Multi-Family and Apartment Investing
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 7 years ago, 05/08/2017
300k+ in equity in 3 years, low cash flow should I 1031 out of CA
In 2013 I had some good timing. Purchased a four unit apartment building, built in 1980 with major tenant and management issues. It cost me around $360k all in but I used an FHA203k loan so my out of pocket was around 25k all said and done.
Three years later, the rents are good based on purchase price but not compared to what its worth. Gross rents just under $50k net would be around $30k if not for the mortgage. I'm netting around $100 a door a month all said and done. The property recently appraised for $700k but more realistically I believe its worth $650k. I owe $340k on the property.
By end of the month, the last unit will be renovated. They all match, are built well and are in perfect landlord setup. Easy to maintain, clean out etc for the next tenant. All units have will have good tenants, solid leases and its turn key. I keep looking at what its worth, what little it collects and I'm nervous about the California market.
My main goal in 2013 was to own real estate, I thought appreciation would be possible and to leverage loans to get equity without my money. Now I've done that I am craving cash flow and lots of it. So this place doesn't meet the model anymore. I'm not certain as this is a newer thought process but if the goal is cash flow this isn't the best place to do that.
Has anyone else cashed out of California? Where did you go? How did you decide? How big of a place did you buy? What class of property did you buy? With the equity I have my thought was to shoot for a million dollar property and use the equity to cover my down payment. I didn't visit the place for a year as a test to see if it was possible to manage remotely and it went well. I know I'd need feet on the ground wherever I went though.
Any input is greatly appreciated.
I am diversifying in Memphis market.
Do what you need to do to achieve cash flow
@Justin R. thanks for the reply. I value your input and your style of how you consider all of this. I've got just the one place, no cash for other deals here and I can't shake the feeling of uncertainty I have here. Also, as you mentioned what things you enjoy about this biz. Here is the part i enjoy. Finding the deals.
My skill set has always been dealing with sellers and getting the deal. I've been marketing out of state and I can't count how many millionaire mobile park owners I've spoken to who are sitting on a $1-3m mobile home park bringing in $100-500k a year.
My thought process was, market out of state. Find the mismanaged deal from the older owner who is ready to cash out. Get a contract on very flexible terms as I have many times here. Use that to allow myself a long escrow. Sell my turn key fourplex and 1031 into another deal that has a large upside due to management issues or their lack of motivation to grow or charge market rents.
I don't see my four plex appreciating much more. Its not in a desirable area, California is near the top in my opinion. So I won't see much growth here and if I do its only via appreciation. While if I can locate a good park of building with upside I can buy at a discount and see much greater upside.
Also, I want cash flow. I have my home near the beach in Oceanside that is what I believe to be one of the most appreciation crazy parts of California and it will continue even if we had a downturn. So I have hand in the appreciation pot. The other in the value add + cash flow pot. So I'm diversified and hedging my bets.
This is still just a thought but when you've got a fully dialed in property you aren't going to create much upside besides just waiting it out. I'm not happy with the income it produces and this is a way to move up to a higher class of property.
Its funny, there are a lot of the "Their granddad bought this for $14k in 1960!" stories here we all hear. Great, but if you do the math they actually would have made more had that same amount been placed on an index fund in the stock market. So yeah it feels great to say you own in California etc but I can play that hand with my home.
Originally posted by @Lane Kawaoka:
Tim G. I sold all mine in Seattle and bought turn key rentals.
Where did you buy and what type of properties did you buy?
Originally posted by @Tim G.:
Originally posted by @Bill Baldwin:
You made 300k in equity in 3 years investing only 360k and you're asking if its an investment you should pull out of?
This same question might of been asked in 2006 with the same sarcastic remarks coming. Also, I invested $25k cash not $360k.
This is about goals, with specific goals you hit them. I want cash flow, this isn't the asset for that.
