Investing in PV/Arcadia

Sue Swami · 2017-09-10T16:10:21-07:00

I have three rentals in the Gilbert/Queen Creek area. I am considering selling them all when their leases expire (within a few months of each other) and 1031 exchanging into a single bigger property in a more upscale area (as best as I can get timing right). I understand it's going to be less cash flow but it would save the headache of maintenance on three properties for me. Also, I think we're peaking prices in that area (a guess, who knows?)I have been tempted by the tear down and rebuild wave that's happening there. I would be looking at a combination of proceeds from the sale and a new mortgage to pay for it. I'd be primarily looking for an older home under $1M that I could rent for a few years before rebuilding. The other possibility is to buy a lot and build custom and then sell it, but I don't believe I could get financing for $1.5M+, not to mention no income for about two years. Would be too ambitious I think but I just don't know any figures. What should I consider with such a project and with this area? It's newer to me, and I'd be diversifying away from the HOA/cookie cutter style rentals that we currently deal in. 1) In a quick survey of the two areas they seemed FILLED with for sale properties so is it right now a buyer's market there? Is it always the case that there is that much turnover? 2) What kind of investments are best suited for that area? Flip? Buy & hold rental? How is the area as a rental anyway? 3) Are there pockets within PV and arcadia that are better? I've driven around a bit, but I don't live there and could use some insight. All the realtors I spoke to are upbeat about everything (predictably). 4) Are there other nice areas that anyone can suggest to consolidate at the $750k price range away from Chandler/Gilbert/Queen Creek? Thanks for any and all insight and avice.

Spencer Hollen

Phoenix, AZ · Member since 2017 · 5 posts · 2 votes

9y

Sue I am currently in the same boat as you. I am performing a 1031 Exchange out of California and reinvesting just over a million in property in Arizona. I have a second business that I manage outside of my real estate business, so managing more than two properties is really out of the question for me.

I initially was looking at houses in the million dollar range, but I found the cap rates to be very low compared to what you spend. They were in the range of $4500 a month for houses in excess of $900,000, when houses in the $700,000 range were renting for $3800-4000/month. After looking into that I have decided to split my investment into two separate houses. One in a C class neighborhood in Phoenix in the range of 250k +/- and one other house in the Scottsdale/Cave Creek area for 750k. That will also help because houses in B/C class neighborhoods tend to rent much more quickly than houses in A neighborhoods.

I would be interested to hear what you decide to do as I also opted for a lower ROI, but a less time consuming investment. I know I could make 6k + a month with 5 houses in Phoenix and keep them rented out, but the amount of work/repairs/screening involved would exceed my time. Cheers. I wish you luck.

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Sue Swami

OP

SF Bay area · Member since 2017 · 3 posts · 1 vote

9y

I'm glad to find someone else with a similar mindset. Even with what is considered good cash flow, my stocks are performing just as well if not better (at least for now) so it's not worth the headache to have multiple properties for me. I use real estate for diversification, and don't mind slightly lower returns.

From researching, I am beginning to see the light in what you did. I think might be better off with a bigger property in class B than a small one in A based on the cash flow and just the vacancy period and how long it is on market.

But I'm still hoping someone will respond with some insight on the rebuilding in Arcadia that's happening. I'm fascinated.

On a separate note, would you PM your realtor contact if you had a good experience with them?

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Cara Lonsdale

Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes

8y

Originally posted by @Spencer Hollen:

Sue I am currently in the same boat as you. I am performing a 1031 Exchange out of California and reinvesting just over a million in property in Arizona. I have a second business that I manage outside of my real estate business, so managing more than two properties is really out of the question for me.

I initially was looking at houses in the million dollar range, but I found the cap rates to be very low compared to what you spend. They were in the range of $4500 a month for houses in excess of $900,000, when houses in the $700,000 range were renting for $3800-4000/month. After looking into that I have decided to split my investment into two separate houses. One in a C class neighborhood in Phoenix in the range of 250k +/- and one other house in the Scottsdale/Cave Creek area for 750k. That will also help because houses in B/C class neighborhoods tend to rent much more quickly than houses in A neighborhoods.

I would be interested to hear what you decide to do as I also opted for a lower ROI, but a less time consuming investment. I know I could make 6k + a month with 5 houses in Phoenix and keep them rented out, but the amount of work/repairs/screening involved would exceed my time. Cheers. I wish you luck.

