Liquidating a San Diego condo Portfolio

1031 Exchanges
5yFollow

Liquidating a San Diego condo Portfolio

Dennis Nikolaev
Member since 2019 · 84 posts · 32 votes

I got a mind-bending challenge.

I want to liquidate my 6 rental condos and move the funds into one larger property.
The condos are all over San Diego and the leases are all over the different months.
I can't imagine a reasonable plan that may fit into the 1031 exchange.

Unless I can sell the whole portfolio all at once with tenants in place. However, I never hear people do it.

I desperately need advice, how to accomplish it without losing much market value.

Dennis

4Reply
82 views

Most Popular Reply

Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
5y

@Dennis Nikolaev, consider locking up your replacement property first through a Reverse Exchange.  This would then give you 180 days to sell all of your old condos and purchase the new property from the entity set up by the 1031 QI.

.

The 1031 Investor5137 Reviews
WebsiteView Page
11Reply
See this reply in the discussion

29 Replies

Jump to latestLatest
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    Any advice to share publicly?

    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    Any advice?

    0Reply
  • Kenneth Donaghy
    Real Estate Broker · San Diego, CA · Member since 2016 · 355 posts · 195 votes
    5y

    @Dennis Nikolaev Any advice I would give would be situational specific. The playbook is too big to go into every scenario.

    A good start is be clear on your goals. Work with a great 1031 Exchange accommodator, understand the rules completely and work with a great realtor who understands your clear communicated goals and vision. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    5y

    @Dennis Nikolaev, consider locking up your replacement property first through a Reverse Exchange.  This would then give you 180 days to sell all of your old condos and purchase the new property from the entity set up by the 1031 QI.

    .

    The 1031 Investor5137 Reviews
    WebsiteView Page
    11Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    @Dennis Nikolaev selling as a portfolio is an option, but it is not going to net you highest value. You will have to discount the portfolio because condos are more desirable to owner occupied. This may still work out financially better.

    One thing you can do is stop giving lease terms and change all your leases to month-to-month. This would give you flexibility to sell all of them at the same time. Offer them first to the tenant, then place them on the market with aggressive pricing so they sell around the same time. 

    Consider the possibility of a hybrid strategy. Sell some properties as part of a 1031 and on others just pay the capital gains. You may be able to offset the taxes losses on the new property. Run the numbers on each property and figure out which ones will have the largest tax burden. Focus on those being exchanged. 

    Be aware that doing an exchange will transfer property basis. Although you are deferring taxes, you are also going to have less deprecation expense to claim on the new property. That means you will end up with more taxable income, then if you acquired the new property outright. Depreciation and interest are two of your biggest expenses that reduce taxes, so don't forget to factor this into your numbers.

    Ultimately an exchange defers taxes. The only way to avoid the taxes is by dying. It sounds good in practice to keep exchanging to larger properties, but at some point you get old and tired. You will either get sick of buying bigger properties or you will get sick of being a landlord. There is also the possibility that they change tax laws. Your future tax rate could be higher or lower. A future exchange may or may not be possible. 

    My point is cashing out some properties and paying some taxes along the way may make sense. The future is unknown and escaping taxes forever is unlikely. 

    5Reply
  • Alex Olson
    Real Estate Broker · Kansas City Metro · Member since 2015 · 2k+ posts · 1k+ votes
    5y

    @Dennis Nikolaev I recommend doing exactly that, selling all at once. Put them all on the market at the same time and make sure they all close at the same time. Selling them as a portfolio will be fine. Now, if thy are all owner occupied, it makes it much harder but doable if you have them priced correctly (competitively) and you know the market that they will all go under contract at about the same time. Then you need to make sure they all have the same closing date - give them leeway on closing date time so they all feel comfortable, and make sure they are all contingent on each other. What market are you going to exchange in to? Do you know what kind of equity you will have?

    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    Thank you for the ideas. It helps to shape my vision.

    I hope to net 1.2 mill and focus on STR friendlier properties in the same market and building a multifamily in San Antonio.

    So 1031 is critical. The goal is to preserve the working capital to scale up. 

    Selling with tenants in place has a huge advantage as I'm dependent on the cashflow.