I just think if you're doing well in an appreciating market like that best to keep it going. If you want to move to cash flow however my advice would be avoid the 60-100k turnkey SFHs - the individual capex will eat up most of it in the long run. 300k+ houses make more sense but you wont find many markets at those prices with great cash flowing cap rates. My advice is to use that 300k as down payment on a larger multi-unit apartment building where costs are a lot more scalable. Less people have the means to buy a $1m building in these cash flow markets and I've seen much more success with large multi-unit investing than lots of cheap SFHs over the long run.
Originally posted by @Bill Baldwin:
Originally posted by @Tim G.:
Originally posted by @Bill Baldwin:
You made 300k in equity in 3 years investing only 360k and you're asking if its an investment you should pull out of?
This same question might of been asked in 2006 with the same sarcastic remarks coming. Also, I invested $25k cash not $360k.
This is about goals, with specific goals you hit them. I want cash flow, this isn't the asset for that.
I just think if you're doing well in an appreciating market like that best to keep it going. If you want to move to cash flow however my advice would be avoid the 60-100k turnkey SFHs - the individual capex will eat up most of it in the long run. 300k+ houses make more sense but you wont find many markets at those prices with great cash flowing cap rates. My advice is to use that 300k as down payment on a larger multi-unit apartment building where costs are a lot more scalable. Less people have the means to buy a $1m building in these cash flow markets and I've seen much more success with large multi-unit investing than lots of cheap SFHs over the long run.
Yeah none of that turn key crap I completely agree. I'm only doing this to upgrade to a big unit property.
@Tim G. I agree with you, and it makes sense to me that you'd (try to) sell now. Every day we wake up, the question should be: "Would I buy the asset again if it was for sale today?" Good for you for not being lazy.
FWIW, I just partnered with someone who found a deal locally on a new development project. If what you really enjoy is finding the deal and getting flexible terms, maybe you consider taking equity positions on multiple projects rather than owning one larger property by yourself. Just a thought.
Tim it sounds like a Guru got a hold of you! My Grandad was born in the 00's. That's 1900's. Index funds didn't come about til the mid 70's!!! How about comparing a mid 70's purchase in SF using FHA or VA financing that was common at the time to yer fancy indexing?
Originally posted by @Account Closed:
Tim it sounds like a Guru got a hold of you! My Grandad was born in the 00's. That's 1900's. Index funds didn't come about til the mid 70's!!! How about comparing a mid 70's purchase in SF using FHA or VA financing that was common at the time to yer fancy indexing?
The guru was www.calculatedriskblog.com
See that is what experience gets you. I knew just from your posts that someone was influencing you for their gain. Been doing this too long to not see the scam.
Originally posted by @Account Closed:
See that is what experience gets you. I knew just from your posts that someone was influencing you for their gain. Been doing this too long to not see the scam.
I knew from your posts you're scanning and jumping to conclusions.
Originally posted by @Tim G.:
Originally posted by @Account Closed:
See that is what experience gets you. I knew just from your posts that someone was influencing you for their gain. Been doing this too long to not see the scam.
I knew from your posts you're scanning and jumping to conclusions.
??? What conclusion have I jumped to? You verified that I was correct that a Guru was influencing you. How is my being correct wrong?
Originally posted by @Account Closed:
Originally posted by @Tim G.:
Originally posted by @Account Closed:
See that is what experience gets you. I knew just from your posts that someone was influencing you for their gain. Been doing this too long to not see the scam.
I knew from your posts you're scanning and jumping to conclusions.
??? What conclusion have I jumped to? You verified that I was correct that a Guru was influencing you. How is my being correct wrong?
the blog I referenced is free, there is no guru. I was being sarcastic.
Sarcasm won't make you money and just confuses your goal. So, ...what was your point? Mine was that RE investing in SF since the mid 70's would NOT be beat by an index fund. Prop 13 was passed in 1978 partly because RE values were increasing so dramatically.
Everyone has opinions on this forum. You can take some of it, all of it, or none of it as something you want to implement into your investment choices.
I don't care if people have been investing for 5 years or 60. Nobody knows everything there is to know about real estate.
There are a ton of ways to make money in real estate and people will relay the experiences and history they have had.