This is a smart strategy, and I wanted to offer you some encouragement for your decision. It is always smart to diversify your portfolio, and choosing properties in different price ranges is just smart investing.

As a Realtor in Arizona for over 20 years, I have seen different strategies work, but yours is pretty solid.

Sue, to your situation, I would suggest looking in parts of North Scottsdale as well as Desert Ridge. These areas offer good "bubbles" of social activity (not to be confused with a real estate bubble). What I mean is that renters are attracted to these areas because they are in close proximity to where they will buy groceries, shop, eat out, and entertain themselves. Kierland, as an example, is a popular community in North Scottsdale, and has a great bubble with both Kierland and Scottsdale quarter nearby. The rental rates are solid, and there would be opportunities to do different things with the property down the road, if you like, like post it on airbnb and so forth (they have co-hosts that do all the work for you). Additionally, this community has been sought after since it's inception in the 1995-1996 year range.

As a side note to your 1031 exchange...make sure you check with your accountant about what 'like for like' means. You mentioned different types of property, and not all of them would follow the rules of a 1031 exchange necessarily, so you would want to be clear on that.

Lastly, has either of you considered a property manager? This may eliminate your original problem of not having the time/energy to manage the properties yourself. Sure, they may take up to 10%, but it sounds like you are leaving money on the table by short-changing your ROI. It's very possible that even with the expense of the property manager, you may still be better off. And remember, the property manager's fee is tax deductible. Just a thought.

I hope that helps. Best of luck to both of you!

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Ryan Swan

Real Estate Agent · Phoenix, AZ · Member since 2012 · 640 posts · 457 votes

8y

@Sue Swami I grew up in Arcadia proper, and am blown away by the growth going on there right now. I also personally know a builder doing very well with 2-3 spec homes at a time in Arcadia Lite.

1) The good properties sell right away, often before construction is even finished. Everyone wants to live in Arcadia, but the rising prices are a barrier to entry.

2) That depends on the person and their investment goals, but the tear down spec builds can be incredibly profitable. However, those are very experienced teams of agents/builders/subs doing those. Some owners choose to rent their homes rather than sell, but I personally wouldn't look to buy a home in Arcadia just to make it a rental - there are much better uses of your capital.

3) I know Arcadia and PV like the back of my hand, and yes there are definitely more desirable areas of each. Would be happy to give you the lay of the land.

4) I would suggest having a discussion about property types vs areas to deploy your funds.

Whatever area/strategy/property type you focus on, the key piece of your transaction is that 1031 exchange. Timing is critical to the success of a 1031, so you really want an agent that knows how to do them successfully. I'm assisting another BP member who's bringing 1031 funds out of expensive California to invest in MultiFamily properties here across the metro Phoenix market.

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Sam Grooms

Investor · Phoenix, AZ · Member since 2017 · 583 posts · 919 votes

8y

@Sue Swami, Just a few thoughts:

1) To address your question about renting in this area for a couple years before doing a scrape and new construction - This is a great strategy in a down turn, and if the recovery is just starting. However, when prices are at all time highs, you'd be taking on a lot of risk. Once a market is in an expansionary phase, you should build as quickly as possible. You don't want to be the one without a chair if supply starts outpacing demand.

2) I'm not sure about PV, but Arcadia price growth has slowed down on the high end, but not the low end. This means your spread on a scrape and new construction keeps decreasing. You asked if we were in a buyer's or seller's market, and the answer is both. It's still a seller's market on the lower end (where you'll be buying), but a buyer's market on the high end (where you'll be selling). I've noticed this anecdotally (this is our main area for investing, I live in the area, and I watch every property from 64th to the 51, from Thomas to Camelback), but I mentioned this to my wife and she said the same thing. She's an agent with North & Co., and said many of her coworkers have said houses are starting to sit longer at the high end. Also, if you ever go to Alan's market update at AZREIA, you can see the huge disparity in months of inventory between the high and low end.

3) The hold time on a scrape and new construction is about a year. And that's if you do everything right. For your first, I'd put more of a cushion in there. Also, builders are extremely busy right now, so they may tell you it'll take a couple months to even start your project. There's also been a lag with the Phoenix plan reviews. We just had plans take over two months to get approved, when the usual turnaround was 3-4 weeks.

