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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 personally am no expert but have bailed on CA. I'm in Texas now 100% and my ROI IS SOLID! As in site you are very well aware from your suspicion, I am going to error on the side of caution knowing how CA is one of the most volatile markets. I got my A$$ kicked in the crash and viewed never to get caught with my shorts around my ankles again (sorry for the visual)... 😬 ..., I've made a good recovery after a lot of tears and hard work.
I am def a risk taker but I'm a data freak. I'm constantly reading and assessing market nationally. BP has helped me a lot alot along with differing folks and associations I follow.
I my home now in CA but invest every dime I make our of CA. I actually became s resident of TX because the CA St. Franchise Tax Board will try and take every dime they can from you.
Personally since we are nearing a definite market correction cycle which will of course hour CA hard because that's just the way it is,,,,, in would definitely be looking at a more stable market where you can value add which you've obviously proved you can and buy cash flow on current property actuals and enjoy a much less stressful ride when the wave changes directions.
I'll be glad lag to what others have to say re this great question!
Sorry for all the typos!! Big fingers and iPhones are not a good mix!! Hopefully you get the gist of what I was trying to say.
Yes you would be killing the Golden Goose. I know people that have bailed from CA and HI and they have all been sorry.
@Rob Harris thanks for the reply. The new challenge without a doubt is locating a market I like AND a value add deal where I can see a way to grow the gains through improved management etc. Otherwise I'm trading a retail priced deal for another one. Which would still likely net better returns and hopefully find me somewhere more stable.
I own my home in California, I feel like all my eggs are in one basket. I'd like to hold on to that place and hedge my bets with moving the rental elsewhere. Also the idea of turning a $25k initial investment into a much larger out of state portfolio for serous cash flow sounds like a great path to working less.
For anyone who has tips, ideas on how to research new markets, or the process of buying what is likely going to be considered a commercial property I'd like help.
Originally posted by @Account Closed:
Yes you would be killing the Golden Goose. I know people that have bailed from CA and HI and they have all been sorry.
Sorry in what way? I don't mind the input but its simple scare tactics without some content.
I have friends who regretted not getting out in 2006, many of them. It also has to come down to what do I want? cash flow or appreciation.
I value your input, so provide it.
Originally posted by @Tim G.:
Originally posted by @Account Closed:
Yes you would be killing the Golden Goose. I know people that have bailed from CA and HI and they have all been sorry.
Sorry in what way? I don't mind the input but its simple scare tactics without some content.
I have friends who regretted not getting out in 2006, many of them. It also has to come down to what do I want? cash flow or appreciation.
I value your input, so provide it.
Sorry I thought anyone here with 1,400 posts would have run across one of the Golden Goose threads. Your property has appreciated some $8,000 a month. You give that up if you kill sell the Golden Goose. How are you going to make that up in cash flow? I'd like to see the math.
If your friends bought crap CA property and sold it in 2006 to buy crap property in flyover they would be much worse off. If they bought high and couldn't hold on then I'm sure they suffered. All this has more to do with them than the CA market.
Originally posted by @Account Closed:
Originally posted by @Tim G.:
Originally posted by @Account Closed:
Yes you would be killing the Golden Goose. I know people that have bailed from CA and HI and they have all been sorry.
Sorry in what way? I don't mind the input but its simple scare tactics without some content.
I have friends who regretted not getting out in 2006, many of them. It also has to come down to what do I want? cash flow or appreciation.
I value your input, so provide it.
Sorry I thought anyone here with 1,400 posts would have run across one of the Golden Goose threads. Your property has appreciated some $8,000 a month. You give that up if you kill sell the Golden Goose. How are you going to make that up in cash flow? I'd like to see the math.
If your friends bought crap CA property and sold it in 2006 to buy crap property in flyover they would be much worse off. If they bought high and couldn't hold on then I'm sure they suffered. All this has more to do with them than the CA market.
Appreciation means I still have to earn income elsewhere. I own other CA real estate. Its more hedging my bets and if I am honest with myself. I want cash flow. I appreciate your input but its very biased and lacking on detail. Its pure emotion.
@Tim G. I recently worked with an investor who was thinking of a very similar thing. She had a home in SF and wanted to get out of it because they felt that it was at the top of its market and felt she could 1031 into a much larger property outside of CA.