Tim it's your money. Do what makes sense TO YOU. At the end of the day the investors on here are not writing you a check if it doesn't work out what they said as an investing idea.
Opinions are like rear ends, everyone has one. When someone posts on Bigger Pockets it's not just about the message itself but HOW it is conveyed and comes across to the people receiving it. Just because someone wants to do a different strategy than someone else feels strongly about does not make their strategy invalid or less than the other investors.
- Joel Owens
- Podcast Guest on Show #47
Originally posted by @Tim G.:
Any input is greatly appreciated.
I agree with you @Joel Owens. But the truth is that there are FACTS and there are opinions. Usually facts are gained from experience. I have strong opinions but try to keep them fact based.
Sure Tim should do what is "best" for him. However to come here and ask for opinions or facts and to not consider what is being offered is just a WASTE of everyone's time. I have asked what his alternatives are but it seems like the issue is that he has appreciation equity burning a hole in his pocket and he NEEDS to do "something" with it. I have seen this exact same situation for over 4 decades in every up market and 100% of the time the equity has been squandered when removed from CA real estate. That is just a fact.
#3 Contractors Contributor
- Contractor
- Los Angeles, CA
@Tim G. I'm not a buy and hold investor, so I don't quite understand why someone will hold in CA. I am very active in my business, just like anybody else. So let's say you take out that 300k and actually build something instead of buying something like a mobile park or so, I am pretty sure you could double that in a year or year and a half. I believe that this will beat any other cash flow strategy. Another strategy which is also under my exploration is to simply copy what you did, buy a run-down property, rehab it, get the right NOI and it will simply multiple your property value in a matter of months, then sell again, call it apartment flipping if you will. I don't personally believe in appreciation, it is waaaay too slow, and the value of money is different in the future, I don't believe in CA cash flow either. The only that I will be thinking about cash flow is when I age 50-60, where I will need monthly income so I could spend it, by this time, I will not be worried about losing money on property values, hopefully I could buy the property free and clear and all rents will simply be my spending money.
@Tim G. I have done both and yes the out of state properties have done well in cash flow and I am sure I will continue to purchase them in an up market, however the SD properties have out performed on every level. To answer your question of selling or not, although Bob Bowling can be a little rough around the edges he offers good advise. ( take it) Do not sell your property! Unless you find something that you can not refuse and have to 1031 to get it. Or you are willing to buy a commercial complex out of state however keep in mind one wrong move and your done! When something happens you have no control and are at mercy to your property manager and construction crews. Your long term gains will out perform the out of state property on every level. SD rental market is 2-5% vacancy rates depending on what part of the city, doesn't get much better than that. I would bet that no matter what market you choose there will not be many that have as much demand as SD even in a down economy. I wouldn't touch your property and would focus on how to obtain more property without using this current investment. ( sounds like you did good ) best of luck
$25,000 to $310,000 in 3 years. Sell it. Why try to time the height of the market? Doesn't make sense to me, and what's the point of making money in life if you are just going to hold on to the property until you die?
1031 that money into multiple properties that provide better cash flow and enjoy your life, from here on out. Those properties if analyzed correctly would provide you a crap ton of net cash each month and in 30 years will be paid off.
If you take the other route of holding on, life is an uncertain thing, who knows where we end up. 99% of people would kill to have access to 300k in cash.
Your money, your choice.
Me personally, would purchase myself a new/relatively new Porsche Cayman GTS (70-90k) so i'll smile every time I'm in a car, make sure i'm situated in a nice area I enjoy living, and invest the rest for cashflow. done, simple.
PS. someone mentioned Topsail. I'm 28 and have gone every single year since I was born with my family :). We have been staying mostly on topsail beach, used to stay closer to the surf city bridge. I look at property to buy with my family all the time so we can have a life long vacation house.
Matt
For all the local San Diego folks, I think the location of @Tim G.'s property is a great reason to consider selling. I suspect a 4 plex in Ramona is not going to whether a down turn as well as SFH in Ramona or a 4 plex in central San Diego (beach cities, North Park, etc). I would at least consider moving the equity into an underperforming 5-12 unit in central SD in order to maximize returns and have a new challenge.
