe $90k gross revenue per year assuming 100% occupancy.

The house is currently a STR and has been for 2 years.  It brings in $85-$105/year based on actual records.

[Glendale]

I have rental, and some STR experience. A group of investors and I have been looking from places to invest in. Beach house, Lake house, Ski house, Cabin. We have made several offers and never gotten any of them. Because none of them are profitable at current prices and interest rates. To be fair, I have not looked at the west coast. Which leads me to my quest question: a beach house, in California, in San Diego no less is only 1.2 million? Is this a 1 bedroom condo 5 miles from the beach?

Cash, your going to spend $400,000 to make zero return? You said this place is not going to cash flow right?

You need to make 100k a year in revenues for this place to break even, I would say over 150k a year to make it a worth while investment.  How much do you currently pay to rent one of these places out? It feels like your 400k could buy a lot of vacation.

My experience with these house is you really only have 10 weeks a year to "make it" so to speak. The summer season when kids are out of school is really the only time when revenues are high enough to make it worth while. The rest of the year you might to do rentals, but mostly you are trying to cover costs. STR take a ton of upkeep and eat a fair amount of cash. You cant really compare them to normal housing stock. Were you managing this property? One of my requirements in looking at STR is one of our investors was looking after management, not me. It is a lot of work and a pretty thankless job. You get to deal with all kinds of people. Many who are breaking rules and trying to jam as many people/pets into your property as possible. You have to manage check ins and check outs as well as cleaners, handymen etc etc.

If nothing else do not go this alone, partner with someone who has some experience in this. I don't want to throw too much cold water on you but please share more numbers and we will be able to give you more targeted feedback.

I appreciate the comments and your experience.
The reason why I stated in the OP that I'd like to stay away from the 'why' and just consider numbers is because it goes into the weeds.  This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.  The costs are high and rents are low so why would anyone ever buy?  I rented in California for 10 years and would have been MUCH better off buying the houses that I rented.
Homes that are near the coast sell for $1.1-$2M for the type of house we're looking for.  Those houses bring in about $90-$100k annually as a STR, which means negative cashflow.  Still, these houses are hugely competitive to buy and are being turned into STR's.  This specific house is a 900sqft little beach bungalow.  These homes appreciate much faster than the places that cashflow.

[SeattleCPA]

This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.

@Glendale, I agree. And there's a label for this, I think: "Loss aversion bias."

It shows up in all sorts of the decisions we make. Especially when the accounting and analysis get tough because it's work to do the numbers.

The tragic mistake one sometimes sees here or encounters in real life is when someone has decided to try for FIRE or to try to implement the bogleheads philosophy but hasn't first focused on investing in their human capital so they get paid as much as they can from their job.

[Glendale]

This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.

@Glendale, I agree. And there's a label for this, I think: "Loss aversion bias."

It shows up in all sorts of the decisions we make. Especially when the accounting and analysis get tough because it's work to do the numbers.

The tragic mistake one sometimes sees here or encounters in real life is when someone has decided to try for FIRE or to try to implement the bogleheads philosophy but hasn't first focused on investing in their human capital so they get paid as much as they can from their job.

Thanks for that - I appreciate your posts being so level headed and informative.

[waltworks]

If you dig into the numbers from the sellers and it's really netting that much, awesome. Be very wary if they're spending next to nothing on maintenance or management, though. Every AirBnB owner I know overstates their cash flow in various ways (many LTR owners do too) - they forget to include replacing the linens every 6 months and spend their weekends cleaning the place themselves and discount their time and talk about the most lucrative weekends of the year as if they're average.

Just human nature there, I'm known to exaggerate too. If you're just taking the owners at their word you might want to dig in further.

I'd also personally not want to be locked into one vacation destination, but maybe that's just me. People change and what you and your family really like to do now might be different 1/5/10 years down the road.

-W

[LD_TAndK]

I think your 5% home value increase and 3% rental increase are overly simplified. I'm involved in a STR and home appreciation and rental incomes vary wildly year to year. The STR market is somewhat mirrors the overall economy. '21, '22, and '23 were banner years due to covid rentals but prices have since deflated. Possibly San Diego is a more stable STR market, I have no knowledge of that area.