It really depends what you want to upgrade to. If you wanting to get into commercial (retail, MF, hotels, office, etc...) then the only way you can take something down is to go out of state. That is, unless the property is a couple million.
I worked with brokers in areas that I have done deals in the past with and also did alot of searching on loopnet for a multi family property for the investor. We found a 32 unit deal just outside of Chicago that is cash flowing nicely for her. Reason we went with Chicago is she likes the area and a friend who lives there recommended we look in the area. After investigating it actually turned out to be a good area for investing.
If you are looking for commercial it really is where not to invest rather than where to invest. Yes there are places like Texas that are more recession proof than somewhere like New York but just remember that you can surround yourself with a team to help you even if it is across the country.
Just in my opinion I would avoid the following if you do not specifically live there or do alot of deasl in the market:
Houston
Memphis
Parts of Florida
The New England States
To each his own, just my opinion from what I have done in the past. Just remember that if you find a deal you like, make sure the numbers work and do your homework on the area. You can use a multitude of people like local Brokers, PM companies and local investor (BP is a great place to find them) to help you. The safest way is to not do it yourself but to surround yourself with pros in the area to help solidify your decision. It is not a overnight thing to find that hidden gem, it can take time.
Good Luck!
Originally posted by @Jonathan Orr:
@Tim G. I recently worked with an investor who was thinking of a very similar thing. She had a home in SF and wanted to get out of it because they felt that it was at the top of its market and felt she could 1031 into a much larger property outside of CA.
It really depends what you want to upgrade to. If you wanting to get into commercial (retail, MF, hotels, office, etc...) then the only way you can take something down is to go out of state. That is, unless the property is a couple million.
I worked with brokers in areas that I have done deals in the past with and also did alot of searching on loopnet for a multi family property for the investor. We found a 32 unit deal just outside of Chicago that is cash flowing nicely for her. Reason we went with Chicago is she likes the area and a friend who lives there recommended we look in the area. After investigating it actually turned out to be a good area for investing.
If you are looking for commercial it really is where not to invest rather than where to invest. Yes there are places like Texas that are more recession proof than somewhere like New York but just remember that you can surround yourself with a team to help you even if it is across the country.
Just in my opinion I would avoid the following if you do not specifically live there or do alot of deasl in the market:
Houston
Memphis
Parts of Florida
The New England States
To each his own, just my opinion from what I have done in the past. Just remember that if you find a deal you like, make sure the numbers work and do your homework on the area. You can use a multitude of people like local Brokers, PM companies and local investor (BP is a great place to find them) to help you. The safest way is to not do it yourself but to surround yourself with pros in the area to help solidify your decision. It is not a overnight thing to find that hidden gem, it can take time.
Good Luck!
Thanks for the input. Could you share the figures on the SF home sale and what they moved into. Purchase price, gross rents and net income? Thanks!
What is emotional about $300,000? You are the one failing to supply the mathematical calculations of how you plan to replace $8,000 a month in appreciation.
Hey, if you need the cash to pay your cable bill you have no choice but to cash out. But for long term investing for the most profit it would be best to hang on to CA investments. Where are you going to get 8% appreciation AND 6%+ rent growth? Where?
Also realize you are looking at barely 10 years. I'm looking back and have the experience of 40-50 years.
@Tim G., why do you think San Diego is not stable? I'm not in SD, but rents here in Los Angeles didn't even really dip at all in the Great Recession. The inland areas of CA really took it on the chin though, more like Phoenix and Vegas.
Have you considered refinancing or a HELOC? Seems like a better strategy. Otherwise, you are going to have to 1031 and will really be under the gun. People seem to make a lot of mistakes doing this. The third option is to sell and pay a boatload in taxes, which will reduce the amount of money you have to play with in addition to writing some painful checks to the IRS and FTB.
I've been in your situation and done some commercial RE and oil investing out of state through syndications. You def. lose control, but I still work full time, so it is the best model for me. Besides NNN or potentially very large apartment buildings, I don't really want to own direct real estate out of state at this point in my life. Haven't taken advantage of my equity in one of my local buildings, but I will likely save that for a local opportunity when it arises.
