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?
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.
I'm a newbie, but have you considered refinancing your rental to cash out most of your equity to invest in the multi-unit? You get to keep your existing property and have money to put down on another property somewhere else with higher cash flow.
I think the multi route sounds great. I have not purchased any yet but I did manage 14 LA units and it was easy as pie at that particular location. Which will be 24 condos in a couple months. That wise investor walks away with 8 figures for his patience. He was probably cash flowing close to 10k a month at the end of the 14 units life. He was out of country ( Sweden). It was the location that made it work for him I think. He understood some multi management challenges can be partially avoided by simply picking the right zip code perhaps.
@Solomon Cheng Yes I have considered that. My thought was the risk there is if you take out up to 80% LTV and then the market dips, your dept to equity ratio tanks and may be difficult for future financing...
@Matt R. One could only hope to get an "easy as pie" must family, but i am looking! Thanks!
@Cameron Campbell. I also have a rental that about breaks even, but with a little less equity than yours and I am seriously considering taking my equity down to 20% for additional investing.
Question for all: With a property that currently breaks even, how concerned should I be about market dips in the next few years?
@Cameron Campbell You might consider re evaluating the structure on your loan. I'm a huge believer in finding cheap money and using it to your advantage as best as possible. Talk to a bank and see if you can't look into refinancing with a low interest rate loan and decrease your equity share that way you can use the funds to purchase something else and not get hit with a capital gains tax or go through with a 1031.
I manage a portfolio of properties that generate 10%+ rates of return in Newport Beach. The return rate is so great because of timing, but more significantly it's because of the type of loans on the properties. Most of the properties have monthly payments below 2k/month with income at $3500/month or more. The properties have increased in value by nearly 75% and are prime opportunities to cash out and refinance the loans with the expectation to by more property.
I definitely agree with everyone about looking for more units in your next purchase, but not a terrible thing to try to hold what you have in southern California for the sake of appreciation and turning that property into your bank with refinances. Don't hesitate to reach out if you'd like to discuss more!!!