What to do with equity in So Cal? Sell, keep or upgrade?

Newport Beach, CA · Member since 2016 · 8 posts · 5 votes

This post is inspired by show #238 @Michael Swan. I have about $250k worth of equity in a SFR rental in a suburb of Los Angeles I bought in 2010. The property about breaks even and the tenants are easy. I made the money to buy the house through flipping in college, but am no longer flipping and have a full time career in another industry. I am 28 now.

Is trying to 1031 this into a bigger multi unit the way to go? Where would I begin to look? (not in so cal!)

Does buying a bigger property using the proceeds of a sale that hasn't happened yet limit your buying buyer? or ability to get good financing?

Thanks to anyone who has insight!

0 Reply

113 views

Most Popular Reply

Brendon Woirhaye

Rental Property Investor · Whittier, CA · Member since 2014 · 324 posts · 268 votes

If it is only breaking even, there is probably better use of your money. If you 1031 into a bigger multiunit, you avoid the taxes but you may increase your involvement in the rental business again.

Buying a bigger property with the proceeds would make your new purchase contingent on the sale of the current one, that would be pretty undesirable in a seller's market. You also need to look at the 1031 rules - after you sell the first place, you have 45 days to identify a replacement property (identify a number of potential properties), and 180 days from that time to close.

1 Reply

See this reply in the discussion

30 Replies

Jump to latestLatest

Sort by

Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y
@Cameron Campbell, Michaels story is a text book usage of the 1031 to change geography and sectors of real estate to maximize return and place your money where it can reap the greatest returns in appreciation and cash flow. Of course like any success in real estate it starts with the buy!
Others (and your own due diligence) can speak to the sector and geography you want to pursue. But you're absolutely right that sometimes the calendar of a 1031 can cause you issues in getting a good buy - especially when it's an asset class that has a smaller pool of potential targets (like large MF etc).
There's two answers to this. The first is systemic. Once you're in the larger asset class sector longer periods of due diligence and contracts with contingencies become more the norm. Sellers and buyers understand and the contract time itself becomes part of the buying period for the 1031 exchange as well as the 45 days after sale.
The other thing that becomes used much more frequently is the reverse exchange. In a reverse exchange you locate your purchase first. But your QI actually takes title to it as what is called the Exchange Accommodating Titleholder). The property is under your control but not in your name so when you complete your sale, your replacement property is ready for you. These are more complicated and expensive than a regular 1031 but worth the cost when the calendar is not your friend.
The 1031 Investor5137 Reviews
Website View Page
0 Reply
Antoine Martel
Investor · Los Angeles, CA · Member since 2016 · 577 posts · 240 votes
9y
I would 1031 the property into a large multi family out of state.
0 Reply
Brendon Woirhaye
Rental Property Investor · Whittier, CA · Member since 2014 · 324 posts · 268 votes
9y
If it is only breaking even, there is probably better use of your money. If you 1031 into a bigger multiunit, you avoid the taxes but you may increase your involvement in the rental business again.
Buying a bigger property with the proceeds would make your new purchase contingent on the sale of the current one, that would be pretty undesirable in a seller's market. You also need to look at the 1031 rules - after you sell the first place, you have 45 days to identify a replacement property (identify a number of potential properties), and 180 days from that time to close.
1 Reply
Cameron CampbellPro Member
OP
Newport Beach, CA · Member since 2016 · 8 posts · 5 votes
9y
Thanks @Dave Foster. QI is the intermediary, correct? Any insight on what a 1031 service would charge, is it fixed or a product of the buy price. (Would likely be in the $1M range for me.)Is this something a RE attorney would handle or a separate party?
Antoine Martel good call, but then the real question is WHERE? ha
0 Reply
Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
9y
@Cameron Campbell
I would totally use all that equity to buy a 1 million dollar MF in a cash-flow market in the midwest. You could get a commercial loan for 25% down and 25 year AM and all your equity would come from this property via a 1031 exchange. I'm just starting to get into this in Kansas City and I'm not expert, I've just done a lot of research and now own 6 units (aiming for owning 20 units by the end of the year). I also heard that he debt is "better" once you get into loans over 1M. But turning the 250k in appreciation into at least 1000/mo cash flow is a no brainer to me. That podcast by Swanny was awesome!
Podcast Guest on Show #373
0 Reply
Manolo D.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Cameron Campbell You don't like the appreciation you're getting? If you sell and buy now, it is a higher price, i wonder if it's not worth it to cash out and put it on a stock market on govt bonds, have it sit until market dips and start buying. Not that good on avoiding taxes.
0 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
I'd use equity, from wherever I could get it, to buy more income property. I'm not sold that a 1031 has to be part of the equation. I've bought and sold for 10 years. Started with 8 units. Have much more now. Never 1031'd
0 Reply
Gordon CuffePro Member
Investor · Roseville, CA · Member since 2009 · 1k+ posts · 583 votes
9y
@Cameron Campbellyour in a great situation for a young age. If you desire a nice passive income then it is a great time to sell as we are closing on a peak in the real estate cycle . You can follow the supply of homes for sale to determine when the appreciation cycle is stopping .you can find good cap rates in many Midwest cities in decent neighborhoods. Lee ripma is correct in that Kansas City is a great city where many out of state investors are buying cash flowing properties. It is very easy to do a 1031 exchange and a attorney is not needed.
0 Reply
Leslie Pappas
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
9y
Originally posted by @Cameron Campbell:

