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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.
Originally posted by @Tim G.:
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.
I am basing the number on my ACTUAL experience from my first purchase in 1978. $2,000 down on a property that has appreciated over $500,000 and netted rents over $500,000. In the S&P example the dividends were reinvested. If you did that with the over $500,000 in rents AND bought 12 at $2,000 down =$24,000 total invested then you'd have a minimum of $12,000,000 and probably well over $20,000,000 with all the reinvested rents.
@Account Closed
Maybe Tim wants to enjoy his life now, not 40 years down the road when life is uncertain.
I think down the road, but I get depressed thinking about preparing for when I'm 70.
Yikes.
Originally posted by @Matthew A.:
@Account Closed
Maybe Tim wants to enjoy his life now, not 40 years down the road when life is uncertain.
I think down the road, but I get depressed thinking about preparing for when I'm 70.
Yikes.
YOLO
The S&P500 example is unleveraged.
@Tim G. If I couldn't force more appreciation and raise rents, I think that would make up my mind and I'd be pursuing the deal that I do next like you outlined. Someone wise once said, "You'll never go broke taking profit." You may miss out on further profits and you'll definitely get burned if you don't underwrite your next deal judiciously, but you won't go broke on this one deal by taking profit now.
Originally posted by @Sarah D.:
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.
Tim said "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."
Now I don't know SD or Ramona but I can understand getting out of a bad market when the getting is good. Most of the pain in the Bay Area was in locations that were overpriced and saw some run up but then lost value that really wasn't there to start. Google Mountain House. The lesson is buy quality.
Now the problem Tim has is that he is going to have expenses eating at that $300,000. Just the selling fees will probably take 20%+. Then he also loses his Prop 13 base which is worth about $4,000 to $5,000 a year. Plus again where will he invest out of state that will be anywhere near as profitable as CA?
Originally posted by @Account Closed:
Originally posted by @Sarah D.:
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.
Tim said "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."
Now I don't know SD or Ramona but I can understand getting out of a bad market when the getting is good. Most of the pain in the Bay Area was in locations that were overpriced and saw some run up but then lost value that really wasn't there to start. Google Mountain House. The lesson is buy quality.
Now the problem Tim has is that he is going to have expenses eating at that $300,000. Just the selling fees will probably take 20%+. Then he also loses his Prop 13 base which is worth about $4,000 to $5,000 a year. Plus again where will he invest out of state that will be anywhere near as profitable as CA?
This is the feeling...
Ramona is in the outskirts of San Diego County. It reminds me of rural Michigan where I lived for a while. The property was a war zone when I got it but the area is not chill and quiet. There was a chicken in the middle of the road when I was there the other day. Its a nice quiet town where folks live when they want a country setting or slightly cheaper rent.
The taxes are ok, but there is an issue. Ramona Water District charges me very low monthly water bills $150 for four units. But annually there are $800 per unit bonds I have to pay. There is a class action law suit over the way this is handled. So my taxes are almost double what would be but my water bill is around half what it would be elsewhere... so maybe that's a wash.
Either way, Ramona is a slow town. Its growing due to a focus on vineyards but its never going to be a desirable area. Its a class C property that has appreciated like crazy.
I wholesale full time, that's increasingly challenging and not as exciting as it used to be. I don't enjoy that challenge us much and want to take on bigger deals and really enjoyed turning this property around. The idea of doing that is interesting to me and within my skill sets. So I'm not a person looking to just move money and have other folks handle it. I would be the one running point on it but.. I'd need that cash flow as its going to be supporting me. So I guess I could take this on three routes. Sell this place and take the equity (I would anticipate 5% selling costs total I can sell it) yank equity out or raise capital and take on deals.
I don't want to work a full time job watching homes appreciate so that my punk *** kids can be loaded one day (this is seriously how it looks to an outsider in California, young folks just waiting for a death to cash in). I want to enjoy my life, continue traveling and let assets pay me while I'm enjoying life.
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.
Its us Gen Y/Millenials. We want cash flow and we want it now! :) My Honolulu property may have appreciated $3k/month but I am still chasing the $100-200/month cash flow properties. I blame social media and my lazy generation..
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!
Could you share what your bad experience was in Memphis specifically? Was that with SFHs or larger multifamily. Even buying retail, lets just assume that the $300/month of leveraged cash flow turns to $0 after long term CapEx (a very conservative assumption). With tenant mortgage paydown, tax benefits, and a modest 4-5% annual appreciation, still sounds better to me that keeping cash in a savings account or investing in mutual funds.
New England States -- wow that is a huge area, very broad. If someone told my parents not to buy property in NJ in the 90s, 00s, lets just say they would be in a lot worse position than they are now.
Originally posted by @Andrey Y.:
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.
Its us Gen Y/Millenials. We want cash flow and we want it now! :) My Honolulu property may have appreciated $3k/month but I am still chasing the $100-200/month cash flow properties. I blame social media and my lazy generation..
You whippersnappers! I got your guaranteed $400 a month cash flow for two years. Send me your $300,000 now. Guaranteed for two years! I can beat any other offers! Call Cash Faux Bob today. Don't be a loser.
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.
Incorrect. You're idealized, hypothetical example works as a thought experiment only. When you add inflation (3-5%), taxes (3% {30% tax bracket}), and human emotion (3%), your impressive 8% annualized S&P return is 0%. Yes, ZERO. That's actually being generous. When holding something for 40 years, those 3 things will absolutely play a part in the real world. Your example fails.
Real estate on the other hand, is hedged against inflation (leverage with a fixed rate), and has the ability to pay close to nothing in taxes (property planned tax benefits). Back to the drawing board mate.
