Deciding where to 1031 Exchange to

[Michael DeLuca]

We're looking for advice on a 1031 exchange out of a ~$1.6mm property in San Diego. We've been renting for awhile, but the numbers just haven't made sense. We've about to close on this deal, so our 45 day time line is fast approaching.

We're considering buying a multifamily building, but the cap rates in San Diego are atrocious. We're looking at this purchase as a long term investment. I'm leaning towards buying a small apartment building in a much cheaper CoL area where our dollar will go farther/the returns will be better. The other decision making party is leaning towards just buying some sort of investment property with at least a 5% cap rate in San Diego because it's easier to manage/not get scammed.

I agree with him in part, but I imagine if we buy at the right price in the right area (I was looking closely at Johnson City/Knoxville TN) we'll be much better off in the long term. 

Any advice for us? The market in San Diego just doesn't seem friendly right now. Where should we buy? We're open to any kind of help in this process.

[Russell Brazil]

It is important to note that your cap rate is only 1 factor in your return. The cap rate is a snap shot of a property at one moment in time. Why might the market determine that a property has a low cap rate? Will this area have high rent growth? If the rent growth is high, then both your cash on cash return will continue to rise through time, as well the underlying value of the asset. Cap rate is also an indication of the perceived risk inheritant in a property or it's market. I would personally prefer a property with a 3 or 4% cap rate in a Boston/DC/NYC/San Fran type of city to something with a 12-15% cap rate in the mid west, because I think the the total actual return, or the IRR will likely be higher in the former than the latter.