Cash Out On CA for TX or Am I Crazy?

Question

Looking to start a new life in San Antonio area, family of 4. CA is just too expensive. Both properties should sell for twice what we owe, and that's being conservative.

Strategy: Do the 1031 Exchange on a really nice duplex, or 2 duplexes or maybe a quad plex all within our exchange budget of 500k-550k. We will then (hopefully) move into one of the rentals on the initial move to Texas.

Our primary house will be empty and I'll come back for last cleanup and repairs and put it on the market.

We'll get jobs in San Antonio, wait for the primary to sell. Then buy a new primary in the area. Probably putting down around 150k-200k down payment on something in the 300k-400k range.

Preliminary numbers show a positive cash flow of 1000-1200 per month on the rentals, this includes property management, big TX property taxes, insurance including healthy umbrella. Or almost enough cash flow to cover the new primary note, if not all of it.

Does this all sound right? Too good to be true? Still doing homework but is there anything I'm not thinking about. Is this crazy?

Do you need to get pre-approved to do a 1031? I've been a landlord since 1998.

Peter M. · Answer

@Dave Staudte Is this move purely financial? Because if so are you sure you want to move to Texas? I'm not discouraging you, afterall Texas is the greatest country on earth (just kidding, or am I?). I'm saying from personal experience I know ex-Californians that love it and will never go back as well as ones that moved back in less than a year. It really is a different world. All it will take is a couple of kicks in the teeth for you to say screw this, were going back. Oh wait we quit our jobs and sold our expensive real estate that is now selling for 20% more than we sold for. Just a thought

Dave Foster · Answer

@Dave Staudte, I'm not sure the the "two properties" you refer to include your primary.  If so then you only have one property you need to do a 1031 on.  The primary won't qualify.  and if you've lived in it for two out of the last 5 years you'll get the first $500K in profit tax free.  That will leave you with the need to only 1031 your other investment property.

What you're thinking is a classic strategy.  Investing in high appreciation areas at the beginning of a market gives you the maximum return as you've found.  But cash flow in those areas can be awfully slim.  And that's when folks sell to buy in more cash flow friendly areas.

The rest, whether or not TX or CA are your cup of tea is something to discover.  But you can make that transition several times if needed and make each transition very tax friendly way.  The combination of 1031 and 121 (primary residence) will always be there if the Lone Star disappoints.  I like our beaches over here just fine!!

Sterling Williams · Answer

Dave,

I would get in contact with a reputable 1031 intermediary. They will be the third party required to hold the funds until you purchase your other property. They will also be able to provide you with a proof of funds letter for your next purchase.

I would need to see the proforma or know the builder before I could say if the numbers would be achievable.

DM me if you need a qualified intermediary contact.

Account Closed · Answer

Just today I was listening to a radio show on NPR about people from CA moving to TX and there was a story about a family who had a son with developmentally disabled issues.  They hadn't considered this when they moved to TX and it turns out that there aren't the same amenities for their son in TX as there were in CA.

Whenever taxes are cheaper somewhere, you will have less amenities.  And if you do have amenities, the taxes will be there in some form or another.  Maybe not sales or income, but maybe in property taxes, etc.

Anytime it's cheaper to live somewhere else, you really need to look at why.  Are you sure you won't actually pay more in the long run per some tax or other, or will your property be up for reassessment every year and can it be taxed to the point of pricing you out of your home?

You just really need to look at everything.  When you leave CA, you lose your Prop 13 benefits and lots of amenities that those other higher taxes pay for.  Sure you want to give those up?

I have friends who left southern CA to move to NV and after just one winter there, moved back to southern CA.

I've lived in other places and there are so many things about living in CA that are unique and priceless, like low humidity and pretty much zero bug issues.  Pretty much anywhere else is going to have cockroaches or mosquitoes that can carry of small children - and TX has scorpions.  Just sayin'.

That said, even though I'm a Democrat, I do really like TX.  But, I really hate their bugs, etc.  If I had to leave CA, I'd consider TX, but I wouldn't be thrilled.  I'd rather visit there.  Nothing like TX hospitality and Tex Mex.

Dave S. · Answer

Wow Stone, now that's a warm Texas welcome if I've ever heard one! We can't wait to get there, seriously. I truly hope my family can see there is great places other than CA.

Stone Saathoff · Answer

@Dave Staudte, Personally I think you're making the right decision. I can't stress enough how much potential the real estate market in San Antonio has. Regardless of how you end up making the transition (1031 or other), definitely looking forward to having you down here in the Alamo city.

Dave S. · Answer

Thank you Sue, and I thank everyone for your thoughts and advice! This is exactly the type of discussion I was looking for. Selling everything, moving half way across the country with your family is not to be taken lightly. I'm confident we will be better off 10 years from now financially. It's almost a now or never situation, my wife and I are both 48 and we can't be doing this at 58. Hopefully we can build more real estate wealth after we get settled. I bought the duplex before the real estate ballooned in 1998, we bought the primary house in 2010 when the prices from the recession were still low for 250k now its valued at 700k on Zillow but realistically we'll get 550-600. Same with the duplex, owe 250 and we'll get 500-550.

Dave S. · Answer

Oh yeah, Boerne looks really nice. No we don't need new construction, no planned neighborhoods either. I lived in my duplex for 10 years, blue collar neighborhood. All my neighbors were/are contractors and taught me how to work on my home the right way.

San Diego is just too expensive. You need to make 6 figures to live here, both parents. To live in a decent neighborhood with good schools you're going to spend 750k-1.5mil. on a home. Our situation is different, but we're done chasing the almighty dollar to stay here. I want to sent my kids to college.

Sterling Williams · Answer

Considering you're looking to house hack for a short period and likely looking for a good school district for the kids, I would take a hard look at Boerne. Great schools with some 2-4 multifamily, no new construction, but some solid B class assets.

Fairoaks Ranch is located just between Boerne and San Antonio, where you will find the Hill Country lifestyle with 1+ acre lots. Fair Oaks is also still within the Boerne school district as well so there will be no issue once making the transition to a single-family home.

New Braunfels is also an option if looking exclusively for new construction.

Dave S. · Answer

Yeah, another good point. We'll find out! Once you leave CA it's virtually impossible to come back, I've personally seen it happen to co-workers exactly how you described. And, they've had to give it up again after trying.

When we go out to purchase the rental under the 1031 we'll go out as a family. That will be the acid test for them.

I've been to TX several times, I grew up in Denver and moved to San Diego in 1997 when I was 25. So I can hang no problem. Californians have been invading CO since I can remember with some disdain from the locals, and I hear it's probably the same in TX.

The properties that attract us the most are the 'country living' style. Hopefully an acre or so, workshop, and few or limited neighbors. Somewhere north of the city off the 281 might be good, yes?

My kids 12 and 14 are not very excited, but they'll get over it. We do more camping than going to the beach.

Oh, and without being political we're more aligned with the traditional thinking of Texas on that end of things...red state Texas that is...

Cash Out On CA for TX or Am I Crazy?

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