This post is inspired by show #238 @Michael Swan. I have about $250k worth of equity in a SFR rental in a suburb of Los Angeles I bought in 2010. The property about breaks even and the tenants are easy. I made the money to buy the house through flipping in college, but am no longer flipping and have a full time career in another industry. I am 28 now.
Is trying to 1031 this into a bigger multi unit the way to go? Where would I begin to look? (not in so cal!)
For some it can be, especially if they are ok with investing out of state.
If you're an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about if you decide to perform a 1031 exchange.
https://www.biggerpockets.com/blogs/7993/48972-set...
0 Reply
Cameron CampbellPro Member
OP
Newport Beach, CA · Member since 2016 · 8 posts · 5 votes
9y
@Lee Ripma those are my thoughts exactly. Haven't looked much in KC, but will start.
@Manolo D. I LOVE the appreciation I GOT, this is an historic high for the area and I don't think it will continue. If I sell now and move to liquid assets my tax exposure is pretty high.
@Cody L.do you just pay the capital gaines tax?
@gordon cuffe Thank you!
@Leslie Pappas Ill check that out!
1 Reply
Hunter Peterson
Rental Property Investor · Austin, TX · Member since 2017 · 38 posts · 4 votes
9y
@Cameron Campbell I'm in a similar boat, but less than $250k equity and I'm the owner occupant so no need for 1031. Interested to see what markets look promising like those suggested above. Really curious if anything in California makes sense, or if it's really that crazy and just nowhere makes sense right now.
0 Reply
Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
9y
If you want to stay in real estate, then a 1031 may be a good option for you. If you want to invest elsewhere or keep your money on the sidelines in an alternative investment, then you can consider a Monetized Installment Sale. A lot of Californians are using this strategy to cash out of their highly-appreciated properties and defer their taxes for 30 years.
I don't have any money directly invested in real estate right now. I think the market is overpriced with few good buying opportunities. Everybody wants to 1031 out of their highly-appreciated investments and everyone has the same 45-day clock ticking as they try to find a replacement property. Investors are overpaying for properties simply to defer the taxes. I see a lot of poor investment decisions being made. This house of cards could come tumbling down.
0 Reply
Manolo D.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Cameron Campbell yeah, i'm not the right guy to talk to holding stuff. hehe. I've read somewhere that you could defer it but i'm a skim reader when it comes to something that's not in line with what i do. But in general, id put it somewhere that taxes can be deferred, not sure if changing strategy will do that; or cash out and buy more small ones with great tenants until it will grow enough for commercial portfolio. I don't know much about holding, but in the back of my mind if equity drops in CA cashed out or kept, it will drop bigger or wiped out in other states. I've been to ND during the oil boom, 1/1 apartment was renting 1200/mo and killing it, now they dropped to 430/mo and nobody is renting it. so i couldn't imagine how they could pay mortgage on those.
1 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
9y
Originally posted by @Cameron Campbell:

This post is inspired by show #238 @Michael Swan. I have about $250k worth of equity in a SFR rental in a suburb of Los Angeles I bought in 2010. The property about breaks even and the tenants are easy. I made the money to buy the house through flipping in college, but am no longer flipping and have a full time career in another industry. I am 28 now.
Is trying to 1031 this into a bigger multi unit the way to go? Where would I begin to look? (not in so cal!)
Does buying a bigger property using the proceeds of a sale that hasn't happened yet limit your buying buyer? or ability to get good financing?
Thanks to anyone who has insight!
Congrats and that is most impressive especially during college. IMO that would depend on the sfr location, even bilionaire investors of LA multis hold some prime located sfrs in their holdings. Also keep in mind LA is number #1 in the nation for total SFR profits ( cash flow + equity) since 2000. SF and SD are 2 and 3. Location matters.
Good luck!
1 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Originally posted by @Cameron Campbell:

@Lee Ripma those are my thoughts exactly. Haven't looked much in KC, but will start.
@Manolo D. I LOVE the appreciation I GOT, this is an historic high for the area and I don't think it will continue. If I sell now and move to liquid assets my tax exposure is pretty high.
@Cody L.do you just pay the capital gaines tax?
@gordon cuffe Thank you!
@Leslie Pappas Ill check that out!
Sure. If I buy a property for $x, sold it for $y, then $y-$x is my income and I pay tax on it. Same way I pay tax on my properties where their income is $a, the costs are $b, so I made $a-$b and pay tax on that.
I'd love to switch to a simple national sales tax / VAT based system and get rid of the "income" tax since "income" is so hard to define and the reason our tax code is 1000's of pages long. Think about how many rules are in place, and millions of human hours are wasted trying to make sure 'income' is properly accounted for.
0 Reply
Cameron CampbellPro Member
OP
Newport Beach, CA · Member since 2016 · 8 posts · 5 votes
9y
@Hunter Peterson I have been looking at properties in Dallas, Phoenix, Memphis, KC, etc. Not sure where would be best. In CA I have looked at Bakersfield and some other central valley cities, the only places that you can get returns, but not sure I love the areas or tenant pool.
@Thomas Rutkowski I had never heard of the Installment Sale, I will look into it!
@Manolo D. Good points. That is the fear that you move the equity into a cash flow play, but then instantly lose the equity when the market drops. Just a matter of finding the right market I guess...and not one that is based on a boom or bust type economy like oil, etc.
@Matt R. The property is in La Mirada, CA (not far from Disneyland, South LA county, nearly Orange County). I flipped a house about a year ago in the same area and sold for $500k, in 2010 you could buy in this neighborhood for $250-$300k. So that is the fear that if it drops, it drops back to low $300's!
@Cody L. Copy that. If I sold I would have about a $40k tax bill. Totally with you on the taxation issue, but thats a whole other topic we could go for ages on!
0 Reply
Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
9y
I can introduce you to someone right in Newport Beach that can do it for you or explain how it works.
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
9y
Originally posted by @Cameron Campbell:

@Hunter Peterson I have been looking at properties in Dallas, Phoenix, Memphis, KC, etc. Not sure where would be best. In CA I have looked at Bakersfield and some other central valley cities, the only places that you can get returns, but not sure I love the areas or tenant pool.
@Thomas Rutkowski I had never heard of the Installment Sale, I will look into it!
@Manolo D. Good points. That is the fear that you move the equity into a cash flow play, but then instantly lose the equity when the market drops. Just a matter of finding the right market I guess...and not one that is based on a boom or bust type economy like oil, etc.
@Matt R. The property is in La Mirada, CA (not far from Disneyland, South LA county, nearly Orange County). I flipped a house about a year ago in the same area and sold for $500k, in 2010 you could buy in this neighborhood for $250-$300k. So that is the fear that if it drops, it drops back to low $300's!
@Cody L. Copy that. If I sold I would have about a $40k tax bill. Totally with you on the taxation issue, but thats a whole other topic we could go for ages on!
Right on. So maybe an average location for SoCal and consider average for SoCal is even with Austin, TX. I doubt we will see that in the low 300s in this lifetime again. Good luck!
0 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
Originally posted by @Cameron Campbell:

