Sell California Condo or Sell and 1031 into OOS Multifamily?

[Kyle Steiner]

Edit: The title should have been "Lease California Condo or Sell and 1031 into OOS Multifamily?"

I have a condominium I bought about 5 years ago for $60,000 that I can sell today and walk away with about $100,000 after selling expenses. It rents for $975 per month ($11,700 per year) and after expenses I clear about $6,500 of NOI. It's owned free and clear which means, based on my total cash invested, it has a COC return of 10.8%.

However, when calculating my Return on Equity, I'm only getting about 6.5%.  My question is, if you were in my situation, would you continue renting this property out or would you sell the condo and look into investing out-of-state in a market where you could take that $100,000 and buy 5 houses or a small apartment building?  I think I could get closer to a return of 10 to 12 percent on my $100,000 rather than a 10.8% return on $60,000.

Also, another option is that I rent the condo out and get a line a credit on it. I have a bank that is willing to loan $60,000 at 5% interest against this property, so I could pull some equity out and deploy it elsewhere for a higher return.

I am interested in Cincinnati as a market but I am hesitant to jump into an out-of-state property because of the difficulty in managing a property that's not within a few hours drive of where I am.  Also, my condo is currently vacant and I want to either rent or sell it ASAP which means I don't have a lot of time to fly out to other markets and make connections with property managers, etc.  Additionally, I work full time and wouldn't be able to get time off until around Thanksgiving.

I'm interested to hear your thoughts and suggestions on my situation. 

[James Kojo]

@Kyle Steiner : Hey, fellow Californian!

I can't tell you what to do, but I can tell you what I did, as I'm in a very similar situation as you, but just scaled up slightly.

I began acquiring SFR in various CA markets around 2009, and like you, I ran up the score on appreciation.

We've had a pretty awesome run here in CA, but for my own reasons, I wanted to diversify out of NorCal. Within the last year, I sold 2 CA SFH in CA and traded them for 2 SFH's in Austin, and a 4-plex in OH. Since these are fairly recent trades, time will tell if they work out or not.

what I will say is that acquisitions OOS is not at all "passive", especially in this hot market. It's not just about writing checks and entertaining the notary at closing. You will mostly likely need to get on a plane, probably twice.

Even if you buy "turnkey," you're essentially trusting a random stranger that you probably met on the Internet to manage your 100K. That can go wrong on a lot of different levels from outright fraud to just run-of-the-mill incompetence. How do you know they aren't selling you a flaming pile of crap in the middle of a war-zone? You should be doing a bunch of background checks on the provider AND you should be getting on a plane to see what you're buying.

I should also mention that a 1031 puts you on a very tight timeline. If you aren't already familiar with them, then research that first.

Finally: I really wouldn't recommend trying to self-manage a property OOS. It can be done, and there are proponents of such tactics, but it is fraught with pitfalls and demogorgons. However, using a PM gives you a roughly 10% haircut. You should factor that into your ROI. If you still prefer DUI management, and you do go into Cincy, give Misty a call at CincyRents, and tell her I sent you. They have tiered services which may match your style.

Hope that's some valuable food for thought. Let me know if I can help otherwise.

James