    Another advantage of selling the whole portfolio is that I dont have to rush. If I find a buyer in 6 month or a year, I dont have risks or losses. 

    If I was going to sell it as a portfolio with tenants in place, what kind of discount from market is expected ?

    1Reply
  • JJ P.
    Real Estate Agent · San DIego · Member since 2019 · 177 posts · 185 votes
    5y

    As usual, @Joe Splitrock, your advice is spot on and the clear voice of someone who has actually done these things and can speak from experience.  

    You can 1031 part of the portfolio, without doing the whole kit and kaboodle. You could list them all and 1031 the ones that fit into the timeline easily. I think the discount and ease of sales would depend on the size of the portfolio and the return on investment for the new buyer. Our littlest condos in SD can be $350K+, so a portfolio might be very large and offer a lackluster ROI. Lots of investors are looking further afield for the exact same reasons that you are. The end user Owner Occupant is always going give you your top sales price.

    2Reply
  • Chris Ng
    Investor · Saint Johns · Member since 2021 · 34 posts · 16 votes
    5y

    @Dennis Nikolaev If you are exchanging some condos for STR properties and some for the multifamily in San Antonio, I don't get why you need to sell them all at once. It seems like separate exchanges will do.

    Realtors: Is it that hard to sell rental properties with tenants in San Diego? I'm looking to unload some of mine, too. Realistically, how long does it take?

    0Reply
  • Tony Mai
    Rental Property Investor · Los Angeles, CA · Member since 2016 · 137 posts · 80 votes
    5y

    @Joe Splitrock

    Taxes is inevitable. If you have heirs to the estate, the estate will pay the taxes you owe at your death. If you don’t have heirs the state takes your property. So eventually the taxes are paid one way or another.

    It will be difficult to sell all at the same time but not impossible. If it were me I would follow your strategy. Do a partial exchange with the properties with the largest cap gains and sell some others and pay the taxes. You can always pay down the debt or buy another investment or enjoy life.

    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    Love you all guys ! Through a discussion I gain a strategic vision!

    Simultaneous sale is no longer required!

    as long as I keep doing RE transactions, I can keep on folding 1031 sales into them!

    the propert class I'm looking for is within 2millin range, so all I need for the downpayment is 400k  that I can net from only 2 properties. As I keep selling I can keep on buying.

    1. I assume 1031 doesn't allow the processed to be used for paying down exising mortgages. 1031 is only for new sales.

    2.to the experienced agents here: how much of a discount is expected selling with tenants in place? What are the days on the marketthese days for owner occupied vs with tenants?

    2Reply
  • Tyler WarnePro Member
    Real Estate Broker · Helena, MT · Member since 2016 · 65 posts · 28 votes
    5y

    @Dennis Nikolaev I have seen these sell as a portfolio but there is usually a little discount which is what brings a new buyer. 10-15% then the new buyer is in a position to liquidate one at a time a little easier if needed and or that is the incentive.

    0Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Hi @Dennis Nikolaev

    I sold my 8 condos one at a time here in San Diego and 1031 exchanged my way to financial freedom and am retiring from my 20 yr teaching job this summer and am financially free.  You can do it too.  I just sold one condo at a time and bought  10 unit, 8 unit, 12 unit, another 12 unit, 15 unit, and a 21 unit, and a 24 unit.  One condo we did a straight sale on and paid the taxes on that one.  If I can do it, you can too!!  

    I 1031 exchanged them for apartment complexes in NE Ohio too!! Feel free to message me to discuss.  I live in Mira Mesa in San Diego too!!

    Swanny


    5Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Tony Mai:

    @Joe Splitrock

    Taxes is inevitable. If you have heirs to the estate, the estate will pay the taxes you owe at your death. If you don’t have heirs the state takes your property. So eventually the taxes are paid one way or another.

    It will be difficult to sell all at the same time but not impossible. If it were me I would follow your strategy. Do a partial exchange with the properties with the largest cap gains and sell some others and pay the taxes. You can always pay down the debt or buy another investment or enjoy life.