@Hunter Peterson I have been looking at properties in Dallas, Phoenix, Memphis, KC, etc. Not sure where would be best. In CA I have looked at Bakersfield and some other central valley cities, the only places that you can get returns, but not sure I love the areas or tenant pool.
@Thomas Rutkowski I had never heard of the Installment Sale, I will look into it!
@Manolo D. Good points. That is the fear that you move the equity into a cash flow play, but then instantly lose the equity when the market drops. Just a matter of finding the right market I guess...and not one that is based on a boom or bust type economy like oil, etc.
@Matt R. The property is in La Mirada, CA (not far from Disneyland, South LA county, nearly Orange County). I flipped a house about a year ago in the same area and sold for $500k, in 2010 you could buy in this neighborhood for $250-$300k. So that is the fear that if it drops, it drops back to low $300's!
@Cody L. Copy that. If I sold I would have about a $40k tax bill. Totally with you on the taxation issue, but thats a whole other topic we could go for ages on!
Yeah, I don't want a $40k tax bill. But I also don't want to deal with a 1031, which, even if you do, just adds that taxable equity into a new property. Kicking the can down the road so to speak. And I think, long term, taxes are going to go up (as we becoming a society more dependent on government) so I'd almost rather take my tax lumps now vs. take them once this new generation of "gimme yer money!" comes into power.
1 Reply
Thomas RutkowskiPro Member
Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
9y
As a planning exercise, the monetized installment sale is a little easier than a 1031. In a 1031, the capital gain is always there staring at you. If you sell, you trigger the taxes. It is certainly kicking the can down the road.
In a monetized installment sale, the seller gets cash after the closing. Since the taxes are deferred for 30-years, you have two things working in your favor. The money technically is owed to the government, but you are holding it for 30 years. The present value of the future tax obligation is very small with 30 years of compounding growth. So you can set aside the "present value" of the future tax and keep the rest for yourself.
Additionally, the future tax rates could change, but inflation alone should outweigh any tax implication. Inflation alone brings the future value down ~50% in real dollars. Tax rates would have to double.
Since you essentially have a tax-free loan of the government's money, putting it to work in a tax-free vehicle is the best of both worlds.
0 Reply
Jennifer Slaughter
Real Estate Agent · Fort Collins, CO · Member since 2016 · 246 posts · 142 votes
9y
I am also evaluating equity in my local investments and I plan on using it to scale my out of state investments. I like what people have said about 1031 into another property that could perform better if you are only breaking even.
0 Reply
Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
9y
I am not sure I would call 3k a month equity gains same as breaking even. We get that it is cash flow neutral....yes.
0 Reply
Brian Ploszay
Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
9y
You had a run up in value because you bought this at the right time. The So Cal market had a nice recovery. And then some. Investing out of state, in a larger multi-family has a lot of downside. You are relatively young and you have another career. Don't get involved in something that can take a lot of time and energy. Apartment buildings do not run themselves. Even harder when you are out of state. Don't assume that a property manager does a good job. I'd keep the current investment.
0 Reply
Cameron CampbellPro Member
OP
Newport Beach, CA · Member since 2016 · 8 posts · 5 votes
9y
@brian ploszay I agree I did enjoy quite an upswing, and by no means do I expect a hands off investment. I have a relatively flexible career now and plenty of energy to manage a management company so to speak. My goal is to grow my portfolio to a point in which I have the freedom to continue on my career path or choose to live off passive income. You are correct that the investment isn't "breaking even", as I have a tenant paying my mortgage...I am just exploring the idea of putting the equity to work in a greater capacity and using the leverage to buy a property that would generate more income.
0 Reply
Carlos Altamirano
Investor · Los Angeles, CA · Member since 2015 · 325 posts · 75 votes
9y
Hello @Cameron Campbell
Great situation you are in at such a young age. Personally I like multi-family. I would consider 1031 that equity into a multi-family. Easier said than done of course. Multi-family is not passive by any means, specially out of state. Maybe this is your opportunity to get into that sector. Good luck !
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.