When is it time to move up

Question

We currently have a small rental property in Los Angeles thats cashflowing about $500 a month.  Our equity has doubled since we bought it 10 years ago and are wondering if it’s worth selling it for a higher cash flowing property in another market.  Are there any tools/strategies to calculate a high appreciation market vs high cash flow market?

Samuel Diouf · Answer

For appreciation markets, look at the economy growth and current/future projects going on. Look at price/rent ratios to identify if the property is a high cash-flow market.

When leveraging your money, you will see bigger returns with appreciation, but if you can still get a little cash-flow so you're not bleeding money, that's the most ideal situation.

If you buy a property with 20% down, and the investment appreciates 5% a year and cash flows $200/Mo, in 4 years you'll have made over double the cash you invested.

If you're looking OOS, prices in Columbus are still low enough to find 1% rule deals and there's a ton of appreciation happening in this market as well.

Nathan Gesner · Answer

$500 cash flow a month is $6,000 a year. In 10 years, that's $60,000.

I suspect your equity is worth 4x that amount.

Stick with the equity growth.

Dave Foster · Answer

@Ryan Dragon, I love how @Gino Barbaro put it.  Don't start with comparing options.  Start with examining the current property.  If you like it then look at options that allow you to keep it.  Maybe access the equity via a cash out refi (check the after refi cash flow).  And use those dollars to buy a property that adds great cash flow but maybe doesn't appreciate as fast.  Equity from a cash out refi is going to be less anyway.  But that would allow you keep the appreciation if it's great, and buy a smaller property to boost cash flow.

If you don't like the property (because of risk, potential future events, etc) then sell it and while you're getting ready to 1031 it, use the IRR calculation to compare cashflow locations with appreciation locations (the IRR factors in both).

Gino Barbaro · Answer

@Ryan Dragon

The question is are you happy with the Return on your current equity, and can you roll the equity you have into a better yielding asset.

You're generating around $6,000 per year in cash flow, but how much equity would you have if you sold?

High appreciation markets have low cap rates, good population and job growth. Think Nashville, Charlotte, Phoenix, Dallas. Places where people want to live. Prices are higher and cash flow is much less, but you get rich with appreciation.

The opposite is generally true with high cash flow. Higher cap rates, less population growth, the market is more linear and is stagnant.

The key is to find markets that have a blend of both, such as KC, Omaha, OKC, Knoxville, just to name a few

Gino

Rick Albert · Answer

It all depends on what you are buying. Remember that you have to follow the 1031 Exchange Rules.

Is that $500/month after putting money aside for vacancy, repairs, etc.?

I would suspect that rents will go up considerably in Los Angeles over the next five years. Right now it seems stagnant/slight decline. It will be short lived depending on what's being built in your neighborhood.

There are always reports out there that show high appreciation and high cash flow markets. In my experience (and I own in four different states), those reports are nice but already outdated. The information is about what happened in the past and once people read those, they start to flock to those markets, making it more competitive.

I would create a list of wants in a market and then narrow down. That's what my wife and I did when we bought our first out of state property. Some of the criteria was:

1. Landlord Friendly Market: Otherwise we would keep investing in Los Angeles

2. Population of at least 100,000: We want a big enough tenant pool.

3. Are there major industries there (hospitals, universities, etc.).

4. Are people moving there?: Check out howmoneywalks.com to get some idea.

5. What does your gut tell you? This is super important. I didn't follow my gut in the past and it has bite me (always worked itself out).

Drago Stanimirovic · Answer

Hi Ryan,

It sounds like you're in a great position with your rental property, especially with both positive cash flow and significant appreciation over the years. When deciding whether to sell and reinvest in a higher cash-flowing market, you can use several tools and strategies to compare high appreciation markets versus high cash flow markets. Here’s a breakdown of what you can consider:

1. Return on Equity (ROE) Calculation:
One key metric to assess is your current Return on Equity. Given that your equity has doubled, it’s worth evaluating if your current property is underperforming based on the equity you’ve built.

Formula:
ROE = (Annual Cash Flow / Total Equity) x 100

If your ROE is relatively low, it might be more beneficial to sell the property and invest in a higher cash-flowing market.

2. Cash-on-Cash Return:
If you're considering a property in a different market, cash-on-cash return helps compare how much immediate return you're getting on your invested cash.

Formula:
Cash-on-Cash Return = (Annual Pre-Tax Cash Flow / Total Cash Invested) x 100

High cash-flow markets (typically found in secondary or tertiary markets) often have higher cash-on-cash returns but may offer lower appreciation over time.

3. Appreciation Potential:
Evaluate potential appreciation in different markets by studying:

• Historical Market Trends: Tools      like Zillow, Redfin, or local MLS can give you historical price data. Look      for cities with strong population growth, job creation, and infrastructure      development.
• Cap Rate Compression: In      appreciating markets, cap rates tend to compress over time, signaling      strong property value increases. You can track cap rate trends on      platforms like CoStar or LoopNet.

4. Market Analysis Tools:

• Mashvisor: Provides in-depth      analysis of neighborhoods for both short-term and long-term rental      properties, including cash flow estimates, cap rates, and appreciation      potential.
• Roofstock: A marketplace for      single-family rentals that allows you to compare cash flow and      appreciation potential across various markets.
• Zillow’s Market Reports: These show      market appreciation trends across different cities, helping you spot      high-growth areas.

5. 1031 Exchange:
If you sell your current property and reinvest in a higher cash-flowing property, you may want to consider a 1031 exchange to defer capital gains taxes. This can maximize your investment potential when moving to a higher cash-flow market.

6. Comparing Markets:
High appreciation markets (like Los Angeles, San Francisco, etc.) tend to have lower cap rates and higher property prices, making them less cash-flow-friendly but better for long-term appreciation. High cash-flow markets (e.g., parts of the Midwest or Southeast) offer higher yields but lower appreciation.

A strategy could be to diversify: Sell your high-appreciation property in LA, then invest in a few smaller, higher cash-flow properties in secondary markets to balance both cash flow and growth.

If you'd like help analyzing financing options or structuring a 1031 exchange for a new property, I’d be happy to assist!

Best regards,

Drago

Tim Ryan · Answer

Your property being in LA mean you are already in one of the best appreciation markets in the world.  $500 is not very much monthly net income if this is a decent value rental. So you probably have a decent amount of equity now that is just sitting there. Let's hope we don't get "unrealized gain taxes"!  Buying out of state with LA money could get you a lot more cash flow since you'll now be using the equity. You can get appreciation also if you know where to buy. DM me and I'll give you some advice on where to buy.

Alex Bekeza · Answer

@Ryan Dragon What part of LA are you in? We host a monthly REI Meetup in Woodland Hills and there are many folks in our group grappling with similar scenarios. I'd encourage you to come join us sometime and network with other investors in your shoes. https://investorpropertyloan.com/reor/See some clips from previous meetups here! https://www.instagram.com/p/C6KFqlfykIB/?hl=en.

Evan Polaski · Answer

@Ryan Dragon, before you sell anything, I would be looking at these supposed "higher cash flowing" properties.  I don't know what your expectation is, but I live in Cincinnati, which is typically considered a "cash flow market".  I can say, there are very few deals here that I would buy.  And, as Nathan noted, you are likely giving up huge appreciation potential, which will likely never be replaced by cash flow.

But at the end of the day, if you are in a declining market in LA and are able to find great deals in higher cash flow areas, taking into account the likelihood of needing to outsource everything and additional travel costs to visit the properties a couple times per year, and you don't really care about appreciation, then it could work for you.

When is it time to move up

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