What do you think about this Strategy?

Question

I own three houses in CA (2 San Diego and 1 Oxnard). The Oxnard house is currently tenant occupied and the tenant is possibly moving out this summer. This house is under VA Loan at 2.5% interest rate. I also have HELOC under this house.

The strategy that I have been thinking is to sell the oxnard house. I would take at least $160,000 after everything is paid off including the HELOC.

What would I do with the money?

I plan to do 1031 exhange buying 3-4 duplex/fourplex in Cleveland, OH with 5% CoC or better. Plus, It would be free up some of my VA entitlements which would lead to $560K entitlements. Therefore, I can use VA Loan to buy another home in San Diego as well.

What would you do in my situation?

My goal in real estate is: to own RE both cash flow and equity. Owning RE in Cleveland would give me that cash flow, and CA houses would be the equity. Why do I need cash flow now? To cover some expenses like my kids' private school and fund future RE.

JP Eugenio

Account Closed · Answer

Don't kick the cash cow. If it's working for you, save the expenses of selling (6% or more with closing costs and taxes), you are already in a market that you know, you are close to the properties instead of 3/4's of the way across the country, you have interest rates not available right now and won't be available again for the foreseeable future.

Dan H. · Answer

Then it is beyond me why you would consider selling a high appreciation, positive cash flow, reduced property tax So Cal to potential purchase a higher risk OOS property that would likely be lucky to make a few hundred dollars a month per unit in this high rate environment.

Am I missing something?

good luck

Kenneth Donaghy · Answer

@John Philip Eugenio, Dan makes some good points. You stated your goals is to own both cash flow and equity in RE... The Oxnard property is doing both for you... Is the Cleveland property going to offer more cashflow, i assume, how much? Or is the goal of selling the Oxnard property to free up the equity to get a better return on equity and/or free up the VA entitlement to buy another home here in SD? I also assume one or both of your SD properties have VA entitlements attached to them? maybe not as much equity.

Cody L. · Answer

^^^ I agree with @Dan Heuschele

Maxwell Ventura · Answer

@John Philip Eugenio - Dan great insight, he's a long time local investor here in SD & frequent contributor on these forums. (over 5K posts!)

If you have the ability to use your VA loan out here in our higher priced market on a 2-4 unit property, it could be worth considering. When factoring in all of the other benefits of owning real estate (other than cashflow) your ROI should be quite high.

Byron Valles · Answer

This is so well put. I live and invest in the San Francisco Bay Area and have found many of the points you highlighted to be applicable as well. While it's hard to find cashflow properties here, it's not impossible. The real benefit as you pointed out though is total return, especially over a long holding period.

Dan H. · Answer

I see responses, but none from San Diego RE investors or even So Cal RE investors.  Here are some thoughts from a San Diego RE investor who has done fairly well:

- VA loan leads me to speculate you put very little down.  Then you extracted equity via a heloc. After extracting equity, you still have enough equity after selling to have $160k.  I speculate that this property has appreciated a lot more than $160k.  How much has it appreciated?  How long have you owned it?  Calculate you appreciation per year of ownership. I am confident that your return from appreciation would whoop the cash flow of Cleveland or any other high cash flow market.  - you already have experience in how easy it can be to extract value.  You did it via a heloc, but refi can also be used.  - due to prop 13, you have an articially low property tax.  This prop tax saving would be lost  if you sold the property.  I have property that my prop tax is ~$10k below what it would be if I purchased the property today.  This implies my cash flow is $10k greater than if I purchased the property today.  - the reality is So Cal can be a great cash flow market.  I do not claim the initial cash flow is great but the rent growth improves the cash flow fast.  So why is this great cash flow seldom discussed?   It is because it seldom becomes reality due to extracting value.  However if you prioritize cash flow over extracted value (I do not and neither does most other successful RE investors), you can achieve outstanding cash flow simply by not extracting value.  - investors with small reserves require cash flow.  Those with adequate reserves are more concerned by total return and are less concerned about the source of the return.  However, my opinion is cash flow is the worse source of return. Why?   Because it is taxed annually.  Currently there is no tax on equity pay down.   With the current tax rules, I never expect to pay taxes on my value adds or equity gain.  Even if the rules change such as eliminating 1031 and the readjusting of tax basis upon death, the tax likely would only occur at selling which means I get to keep that money I would be paying in taxes until the property is sold.  This provides an opportunity to leverage that money to earn more money that would not exist if I had to pay the taxes annually such as is required for cash flow.  - San Diego has near lowest eviction rate in country. I suspect Oxnard also has a low eviction rate.- San Diego has near lowest rent delinquent rate in country.   I suspect Oxnard also has a low eviction rate.

- San Diego has very low vacancy rate.  This makes it easy to find and keep good tenants.  I have a long list of tenant requirements.   I suspect Oxnard also has a low vacancy rate.- Historically your Oxnard return surpasses high cash flow markets.  I recommend you check NeighborhoodScout to look at how coastal So Cal cities have appreciated.  Virtually all of them are rated as 10/10 for this century.

The reality is your Oxnard property almost certainly has performed better than a Cleveland RE investment would have.  It is my opinion that it is likely to continue to provide better return than property in high cash flow areas.

Good luck

John Philip Eugenio · Answer

@Dan Heuschele I really appreciate for your thoughtful response. I bought this property back in 2017. I put $160K to be more conservative. This house currently in positive cashflow as well and I am paying way lower property tax compare to my other 2 CA properties.

Hamp Lee III · Answer

If the numbers work with your long-term goals, go for it.

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