Originally posted by @Account Closed:
Tim it sounds like a Guru got a hold of you! My Grandad was born in the 00's. That's 1900's. Index funds didn't come about til the mid 70's!!! How about comparing a mid 70's purchase in SF using FHA or VA financing that was common at the time to yer fancy indexing?
The unadjusted (for inflation) return for the S&P500 from 9/1970 to 9/2016 would be 10,010.8% per https://dqydj.com/sp-500-return-calculator/
So $25K invested 9/70 would be $2.5M now.
Interesting little debate going on here, but sounds like you've outlined a plan that you like, and seems very reasonable: market out of state, get a deal under contract with favorable escrow terms. What's holding you back from that? That puts the burden on finding a good deal, under contract, with the terms that you want. Go for it!
I faced a similar decision, but mine was with a portfolio of 8 homes owned free and clear. A little difference since you've already used leverage, but similar in that the fast appreciation is mostly over and there seems to be only 10-12% left in this market, from my estimation.
The question I rolled around was selling and 1031 exchanging, just selling outright, or put leverage in place and either hold until the right time using my PUA rider in life insurance to put roughly $400k in an account earning 6.25% or find properties that produce 10%+ COC returns. I chose refinance and that is what I am currently working on. I've refinanced two using HELOCs and the other six are in the credit review stage of a commercial loan targeting 75% cash out.
Now, I'm in a similar situation as the one you are contemplating: where do I put the money to work? I tend to think that refinancing to around 75%, keeping cash on hand to cover shortfalls or a drop in rental income, then using the balance to fund another deal is a solid bet. You have to produce enough cash to cover debt service and expenses, but you will continue to receive tax and appreciation benefits, since they will continue over the 10+ yr time frame, or at least be a hedge against inflation due to rising rents and appreciation. You will trade one set of problems for another, but it seems that you will cover both sides of the equation with cash flow covering expenses, taking some money off the table in a tax efficient manner, invest in another area, and protecting against inflation.
Can you share your thoughts on why you haven't really discussed a refinance? It seems that the only downside would be a larger prortfolio with higher leverage (should be mitigated by keeping cash reserves if you're disciplined) and that you would only be able to put to work roughly 75% of the $300k equity appreciation, rather than the full amount. Your thoughts?
@Luke Grogan with the low cash flow currently coming in, I don't think I could pull much out of this property and still cover the payment.
Originally posted by @Chris Martin:
Originally posted by @Account Closed:
Tim it sounds like a Guru got a hold of you! My Grandad was born in the 00's. That's 1900's. Index funds didn't come about til the mid 70's!!! How about comparing a mid 70's purchase in SF using FHA or VA financing that was common at the time to yer fancy indexing?
The unadjusted (for inflation) return for the S&P500 from 9/1970 to 9/2016 would be 10,010.8% per https://dqydj.com/sp-500-return-calculator/
So $25K invested 9/70 would be $2.5M now.
Investing in SD real estate would probably result into $10,000,000-$20,000,000.
Originally posted by @Account Closed:
Originally posted by @Chris Martin:
Originally posted by @Account Closed:
Tim it sounds like a Guru got a hold of you! My Grandad was born in the 00's. That's 1900's. Index funds didn't come about til the mid 70's!!! How about comparing a mid 70's purchase in SF using FHA or VA financing that was common at the time to yer fancy indexing?
The unadjusted (for inflation) return for the S&P500 from 9/1970 to 9/2016 would be 10,010.8% per https://dqydj.com/sp-500-return-calculator/
So $25K invested 9/70 would be $2.5M now.
Investing in SD real estate would probably result into $10,000,000-$20,000,000.
Whoever owned this place before me paid $175,000 for it in 1989 and sold for $322,500 in 2013. I've realized the same gains in three years that took them 24. Timing seems to be the key part of capturing the gains.
Unless you are talking about a lot on the beach in San Diego, you aren't going to see $25k turned into $10,000,000 and even then. It would be a massive stretch.