Section 8 in bad CA neighborhood (barstow) or SFH out of state?

Question

David Faulkner · Answer

You've already discovered what chasing cash flow in state will get you ... and now you want to try to chase cash flow out of state, where you will have even less knowledge and less control and be 100% reliant on others to make or break your investment for you thinking that it is going to turn out better for you? Before you'd do that, I'd sell, take the tax hit, repay your heloc, and be thankful that you got out mostly whole before a market correction.

Ali Boone · Answer

I mean ultimately you will get higher cash flow out-of-state, with way less [tenant] risk. Assuming you buy right and in the right state. But section 8 can be nice for guaranteed income too. The only thing is that CA is so hard on tenant laws (not friendly to investors] that by taking section 8 and in a place like Barstow, you could get some sketchier tenants. If something then happens with them, it could get expensive. I would just run the numbers hard on each option and see what it's looking like.

Clayton Mobley · Answer

Hey @Samuel Yi Honestly, while there will definitely be people that would say you should hold on to any CA property for the sake of appreciation, I feel like this is the time to get out of this low-tier prop.

A C/D property is almost always more headache than it's worth unless you self-manage and really know what you're doing in that market.  When you add Section 8 into the mix, it's honestly just too much hassle. When I started out I tinkered with that class, but while the on paper ROI is often great, the actual returns are rarely what they could be. Section 8 means red tape, inspections, tenants losing vouchers, or only have vouchers good for lower rent amounts. It means evictions and vacancy, maintenance issues, messy move-outs, and middle men. If you don't want to deal with all that, you'd either need a good PM (and rents that mean you can give up 8-10% to that PM) or you need to look elsewhere.

Based on the goals on your profile, you're looking to upgrade your current home and then build passive income for early retirement. You said yourself that you wouldn't have purchased it if you'd been on BP, so my guess is that your goal wasn't to work in the C/D class anyway. A C/D prop is not going to be a passive investment, so it's time to redeploy that capital elsewhere.

Luckily, you are still in CA, so it looks like you have at least some gains to lock in. If you sold for $100k and executed a 1031 exchange, you could get a solid B/B+ prop in another market (for sure here in Bham, but likely other places in the South and Midwest as well) without having to pay any taxes on the sale. With $70k in debt and approx $30k in equity in the current prop, you'll likely just roll this into a single property elsewhere (rather than rolling into multiples). However, a B/B+ property OOS, managed by a reputable company, is going to provide consistent, reliable rental income with almost no effort on your part once you've made the investment.

Of course, you have to decide if you want to go the turnkey route and be totally hands off after you cut the check, or if you want to be a bit more involved and self-assemble a team to scout props, do rehab, and manage tenants. Then you need to do some serious due diligence to makes sure the people you choose to partner with will be with you for the long haul. BUT either option will result in a more valuable property, with less headaches, a greater chance of appreciation, and better exit options (a D-class duplex is only going to sell to another investor, not an owner-occupant who may pay more than market value).

You'll probably get advice on both sides of this issue. Be honest with yourself about your goals and how you want to attain them. Do your research, ask professionals and experienced investors for advice (you're already doing that), and then trust your gut.

Best of luck!

Yoni Rios · Answer

@Samuel Yi  just following up with your case, read you post and seemed interested. Did you end up selling or

moving with section 8 ?

look forward to connecting

Samuel Yi · Answer

Account Closed thank you for the idea Michael. I have never done an owner financing and I have zero idea when you say note selling.

That being said, if I do owner financing, will I be able to do 1031? Or will I have to pay taxes?

Account Closed · Answer

@Samuel Yi  You should talk to a California real estate attorney before doing it.

Account Closed · Answer

@Samuel Yi  That will be more complex.  You should talk to a CPA or tax attorney.

Account Closed · Answer

@Samuel Yi  If I had a buyer at $125,000 I might consider owner financing and then finding a buyer for the note at 7-13 months.  You might even be able to get a good price as a new note.

Section 8 in bad CA neighborhood (barstow) or SFH out of state?

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