Stay in residential or buy a commercial property

[Tamer Shalaby]

Hello All, 

Please help decide or expose my blind spots. 

I have 3 rental properties in Sothern CA, Orange County area. I have low debt on all of them. I am 45 and have a career, I do not depend on RE for income. I am debating between two ideas, A) cash out from existing properties and buy 1 more residential property or B) sell all and 1031 into a commercial property. My commercial top choices are storage, medical offices, or retail. 

My theory is that rents cannot continue to climb that high in So Cal. Home prices continue to climb but I cannot imagine rents going much higher. Meanwhile if I 1031 into a commercial property I can leverage my equity and hold it for 5-7 years and repeat. 

Plan A Pro and Con

Pro - 

- maintain lower taxes.

- Properties are in affluent neighborhoods, easy to rent. 

Cons

- low cap rates

- lose low interest rates when I refi to cash out, and cannot increase rents.  

Plan B

Pro 

- leverage more 

- commercial rents have 3% increases baked in

Con

- Higher tax and interest

- Recession and high vacancy. 

Summary of Inv

Prop A - 1.5m - 250k loan - 5500 rent - 150 HOA - 3300 mort+tax - cap 3.6%

Prop B - 800k - 293k loan - 3300 rent - 500 HOA - 2600 mort+tax - cap 3.4%

Prop C - 500k - 113k loan - 1900 rent - 500 HOA - 1100 mort+ tax -cap 2.5%

Total Value = 2.8m, Total Debt 660k

Cash left after sale and RE commission = 2m 

Future Property

Fut Prop 3.5m - loan 1.5m - 35k taxes - 2400 ins - 120k mort only - 180k rent - cap 4% 

In 7 years @ 3% appreciation and rent increase and 1% tax increase 

7 Year 4.3m - loan 1.4m - equity = 2.9m 

Which plan would you pick and why?

Thanks