Cash out of California?

Question

I have a SFR rental property in Fontana, CA that is worth 390k and I owe 255k.  I am 1 year into a 20 year mortgage and have had same renters for 6 years no problems.  I am not cashflowing, but obviously trying to pay down principal.  I have entertained the idea of selling, doing a 1031 and find multiple properties out of state that will provide some cashflow and potential appreciation.  I also currently have one SFR rental in San Antonio that is cashflowing 250/month with a 20 year mortgage.  I have looked at Dallas, San Antonio, Indy, Florida, etc.

Obviously, I could leverage into many more rental homes in a variety of markets, but I am a part-time investor and doubt my ability to find great deals in out-of-state markets, especially under the time constraints of a 1031.  I would probably be looking at turnkey solutions, or using my property manager / realtor in San Antonio, who has served me well.

I am most interested in hearing opinions about the benefits of holding my current position longer / forever versus exchanging for cheaper multiple units in another market with less potential appreciation (Cashflow vs. Capital appreciation).  I know it is an individual investor's preference, but hearing others' ideas on what I could do with a 1031 would help me process various potential investment scenarios.

Thanks

Matt R. · Answer

Here is the thing. Anyone and their pet cat can find houses in cash flow markets. They are on nearly every street. Why is that? Why is cash flow so easy to buy? How is something that incredibly cheap when compared to same physical product in Cali. Why when you list your house in Cali now it sells 98 to 99% of list price? Is there more intrinsic value in Cali?

Don't get me wrong cash flow is good. And everyone has different investment needs so there is no single answer here. Just that Cali longterm has blown away cash flow markets in the creating wealth dept. It is not even close really. Still no single right answer one vs the other. And past performance..blah blah blah you know. I just like to examine the investment facts. San Antonio could be awesome too. What I do know is historically Cali has been rewarding longterm investors like the goose who lays the golden eggs. Keep that in mind if you are trading gold for silver.

Here is what the LA Times says June 2014.

"The Inland Empire east of Los Angeles is projected to be one of the fastest-growing large metropolitan area economies in the country over the next six years, according to a forecast released Friday at the United States Conference of Mayors."

The IE is projected to be a top growth area in the country for decades to come is the info I get. To bail that position now.....well it better be for more than just run of the mill cash flow is my take. Think about this. Why is there not one single turnkey company doing business in Cali? Is it because the properies are bad no, because there lack of cash flow right. Well you could rent out 2 parking spots in Cali and make is much cash flow as you can in many markets.

Here is my first blog post. Appreciation vs Cash flow. Maybe you will find something there to think about.

http://www.biggerpockets.com/blogs/5937/blog_posts...

Amit M. · Answer

"If you want steady return over many years, it is obvious that investing in a cash flowing market will be better than CA/Inland Empire."

I disagree with this statement.  Cash flow markets with cheap homes often have serious vacancy problems, hence they are LESS STEADY than a more desireable area in CA.  Also, your CA rental income has high likelihood of growing, whereas lesser areas often have stagnating rents, if you're lucky and avoid high vacancies!  Plus in TX they can build out forever it seems, puting a check on future tents and appreciation.  No housing shortage over there.  Ever, it seems.

I don't invest in the IE (I invest in SF Bay Area), but if the info provided above is accurate about the area's growth, you will cash flow in a few years, and will have $500k plus in equity over the mid to long run.  That could lock up your retirement, a long term investment that is a no brainer IMO.

Put it this way.  How many long term CA investors who brought decent properties 15-20 years ago say they wish they brough cash flow homes in fly over states?  I can assure you, not many.

Leonard L. · Answer

Ben:

Anyone can run the numbers of Fontana vs different market cash flow.  To me, this is a question for which the answer depends on risk profile.  If you want steady return over many years, it is obvious that investing in a cash flowing market will be better than CA/Inland Empire.  If you are willing to take more risk in exchange for greater appreciation POTENTIAL, then stay in CA.  I capitalize the word potential because it is great when it happens, but it is far from a sure thing from current values.   A few smart guys out there (eg, Norris) are starting to talk about taking some of their chips off the table, so while I agree with the consensus that we have at least a few more years of appreciation ahead of us, the consensus often turns out to be wrong.