As a rule of thumb I'd expect modest overall return on investment with a STR and only when you account for home appreciation, which of course you'll only realize when you sell. Stock market will beat it 9 times out of 10.

A purely financial analysis is never going to make sense, a STR that your family also uses is an emotional decision, and that is totally valid. I wouldn't do because you expect long term higher returns.

[Villanelle]

I have rental, and some STR experience. A group of investors and I have been looking from places to invest in. Beach house, Lake house, Ski house, Cabin. We have made several offers and never gotten any of them. Because none of them are profitable at current prices and interest rates. To be fair, I have not looked at the west coast. Which leads me to my quest question: a beach house, in California, in San Diego no less is only 1.2 million? Is this a 1 bedroom condo 5 miles from the beach?

Cash, your going to spend $400,000 to make zero return? You said this place is not going to cash flow right?

You need to make 100k a year in revenues for this place to break even, I would say over 150k a year to make it a worth while investment.  How much do you currently pay to rent one of these places out? It feels like your 400k could buy a lot of vacation.

My experience with these house is you really only have 10 weeks a year to "make it" so to speak. The summer season when kids are out of school is really the only time when revenues are high enough to make it worth while. The rest of the year you might to do rentals, but mostly you are trying to cover costs. STR take a ton of upkeep and eat a fair amount of cash. You cant really compare them to normal housing stock. Were you managing this property? One of my requirements in looking at STR is one of our investors was looking after management, not me. It is a lot of work and a pretty thankless job. You get to deal with all kinds of people. Many who are breaking rules and trying to jam as many people/pets into your property as possible. You have to manage check ins and check outs as well as cleaners, handymen etc etc.

If nothing else do not go this alone, partner with someone who has some experience in this. I don't want to throw too much cold water on you but please share more numbers and we will be able to give you more targeted feedback.

I appreciate the comments and your experience.
The reason why I stated in the OP that I'd like to stay away from the 'why' and just consider numbers is because it goes into the weeds.  This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.  The costs are high and rents are low so why would anyone ever buy?  I rented in California for 10 years and would have been MUCH better off buying the houses that I rented.
Homes that are near the coast sell for $1.1-$2M for the type of house we're looking for.  Those houses bring in about $90-$100k annually as a STR, which means negative cashflow.  Still, these houses are hugely competitive to buy and are being turned into STR's.  This specific house is a 900sqft little beach bungalow.  These homes appreciate much faster than the places that cashflow.

I don't think all STRs, or all RE <1%, are bad investments.  And I don't think that something has to make money to make it worth spending your money. All of us buy things all the time that are for joy or entertainment or pleasure. 

But I do worry about STRs, especially in CA.  With housing shortages and CAs known and growing renter-friendly laws, I'd be very surprised if there were massive crackdowns on STRs.  Whether that's in the form of massively increasing STR rental licenses, going to 30-day minimum rental periods, something else, or a combination, I think CA is going to try to get as many homes as they can back into the regular rental or primary-home markets.  To me, that's the big risk here, not that you won't see appreciation over time. 

[Glendale]

If you dig into the numbers from the sellers and it's really netting that much, awesome. Be very wary if they're spending next to nothing on maintenance or management, though. Every AirBnB owner I know overstates their cash flow in various ways (many LTR owners do too) - they forget to include replacing the linens every 6 months and spend their weekends cleaning the place themselves and discount their time and talk about the most lucrative weekends of the year as if they're average.

Just human nature there, I'm known to exaggerate too. If you're just taking the owners at their word you might want to dig in further.

I'd also personally not want to be locked into one vacation destination, but maybe that's just me. People change and what you and your family really like to do now might be different 1/5/10 years down the road.

-W

All good points, thanks.  We wouldn't really be locking ourselves into a single destination for vacation though - we could block it off from being rented, or vacation somewhere else and allow for the place to be rented during those times.  This house in the last 3 years was over 85% booked.
I guess what I'm trying to understand is how much it would cost us (vs staying in VTSAX) having the 'luxury' of our own place that we can block off whenever we want it, own the place we stay in, etc.

[waltworks]

A lot of people buy STRs with the same general idea who are not running the numbers first, so the prices are generally inflated by the dumb money factor. Keep that in mind.