I'm in a similar situation. I invested 20k in CA and now have two SFH worth a total of about 500k at about 50% equity. In my particular case, I've decided to keep them for now because of the location. They are right on the gentrification line in Sacramento, and have potential for double digit appreciation over the next couple of years assuming there isn't a significant downturn. I've spent a lot of time thinking what I would do once I thought the market was peeking. One plan I've considered goes against common knowledge, but might fit your goals if you really think things might peak.
- Sell
- Take the tax hit
- Use the money to pay off the principle on my primary residence
- Get a line of credit on the primary ready to execute at a moments notice
- Sit back, have a beer, and relax without thinking about rehabs, tenants, or refinances
- But keep an eye out for deals
If the market peaks, I'll be in a great less leveraged place. I'll see $1000/month in cash flow based on saved interest payments. Six months later, I'll be chomping at the bit to get back in the game regardless. No stress about 1031s. Take the time to find the perfect deal. Read, research and fantasize about the mobile home park. Have another beer. Yes, this doesn't yield the maximum return, but is much more fun.
@Chris Martin must be tough to have to invest and live in Topsail. Haha I used to be stationed at Lejeune and love that area. Do you invest in vacation rentals there?
@Tim G. if you need boots on the ground let me know how I can help, if you look into the Louisville, KY market.
wish I could give two votes to @Derek Daun
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@Tim G. If your plan is to move out of SD and be physically present and repeat the process you will retire in a year or two. I thought about that also but decided the sunshine tax is worth it for now. To just try and move every 2-5 years owner occupied. Californians have been doing this for years taking their business to other states including most of their equity because California is expensive on all levels. It all depends on you Tim and where you want to live. If you want to live in SD it sounds like you are sitting on a gold mine and have guaranteed yourself a form of retirement in 27 years. If you want to follow your dreams and move, it sounds like you will retire in 2 years if you commit to this full time. Have you thought of just doing the same thing again out of state? Just keep moving. Although 3.5% down for a fourplex is unheard of these days. With your action plan You'll do great. Best of luck
@Tim G. is absolutely correct that once you are able to get into the CA market, you can leverage your appreciation towards other properties. And that your cash flow will also grow as rents keep increasing. I'd definite take that vs buying in fly over states where I don't know the markets Dynamics like my own back yard. Worked like a charm for me here in San Francisco :)
Originally posted by @David D'Errico:
@Chris Martin must be tough to have to invest and live in Topsail. Haha I used to be stationed at Lejeune and love that area. Do you invest in vacation rentals there?
@Tim G. I don't quite understand how you are only CF 400/month. Based on some rough estimates your mortgage taxes and insurance is about $2500 is that close? If gross rent is about 4400/month what are your other expenses?
Vacancy 8%= 350
PM 10%= 440
Repairs/main 10%= 440
Utilities ?
4400-2500-350-440-440= 670
Also if you self manage then that cash in your pocket. Any way I would suggest a cash out refi to invest in more multi's
@Michael McLoughlin I live in Louisville. How is the out is state investing going? Let me know if there is anything I can help with. @Tim G. if you need boots on the ground let me know how I can help, if you look into the Louisville, KY market.
Here are the numbers.
Rents $4,230
Mortgage $2576
Water, trash, pest, common area elec $392 (avg)
$1262 (avg) gross income each month.
Other repairs this year - $1500 with another $500-700 needed on some small items.
Remember, I'm renovating the last unit currently. So that's a $5,000 expense and then I will have a much more turn key property but that has eaten up all of this years cash flow. You also have to budget for other items over time such as the roof, water heaters, etc... So I'm more conservative and put away more monthly.
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.
That is understandable. If you think Romana is done, you can always parlay that for something better like Amit mentions. Many metros can provide better initial cash flow and many areas in Cali have better futures. Take your pick and don't forget even a so so location in Cali brought to that new table in 36 months. I think this place appreciated $1600 a month since 89 so not too shabby still. Good luck!
We have had quite a few California investors move their investments out here to Utah. I have found that most investors are finding 4-5% cap rates in California and I have sold multiple brand new fourplexes to my investors at 7.5% cap rates.
Originally posted by @Sam Newell:
We have had quite a few California investors move their investments out here to Utah. I have found that most investors are finding 4-5% cap rates in California and I have sold multiple brand new fourplexes to my investors at 7.5% cap rates.
So what is the point of going from a high demand area (4-5%) to a low demand area (7.5%) ?
Originally posted by @Tim G.:
@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
I claim to be an expert on Escondido duplexes to quads. I do rent surveys evert few months of Escondido properties. I did one one month ago for 2 BR units. The cheapest non apartment 2 BR in Escondido at that rent survey was $1700. I put ours on market at $1700 wanting to rent it as soon as it was ready. I had 3 tenants ready to move in when the unit was ready (1 did not pass our check so it went to the second). In Escondido studios go for over $1k. I do believe Ramona is lower than Escondido but I question how you did your rent survey? I think your rent is likely low but I do not claim expertise on Ramona rental market. If you have performed actual rent survey then you may be correct but if you have not actually looked at rent prices on Zillow, trulia, Craig's list I think you are low.
If you decide to sell, PM me ideally before committing commission to a realtor.
Good luck
Originally posted by @Sam Newell:
We have had quite a few California investors move their investments out here to Utah. I have found that most investors are finding 4-5% cap rates in California and I have sold multiple brand new fourplexes to my investors at 7.5% cap rates.
I wouldn't lift a finger for 7.5% not worth the effort but I can find the deal myself.