4) Builder's prices keep going up and up, in labor, materials, and overhead. Overhead, because they know the profit being made on the homes, and it's a function of the other two. Materials, because of the recovery efforts in gulf states. Labor, because of the same reason. Subs move around looking for work. They go to areas an a seasonal basis. Right now, they can go to Florida or Texas and make more. This gives us somewhat of a shortage here right now, increasing prices.

It may seem like I'm trying to talk you out of a new construction project, but that's not it at all. I just want you to be well informed.

I know everyone says to do this, but I'm going to say it anyway, because it helped us out so much. Get out and meet the people who are successful in this area. You'd be very surprised at how much information they're willing to give you. Instead of meeting them for coffee, meet them at one of their current projects. We spent almost 3 hours at a project with a guy who's doing 3-4 new construction projects at a time, and learned so much about his business (including prices/margins/etc).

Lastly, if you have any questions about a specific property/project, feel free to reach out to me.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

@Cara Lonsdale, good advice for @Sue Swami. I wanted to clarify something you said regarding the 1031. Actually all of the property types she mentioned would qualify for a 1031 exchange. The like kind component is about use and not type. Any type of real estate purchased with the intent to hold for productive use in investment can be sold and exchanged for any other type of investment also intended to hold.

This does exclude fix n flips because the intent is not to hold. And does exclude construction after the purchase of the land since you must be buying real estate not improvements to real estate you already own.

But her examples of type are perfectly fine. So is her thought to sell three and buy one bigger piece (as long as the valuations work for her reinvestment target).

Sue, if you want to try to do construction at the beginning and roll it into a 1031 I'd recommend a reverse construction exchange. These are a little bit more expensive and complex but could be your ticket. Otherwise I do like your idea of buying just the right piece of land with an older building on it and then holding for a few years before scraping and rebuilding.

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Cara Lonsdale

Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes

8y

Originally posted by @Dave Foster:

@Cara Lonsdale, good advice for @Sue Swami. I wanted to clarify something you said regarding the 1031. Actually all of the property types she mentioned would qualify for a 1031 exchange. The like kind component is about use and not type. Any type of real estate purchased with the intent to hold for productive use in investment can be sold and exchanged for any other type of investment also intended to hold.

This does exclude fix n flips because the intent is not to hold. And does exclude construction after the purchase of the land since you must be buying real estate not improvements to real estate you already own.

But her examples of type are perfectly fine. So is her thought to sell three and buy one bigger piece (as long as the valuations work for her reinvestment target).

Sue, if you want to try to do construction at the beginning and roll it into a 1031 I'd recommend a reverse construction exchange. These are a little bit more expensive and complex but could be your ticket. Otherwise I do like your idea of buying just the right piece of land with an older building on it and then holding for a few years before scraping and rebuilding.

Thanks for your clarification @dave foster. I told her to seek advice from a 1031 professional because I wasn't sure, since she stated that she wanted to find something she could tear down and build new. That made me question whether it was like for like since her previous properties were held as rentals, and this property would likely not be able to have a tenant occupy it for several months or even a year during construction.

Tell me, what is the time frame for getting a tenant in place in order for this to still be like for like? Does the Tenant in place matter?

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

@Cara Lonsdale, having the tenant in place isn't such a big deal. What is important is the intent and when she takes title. If her intent is to hold it for productive use then it would qualify even though it might take a bit to get a tenant in place. Her limitations are going to be the 180 day exchange period to complete taking title. Or the 180 day window of the reverse construction exchange to complete the construction.

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Cara Lonsdale

Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes

8y

Originally posted by @Dave Foster:

@Cara Lonsdale, having the tenant in place isn't such a big deal. What is important is the intent and when she takes title. If her intent is to hold it for productive use then it would qualify even though it might take a bit to get a tenant in place. Her limitations are going to be the 180 day exchange period to complete taking title. Or the 180 day window of the reverse construction exchange to complete the construction.

Taking title shouldn't be a big deal since there is an existing property on it already, right? We average 30-45 day COEs here in AZ. My only question was about a tear down being like for like with rental properties. Thanks for clearing that up.

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Investing in PV/Arcadia

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