Time to sell two houses and buy apartment building?

Question

First time poster here, please bear with my inexperience.

I am in my mid-forties and live in the San Gabriel Valley area. Currently, I own two rental houses with no mortgage in Southern California. The first one is in San Gabriel Valley which I paid $265,000 in 2000. It is now worth about $800,000. Currently, I am collecting $2,400 per month in rent.

The second house is located in the Inland Empire which I bought in 2003 for $240,000.  It is probably now valued at around $330,000.  The monthly rent on this property is $1,600.

So I have about $1.13 million combined in asset generating $4,000 of revenue per month.  Lately, I have been looking at apartment buildings in places like Riverside County and Phoenix metro area.  Apartment buildings priced around $1 million can generate $7,000 -  $9,000 of revenue per month. Now I understand that the properties in places like Phoenix will never have the rate of appreciation compared to an area like the San Gabriel Valley, but I will get much more bang for my buck in terms of income generation.

What would you guys do if you were in my situation?  Should I sell both of the rental properties and invest in an apartment complex?  How about commercial real estate?

Any ideas to generate more income would be appreciated!

Shawn Ackerman · Answer

@Charles Chang This is the real life monopoly my friend.  Go for it!!!!

Frank Chin · Answer

I've been in your shoes. I started REI in 1982 in NYC and vicinity, a high appreciation area.

I also have a rental that grosses $2,500/month, no mortgage. But taking into consideration taxes, insurance, mowing, it nets $1,500/month, and that doesn't include a PM. I assume the numbers you cited are gross.

If you sell, you're stuck with capital gains. So you're best bet is a 1031 to another property, or refi and take $300 to $400K out for a future down payment. Problem with 1031 is you only have a 6 month time frame, too rushed for me.

Like you, I was tired of SFR's and looked into apartment buildings, and small commercial properties. The only thing that would stop me is the current upward market in RE, around here is 8 years, near it's peak, I believe a correction is coming. So I might refi out, hold the cash, and wait for the correction.

Fortunately, I'm retired now, and I find what you got, a SFR in an A neighborhood easier to manage, so I'm holding on to my mortgage free properties.

Colleen F. · Answer

Actually my point was more about is it worth it to even have a PM manage 10 tenants for what you will get, that is what you need to decide.

Aaron Mazzrillo · Answer

I'll second LAREIA as a good place to go. I'd also consider attending mobilehomeuniversity.com if I were you. I've been to both... several times.

Brian Garrett · Answer

@Charles Chang Love your ambition and drive to continue scaling up!

Charles Chang · Answer

I understand that I will definitely have to hire someone to manage the property if it is 350 miles away. How do you go about finding a property manager you can trust?

Tom Ott · Answer

Send me a message I might know the best 1031 replacement.

Andy D. · Answer

@Leslie Pappas I'd presume that the "exit" strategy for such a DST 1031-rollover would be death? Or put otherwise: how could one get out of it without selling the beneficial interest and in turn becoming subject to (capital gains) taxation? Granted, I have not at all looked into the tax treatment of such a strategy after having put the money into the DST, but at first glance I see this to be the final move if and when one gets (older and/or) to a point where one no longer wants to deal with being a landlord as an individual but rather a purely passive investor. All this in the context of legally avoiding capital gains taxation (and inherent recaptured depreciation).

Leslie Pappas · Answer

Hi @Charles Chang, if you’re an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about if you decide to perform a 1031 exchange. From my experience (and many of my clients) DSTs have helped eliminate the day-to-day hassles of property management, allowing for more free time to do the things that are more important. All the details of rent collection, leasing, maintenance, repairs and bookkeeping are handled by national class, professional property managers. The DST real estate providers (sponsors), who possess the special expertise in managing commercial real estate, perform the functions of overall asset manager and investor relations management.  DSTs offer potential cash flow, tax shelter and appreciation. Loans are non-recourse.

Time to sell two houses and buy apartment building?

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