I can share my own thinking.  I bought largely in 2010/2011 and add a few houses a year when I find screaming deals.  I am keeping all of my money in CA for now precisely because I think we have more appreciation ahead.  But my plan is to sell everything in a few years and invest all of the proceeds in cash flowing markets.  I will then live comfortably into my golden years on this income, giving up most potential further capital appreciation but more comfortable in event of market downturn.  That is because of my personal circumstances (age, investment outlook, retirement planning, etc).

So in the words of Clint Eastwood - are you feeling lucky, punk?  Can you weather a downturn in CA values, eg, your Fontana house going down to $300k value and rental market softening in event of downturn?  Or if you cash out of CA now, are you going to look back and think this first deal you were still young and should have taken more risk?

Morry Eghbal · Answer

Even if you do an Exchange you still be in the same financial situation, unless the property you are getting has more income.

My suggestion, if it pays for itself, leave it alone, twenty years from now you have a paid off property that will be a cash cow. Neither take any money out.

I would do this, if you have a cash flow, give it back to the lender and you pay it off much sooner.

Account Closed · Answer

NEVER give up Prop 13 benefits.

Ali Boone · Answer

Well you can definitely 1031 one it into multiple out-of-state properties if cash flow is your goal, but the other option would be to use the equity on that property (via equity line of credit or whatever else a good lender can recommend) and use that money to buy other properties. Pulling out over $100k would give you quite a few properties if you use that money for multiple down payments on new mortgages.

So you definitely have several options there. If you are looking for turnkeys, you can get great ones ranging anywhere from $60k-120k (or higher if you want even bigger MFR turnkeys), so those down payments really wouldn't be a lot for those properties....so you could definitely scoop up a handful using just the equity in that property. Or if you do pull it all out, you can 1031 it into several properties. Either way is great, just depends on what is more important- the cash flow or that appreciating property. Using the equity, you keep both going, and pulling it all out would put you more into the cash flow-only (although with still some appreciation potential, but not as much as a CA property would offer).

Bill Exeter · Answer

Hi Ben,

Personally, I am a cash flow investor.  I prefer cash flow so that if there is a down turn and I lose a tenant or two I will still be able to cover my expenses and debt service.  Appreciation is nice, but there are more risks with that approach, in my opinion, when the market goes south.

I have had many California clients focus purely on appreciation.  They refinance every chance they get and buy more property.  They remain moderately to highly leveraged.  The vast majority either lose it all or most of it during a serious downturn.  I've seen it happen time and time again.

If you do invest for appreciation, you must plan for those down years.

Wes Shive · Answer

Matt R.  suggested, you should put some serious energy into finding financing options for your Fontana home. IMO, don't sell unless you really have a good reason.

If you've got good W2 income and not too much debt, shop around the bigger banks. If you're looking for more "exotic" (non-conforming) financing, look at credit unions, smaller community banks, and maybe a good mortgage broker. As always, be careful not to overextend--budget for the downturns.

Also, I'm guessing you didn't move out of there within the last 3 years? If so, the home may still be eligible for the cap gains exemption for your personal residence.

Matt R. · Answer

That is a great point Bob brings up. The Prop 13 factor seems to get routinely missed. It takes a guy like Bob who pays less than .5% on million dollar properties to remind us.

500k California home bought today pays 121k in taxes in 20 years.

500k Texas home pays 354k in taxes next 20 years*

*On average

There is no regular income tax in Texas however living in California you would still pay the income tax. Here is one post observation on this thread.  The cash out now camp folks sell out of state properties....:)

Matt R. · Answer

I am not expecting much appreciation for the LA area for now. UCLA is forecasting slow and steady for the next five years. The huge appreciation wave is over. Based on history, it might be years before that happens again. However forced appreciation is another story.

Now I am seeing experienced investors go outside LA and the state. I talked to a gentleman this morning who buys multis in Bakersfield and Phoenix. Both markets have never been as good as the LA area for longterm returns. I think they would rather not have to leave the LA area if it cash flowed better for sure. Are they potentially making a mistake? If we go by history the answer will be likely yes.

Cash out of California?

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