I would probably assume you'll break even on the place at best if you hire out cleaning/management. If not, assume it'll be a HUGE pain/second job type situation. If this place was minting money, why is it for sale? Do you have the full tax filings for the last few years, or just the owner's word?

At 85% occupancy (call it 300 nights to make the math easy) and $500 a night (assuming it's a nice enough bungalow to command that rate) you'd be grossing $150k. With those generous assumptions, not bad! But management and cleaning/maintenance are going to whack off 30% or more, and that's before you pay the PITI.

I guess the most helpful thing would be to get an actual breakdown of the nights it was rented over the last couple of years, the rate it was rented for, and all the overhead costs paid by the owners. Without that info, you're just basically taking their word for it (and nobody here can give you any real advice, since the numbers are all hand-waved at this point).

So far, we have:
$1k/mo in property taxes
$300/mo in insurance (!!! Really? For a million dollar STR in Cali? Have you actually gotten a quote for this?)
$5800 or so in principal/interest assuming a 30 year note

So $7100 a month with zero maintenance/management/utility/overhead costs.

Even assuming those costs are zero, at 300 (optimistic) days occupied per year and $500/day (optimistic?) you're already down to $65k in net income. If you use the place during peak times yourself, those numbers are going to drop significantly, too.

I think the chances that you beat the S&P are low to negligible, but I've been saying RE was overpriced for the last 5 years and been consistently wrong, so what do I know.

-W

[clarkfan1979]

I lived at the beach in San Diego for 4 years (1998-2001). We would sign a 9-month lease and the owners would rent out the unit weekly during the summer months.

I also have a beach house in Hawaii. I rent it furnished, but the minimum leasing term is 6-month because it doesn't qualify as a short-term rental. It's been fun and worth it. However, we bought in 2018 with a 4.5% interest rate and it cash flows.

I've also been looking to buy a short term rental in the mountains in Colorado within 30 minutes of Breckenridge.

I think the 3% rent increase is reasonable. My biggest concern would be what happens to STR bookings when we go into a recession. Could you set up all your bookings as non-refundable? I would personally want extra savings to allow two bad years of about 50% occupancy, assuming your average occupancy is 85%.

I would put time and effort into creating a direct booking system or website to avoid airbnb fees. The goal for me would be 75% direct bookings and 25% airbnb.com

Airbnb.com can shut down your account and cancel bookings for any reason based on their opinion. This can come from bad reviews of previous tenants. If someone claims you have bed bugs, you might have to prove that you fixed the problem before you are allowed to have additional bookings. This could cost you 4-6 weeks of rent during peak season.

Comparing this to the stock market seems like an apples to oranges comparison. I think the most relevant question is, "Can you afford it?" If you feel like you can afford it, then go for it. 

If you have a really good location, you might not have to spend as much on furnishings as you think. I have stayed in STR before in A+ locations. As a result, their furniture isn't great because it doesn't need to be. When you have a B or B- location, you will need to spend more money to make sure all the furnishings are in great condition.

I think you are also correct about this forum being more risk/loss averse than other groups. Even though I don't always follow the advice from the contributors, I still think their opinion provides a valuable perspective and I appreciate it.

[SilentC]

I have rental, and some STR experience. A group of investors and I have been looking from places to invest in. Beach house, Lake house, Ski house, Cabin. We have made several offers and never gotten any of them. Because none of them are profitable at current prices and interest rates. To be fair, I have not looked at the west coast. Which leads me to my quest question: a beach house, in California, in San Diego no less is only 1.2 million? Is this a 1 bedroom condo 5 miles from the beach?

Cash, your going to spend $400,000 to make zero return? You said this place is not going to cash flow right?

You need to make 100k a year in revenues for this place to break even, I would say over 150k a year to make it a worth while investment.  How much do you currently pay to rent one of these places out? It feels like your 400k could buy a lot of vacation.

My experience with these house is you really only have 10 weeks a year to "make it" so to speak. The summer season when kids are out of school is really the only time when revenues are high enough to make it worth while. The rest of the year you might to do rentals, but mostly you are trying to cover costs. STR take a ton of upkeep and eat a fair amount of cash. You cant really compare them to normal housing stock. Were you managing this property? One of my requirements in looking at STR is one of our investors was looking after management, not me. It is a lot of work and a pretty thankless job. You get to deal with all kinds of people. Many who are breaking rules and trying to jam as many people/pets into your property as possible. You have to manage check ins and check outs as well as cleaners, handymen etc etc.

