Cash out or reinvest

[Burke Ericson]

My family owns a duplex in LA free and clear. Due to rent control, these properties are generating about 20% of what they could, it is bad. The property is in one of the most popular neighborhoods in LA and I think even in their very basic state we could get 800,000 to 950,000 for the two bungalows.

Last year I did a 1031 with a similar property and I purchased 22 units for the price of one house in LA. It was difficult to meet the 45 day time limit, sell a house and get a bunch of others in contract, but I did. I learned a lot but I made some serious mistakes that still haunt me. I am feeling risk adverse ever since, but my sense is things are gonna go sideways with the economy and I feel like we need more income and reserves to weather a storm (which may or may not occur).

Considering that I have this other property I can sell, I am not sure if I should. Or should I sell and sit on the cash, or do another 1031? The property in question is heavily depreciated, but the more I look at rental markets across the country I am starting to see that there may be a massive bubble going on. So the question is, would a 30% tax hit be better than buying rentals and having them lose a huge amount of equity?

For example: locales that make sense to buy rentals in my state have appreciated 100-300% since 2010. If things go to hell, I could invest in these kinds of properties and lose far more than the 30% we would have paid in taxes.

Or if I consider turn key out of state, I am seeing properties that have appreciates 4-5 times their value in just 10 years!

Ultimately my goal is cash flow, but I realize I need to value the assets long term value as well.

Anybody with an opinion or experience would be appreciated!

[Account Closed]

The 30% tax you have to pay can be very insignificant compared to what you can make on rental units. Suppose, you have to pay $250k in tax, but over the next 5 years you make $1 million. I had $500k into a personal property (not an investment). I dumped the property for $200k, purchase a 14-unit building for $825k and the day I closed escrow the 14 units was worth $1.4 million. That was about 14 years ago. Today, the 14 units is worth $3 million. 

I dumped a few properties with huge losses and made several million dollars every time. you have so stretch all your investment calculations over a 1, 5, 10 ,20 and 30 years to see whether or not you want to purchase a property and to know when it is time to dump it.

I am asking the same question today. I have about 12 properties in Las Vegas I am thinking about dumping to purchase one large apartment building (haven't found one, yet). I know that a 1031 exchange is difficult when selling 12 houses, but I will pay the capital gains tax in a heartbeat if I find the right apartment building. I had just better make sure I keep some cash aside to pay my taxes.