@Tim G. Where is your property? I use to live near UTC on Eastgate Mall. $360k for a 4plex in San Diego could mean lots of different things based on the location. Is your "appraised" number from an actual appraiser or just from an agent? What is the make up of the units? Something seems wrong if your CF is only $100/month/door on a property that has doubled in appraised value. It feels like your rents are low... are you at market rates? I only ask because based upon my own limited experiences, when my appraised value doubled, my rents had also doubled and cash flow was great.
-Arlen
@Tim G. It's a good position to be in California with a property like that. Long beach is getting better too from what I hear. Depending on your age though and long term goals, it's a tough call.
Personally, I'd either hold LONG as-is or sell. The market will adjust, but long term you "should" come out much higher. If you feel you can accomplish more with the equity in hand than that's the route I would go IE; potentially significantly higher cap rates owning outside of LA multi's, flip in LA, etc ( you can do quite a bit with 200-300k. ) If you have other money to play and to invest with then I'd probably just hold.
A HELOC for 100,000 could be a nice in between.
For example; I own some multi's in Independence MO that I bought for 45k,75k,75k, that rent each for 1600.
That's my opinion! =)
Equity means nothing if it just sits there not leveraged. The only way it's "worth" anything is if you cash it out or leverage it. That being said you turned 25k into 300k. How many years would it take you to do that buying just for cashflow per door? You can now 1031 and use that 300k as a DP on a 1.2m property and get in a higher property class. Choosing the right location is the challenging part.
Originally posted by @Tim G.:
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 just "cashed out" of my last property in San Diego and reinvested into two institutional multi-family properties, one in Chandler AZ and the other in Louisville KY. Both were DSTs.
It's always fun in a bull market. Double your money every three years...
Having gone through several market cycles since being fully invested from 1988, both stock and real estate markets, I'd be cautious about expecting $8K per month in appreciation to continue indefinitely. But what do I know. I'm on the east coast.
Nobody remembers 2007. Or 2001. I get it.
Originally posted by @Tim G.:
Originally posted by @Jonathan Orr:
@Tim G. I recently worked with an investor who was thinking of a very similar thing. She had a home in SF and wanted to get out of it because they felt that it was at the top of its market and felt she could 1031 into a much larger property outside of CA.
It really depends what you want to upgrade to. If you wanting to get into commercial (retail, MF, hotels, office, etc...) then the only way you can take something down is to go out of state. That is, unless the property is a couple million.
I worked with brokers in areas that I have done deals in the past with and also did alot of searching on loopnet for a multi family property for the investor. We found a 32 unit deal just outside of Chicago that is cash flowing nicely for her. Reason we went with Chicago is she likes the area and a friend who lives there recommended we look in the area. After investigating it actually turned out to be a good area for investing.
If you are looking for commercial it really is where not to invest rather than where to invest. Yes there are places like Texas that are more recession proof than somewhere like New York but just remember that you can surround yourself with a team to help you even if it is across the country.
Just in my opinion I would avoid the following if you do not specifically live there or do alot of deasl in the market:
Houston
Memphis
Parts of Florida
The New England States
To each his own, just my opinion from what I have done in the past. Just remember that if you find a deal you like, make sure the numbers work and do your homework on the area. You can use a multitude of people like local Brokers, PM companies and local investor (BP is a great place to find them) to help you. The safest way is to not do it yourself but to surround yourself with pros in the area to help solidify your decision. It is not a overnight thing to find that hidden gem, it can take time.
Good Luck!
Thanks for the input. Could you share the figures on the SF home sale and what they moved into. Purchase price, gross rents and net income? Thanks!
Sale Price SF Home :$750k
$350k equity (syndicated remaining portion of equity)
Acquired: $1.35 million 32 units (70% LTV Fannie Mae Loan 30 yr fixed)
$25,000 gross rents per month
12% Annualized ROI Year 1 with a rent increase model over 5 years.
Originally posted by @Arlen Chou:
@Tim G. Where is your property? I use to live near UTC on Eastgate Mall. $360k for a 4plex in San Diego could mean lots of different things based on the location. Is your "appraised" number from an actual appraiser or just from an agent? What is the make up of the units? Something seems wrong if your CF is only $100/month/door on a property that has doubled in appraised value. It feels like your rents are low... are you at market rates? I only ask because based upon my own limited experiences, when my appraised value doubled, my rents had also doubled and cash flow was great.
-Arlen
Arlen, it's in Ramona. Market is $1200 for nice units w a pool and carport or garage and a few more amenities. Mine are renting for $1050-1100 with more basic setup. I think I'm at or just below market on two but not a great deal.