If nothing else do not go this alone, partner with someone who has some experience in this. I don't want to throw too much cold water on you but please share more numbers and we will be able to give you more targeted feedback.

I appreciate the comments and your experience.
The reason why I stated in the OP that I'd like to stay away from the 'why' and just consider numbers is because it goes into the weeds.  This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.  The costs are high and rents are low so why would anyone ever buy?  I rented in California for 10 years and would have been MUCH better off buying the houses that I rented.
Homes that are near the coast sell for $1.1-$2M for the type of house we're looking for.  Those houses bring in about $90-$100k annually as a STR, which means negative cashflow.  Still, these houses are hugely competitive to buy and are being turned into STR's.  This specific house is a 900sqft little beach bungalow.  These homes appreciate much faster than the places that cashflow.

To Clarkfan’s point, what happens to STRs in a recession, and I don’t even think you need to wait for that.  Our annual rental, same weeks as last year is 5% cheaper in SoCal.  The airlines are reporting recreational travel fatigue.  I’m guessing you have 2022 & 2023 statements a those were peak “revenge travel” years, and there is potentially a reason the seller is selling now.

[Villanelle]

I have rental, and some STR experience. A group of investors and I have been looking from places to invest in. Beach house, Lake house, Ski house, Cabin. We have made several offers and never gotten any of them. Because none of them are profitable at current prices and interest rates. To be fair, I have not looked at the west coast. Which leads me to my quest question: a beach house, in California, in San Diego no less is only 1.2 million? Is this a 1 bedroom condo 5 miles from the beach?

Cash, your going to spend $400,000 to make zero return? You said this place is not going to cash flow right?

You need to make 100k a year in revenues for this place to break even, I would say over 150k a year to make it a worth while investment.  How much do you currently pay to rent one of these places out? It feels like your 400k could buy a lot of vacation.

My experience with these house is you really only have 10 weeks a year to "make it" so to speak. The summer season when kids are out of school is really the only time when revenues are high enough to make it worth while. The rest of the year you might to do rentals, but mostly you are trying to cover costs. STR take a ton of upkeep and eat a fair amount of cash. You cant really compare them to normal housing stock. Were you managing this property? One of my requirements in looking at STR is one of our investors was looking after management, not me. It is a lot of work and a pretty thankless job. You get to deal with all kinds of people. Many who are breaking rules and trying to jam as many people/pets into your property as possible. You have to manage check ins and check outs as well as cleaners, handymen etc etc.

If nothing else do not go this alone, partner with someone who has some experience in this. I don't want to throw too much cold water on you but please share more numbers and we will be able to give you more targeted feedback.

I appreciate the comments and your experience.
The reason why I stated in the OP that I'd like to stay away from the 'why' and just consider numbers is because it goes into the weeds.  This forum trends toward 'lower expenses' and avoiding risk, so I knew it wouldn't go over well here.  I've been a member here since the early days of the site and have really benefits from it, but I wish that in the early days I focused less on saving $2 on a dinner and more on career ambition where there's low hanging fruit.  I'm getting way off topic here, but I do think this forum is risk averse so the idea of buying a house in California at all wouldn't go over well.  The costs are high and rents are low so why would anyone ever buy?  I rented in California for 10 years and would have been MUCH better off buying the houses that I rented.
Homes that are near the coast sell for $1.1-$2M for the type of house we're looking for.  Those houses bring in about $90-$100k annually as a STR, which means negative cashflow.  Still, these houses are hugely competitive to buy and are being turned into STR's.  This specific house is a 900sqft little beach bungalow.  These homes appreciate much faster than the places that cashflow.

To Clarkfan’s point, what happens to STRs in a recession, and I don’t even think you need to wait for that.  Our annual rental, same weeks as last year is 5% cheaper in SoCal.  The airlines are reporting recreational travel fatigue.  I’m guessing you have 2022 & 2023 statements a those were peak “revenge travel” years, and there is potentially a reason the seller is selling now.

CA insurance woes--and those on the horizon--could be another reason.