Time to sell two houses and buy apartment building?

[Charles Chang]

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!

[Frank Chin]

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.