Appraisal was from a bank, I see Escondido and spring valley units going around $700k that are similar.
Feel free to look for yourself it's 834 A St. Ramona, Ca
Originally posted by @Chris Martin:
It's always fun in a bull market. Double your money every three years...
Having gone through several market cycles since being fully invested from 1988, both stock and real estate markets, I'd be cautious about expecting $8K per month in appreciation to continue indefinitely. But what do I know. I'm on the east coast.
Nobody remembers 2007. Or 2001. I get it.
Chris, my parents live in Hampstead. Topsail is their go to beach!
I don't anticipate $8k growth and think I timed it perfectly. I'm thinking about 07 now and should the market dive like it did then I'd be bummed I didn't get out while ahead and shift my focus to cash flow.
Originally posted by @Rami W.:
Equity means nothing if it just sits there not leveraged. The only way it's "worth" anything is if you cash it out or leverage it. That being said you turned 25k into 300k. How many years would it take you to do that buying just for cashflow per door? You can now 1031 and use that 300k as a DP on a 1.2m property and get in a higher property class. Choosing the right location is the challenging part.
This is my exact thought. I don't want a similar crapshack fourplex somewhere else, trading mine for a paid of similar model elsewhere doesn't sound fun. Trading it into a different class of property does.
I keep hearing about diversification in REI on BP, that is trading top tier assets for 2nd tier typically. True diversification imo is outside of REI, not trading one REI for another. Rei results are mostly location based. If you want more diversication don't sacrifice your top locations to achieve IMO. Now regarding your current asset, I have witness many circumstances that have turned regular old CA multi 20 years later to mid level lottery style winnings with redevelopment. If this kind of current location potentially offers that future....just hold to cash your ticket later is likely the best long term move here...vs chasing immediate cash flow anywhere else. Otherwise just heloc etc in the meantime. Obviously your current location seems wonderful so far. Good luck!
You made 300k in equity in 3 years investing only 360k and you're asking if its an investment you should pull out of?
@Tim G. As you know, we hold similar types of assets here locally. I have entertained doing what you describe, but have elected to hold. Thought I'd share my reasoning which may or may not have any applicability to you, but is helpful for me to articulate. :)
1. I enjoy the challenge of trying to make properties run efficiently and do so at scale. I try to avoid stopping doing things I enjoy.
2. It wasn't enjoyable when I only had 1 or 2 properties. It's *much* better with a slightly larger portfolio since I get economies of scale when it comes to process ... And I've built some skills.
3. I understand this market, and I believe the tenant base will be favorable for a long, long time compared to many other markets. I could go into the data that tells me that.
4. The more time I invest in our market, the more opportunities come my way (next time we run into each other, ask me for a recent example ;). I don't believe the same thing would happen if I shifted to a remote market. This is a subtlety I rarely see discussed - I believe the purpose of the first five deals is to set me up for doubles and triples on deals 6-15. I believe in doing everything I can to increase that likelihood, and I judge working remotely to make this goal less likely to achieve.
5. I enjoy simplicity. With the same amount invested, I'm more likely to prefer an 8% free cash flow property with 4 high quality tenants than a 12% free cash flow property with 16 tenants. This is especially true because I am personally planning for an inflationary environment in the mid term.
I haven't said anything about market cycles or valuations. And I got mad love for anyone who's successful at whatever their doing.
If I only had one property locally at this point, I'd probably sell it and invest in other people's projects (assuming I wanted to keep the real estate exposure). How's that for a lot of hot air with an unexpected conclusion?
@Tim G. the address really puts things more into perspective. This type of property is way outside of my wheelhouse. I am normally a buy/hold/refi type of guy. However, in this case I can understand you considering getting out of that property. To give any decent advice I would need to better understand the economics of that area. But based on my ancient memory of the greater SD area, I cannot imagine that you are pulling any tech job related tenants or even military out of Miramar. Is your tenant base mostly retail employed folks spilling over from Poway? How did the area do after the last crash and how long did it take to recover?
With my personal strategy, I would seriously consider doing some deep dive homework into areas in the path of growth, or areas that are very stable, and move into a different tenant type. Staying in state or going out of state is really more of a personal preference.
Good luck to you on this and let us know what you decide to do!
-Arlen
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.