    Not sure about that Heirs get stepped up basis.. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Tony Mai
    Rental Property Investor · Los Angeles, CA · Member since 2016 · 137 posts · 80 votes
    5y

    @Jay Hinrichs you are right, heirs do get a stepped up basis but eventually the estate will need to pay taxes in the form of an inheritance tax when assets exceed inheritance tax limits. Eventually taxes are paid in one form or another at some point and time.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Tony Mai:

    @Jay Hinrichs you are right, heirs do get a stepped up basis but eventually the estate will need to pay taxes in the form of an inheritance tax when assets exceed inheritance tax limits. Eventually taxes are paid in one form or another at some point and time.

    Well according to many no one sells they just keep owning and transferring with stepped up basis or 1031  as long as the rules of the road as they exist stay on the books.  I dealt with this a lot in my Timber days.. Old forest land owner  Zero basis 3 million in standing timber wont log it does not want to pay the tax.. Second the kids inherit we are logging at the stepped up basis.  Very common scenario so it was important for us in our marketing to make an effort to understand who inherits.. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    @Michael Swan What happened that you had to pay taxes on 1 sale? How quickly you sold them all? How long ago? Why NE Ohio?

    1Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    We decided to pay taxes on a few of those.  We did not have to do so,

    0Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Contact me when you can and message me here,

    I love this stuff my friend!!

    Swanny

    0Reply
  • Connor Nellans
    Real Estate Agent · San Diego, CA · Member since 2017 · 28 posts · 24 votes
    5y

    @Dennis Nikolaev it would depend on your equity position in your condos as to whether you would have to sell them all at once or not to get into a $2mil deal here in San Diego. You will likely need at least 20% down for an investment property loan. Depending on the values of your condos and how much equity you have in them you may need to only sell one of them or all 6 of them.


    This last October, I 1031ed one condo I owned in the Minneapolis area into one large multifamily rental here in SoCal. This condo was one of my very first rental properties and had a good chunk of equity in it so this worked well. I have experience on the investing side as well as realtor side when it comes to 1031 so please let me know if you have any questions! Would be happy to help. 

    1Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    @Connor Nellans Wow, what kind of Capitalization Rate is possible to achieve in SoCal on multifamily? Did you come with partners?

    You are right, I may not have to sell all. Just most of them. - good call.

    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    @Michael Swan How long did it take you to sell and close on all 8 condos?

    0Reply
  • Michael Swan
    Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes
    5y

    Hi@Dennis Nikolaev

    From May of 2015 until Sept of 2017 1031 exchanged and traded all Condos for a 24 unit, 21 unit, 15 unit, 12 unit, another 12 unit, a 10 unit and an 8 unit.  We sold one condo and paid taxes on one.  We did not own it that long so it was not much of a tax hit.  That was trading up 7 condos for over 100 front doors.  We went from $50,000 cash flow on the Condos to our now $150,000 apartment complexes we still own.  Sold the 8 unit and the 10 unit.  I will be selling one of the 12 units now under contract in about 60 days.  

    Also,  friends and family went in with me on a 57 unit and a 34 unit too.  Plus I forgot about another 24 unit went in with friends too and a 32 unit too!!

    Swanny

    0Reply
  • Dennis Nikolaev
    OP
    Member since 2019 · 84 posts · 32 votes
    5y

    @Michael Swan If it worked in 2015, it is going to work in 2021! 

    happy 4/20 :)

    0Reply
  • Emy Bernardo
    Investor · San Diego, CA · Member since 2017 · 112 posts · 92 votes
    5y

    If you are considering reinvesting in San Diego for STRs, you may want to think again. See this thread on a new STR ordinance that was passed, restricting STRs to 1% of the housing stock. https://www.biggerpockets.com/forums/617/topics/946763-san-diego-limiting-short-term-rentals?

    As far as DOM for condos, that will depend on the area, but in my area (92117) average DOM in March was 21 days, median sales price $484k.  As far as a discount for tenants, I don't necessarily think that will effect the price, but it may take longer to find the right buyer depending on when the lease is up and if the rent will cover the buyer's mortgage payment.  Sellers' will often offer to make up the difference to sweeten the deal. You could also offer "cash for keys" to your tenants as incentive. With so little inventory on the market, it's likely the condos will sell fast, esp. if priced right. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free