1031 from San Diego to where?!?

Question

I’m looking to 1031 a $1M duplex I own in San Diego due to it’s low Return on Equity to a place in the south east. I’ve been researching areas around Orlando, Jacksonville, and Tampa. Any suggestions on areas or brokers I should start contacting?

Footnote: this will be my first 1031 exchange! Any help would be greatly appreciated!

Brad Penley · Answer

Great points!

$1M sale price

$642k owed

NET $1000/mo

I was doing the return on equity equation and was seeing that I wasn’t using my equity for the best returns. However San Diego does have a strong appreciation market.

Bill B. · Answer

@Brad Penley

Wow yeah$12k/year on $360k. Not to good, but not negative in SD, that’s saying something

That’s most of the numbers. Except: What’s the profit? (What did you pay? To determine how much capital gains taxes would be due.) and how many years have you been depreciating that amount? (Depreciation recapture due) Just trying to make sure the 1031 part is worth it as opposed to just selling and then finding your next target.

Brad Penley · Answer

Paid $45k in 2014

$5k in rehab

Have been depreciating since 2014.

Thanks for your help!

Nick Foster · Answer

@Brad Penley, you could sell that property, buy 2-3 condos in along coastal SD, rent them out on AirBnB, double to triple the net cash flow, and continue to enjoy SD’s phenomenal appreciation.

I would never shop my money OOS, you live in one of the best appreciation markets in the country. Just my two cents.

Steve K. · Answer

@Nick Foster Completely agree with you on this and have been wondering why so many in these threads are sending money out of the historically best real estate markets to go into more speculative locations. Logistical issues of OOS investing aside, buying in the rust belt or the South you may get a measly couple hundred bucks more a month in cash flow. But property in San Diego appreciates by hundreds of dollars PER DAY.

Brad Penley · Answer

Yes this is a true rental and not my primary residence! Thanks for reaching out! If I decide to pull the trigger on this I will definitely reach out

Bill B. · Answer

I can’t speak to Vegas MFR rents, but rents for SFR have actually increased in Vegas before during and after the recession. And those increases actually accelerated during the recession. I raised rents almost 10% yearly from 2008-2013. Rent growth has since dropped back down to about 5-7%, about the same as before the recession.

Cashflow skyrocketed in Vegas during the recession (at least in my market, NW valley SFR) as people who had recently, or perhaps only, ever lived in houses had zero interest in renting an apartment. They wanted yards, garages and in unit laundry.

But like Dan mention on his duplex my ROE is dropping like a rock as the equity increases.

Below is how wacky the numbers can get. Which numbers are good and which are bad?

Return On Equity

Cash On Cash

ROI  (Realized)

Appreciation

On cash

On purchase Price

5.661%

24.779%

38.653%%

442.9%

113.5%

Dan H. · Answer

Using ROE to determine the quality of return on an RE investment that has appreciated is analogous to not wanting to earn more income because you will be taxed more.  As an investor you should desire market appreciation yet the rents will typically (virtually always) lag the market appreciation.  The market appreciation increases the equity (LTV becomes lower than at purchase).  So it is almost impossible to have the market appreciation without reducing the ROE.

We have a duplex with a lot of market appreciation that has a current rent to purchase ratio over 4% (1% is considered good, 2% outstanding).  However, its ROE is mundane.  This is because the current value of the property has resulted in huge equity and the rent has not gone up as fast as the equity.

I suspect if you used ROI as your measure of return that you would get a very different picture.  ROI has a different set of short-comings buy I refer to it just to give the opposing perspective on a San Diego RE.

By the way, I consider it investing if I have researched the market and have a basis for any expectation including an expectation of market or rent appreciation.  In addition, I do not see how expecting cash flow to remain stable or increase is any different than expecting RE market prices to remain stable or increase.  To see why I have this view look at what happened to the cash flow of RE in Detroit or Las Vegas during the Great Recession.  Cash flow can decrease just as market prices can decrease.  I suspect that rent in Las Vegas declined more than RE prices but I do not have the numbers to validate my belief.  I know there were neighbor hoods with many empty homes.

Good luck

Nic Cooper · Answer

@Brad Penley

Long term single family investor here in SD.  I was around for the rise in the early 2000s and then the crash.  And then the rise to where we are now.  I realized that my rental(s) had not been cash flowing much.  I did the numbers on what my ROE was.  Truly pitiful.

You gotta ask yourself. Do you want to speculate and wait on real estate to rise or fall, betting on appreciation.  Or do you want to invest and any appreciation is a bonus on top of your cash flow.

2 sides to each coin.  Investor vs speculator.   I think you can make money in any market depending on what your goals are.  Economy of scale has quite the ring to it.  While some may discount a few hundred bucks a unit.  Imagine if you had 50 or 100 units.   Yup those units exist in other areas of the country and you can buy one. Probably sooner that you think using your equity that you gained here.

Also I am using Exeter Exchange for my 1031.  They are in San Diego and were very helpful as a QI.  David Blair helped me out there. CA also has a clawback provision on your 1031.  So be aware of that.

Good luck and congrats on all that equity.  Now put it to work.

Tiffany Hoffman · Answer

@James M. makes a fantastic point! The refi would open up cash to go invest somewhere else, while still taking advantage of San Diego's amazing long term appreciation. Literally had a conversation yesterday with a woman who has done exactly that (buy, hold, refi, buy more, repeat) in San Diego & accumulated quite the portfolio. Would you mind sharing what area the duplex is in? Based upon valuation either coastal or uptown area?

Also, not to add more 2 cents, but what are your goals? Would you rather have the cash flow or appreciation? I have a client who, although had lots of cash flow in the short term, over time they lost money by pulling it out of San Diego and taking it to Alabama. They are now selling all of that property and bring every dime back to San Diego.

1031 from San Diego to where?!?

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