Tough Decision whether to sell my one unit and buy more

San Francisco, California
Buying & Selling Real Estate
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Tough Decision whether to sell my one unit and buy more

Brian Cassanego
Member since 2022 · 24 posts · 9 votes

Hello,

Brand new here and would love anyone's input on this. I own a condo in San Francisco. Bought it in 2004 and it has appreciated quite a bit. I have a little over 1M in equity and I am currently renting it and cash flowing a little over 1K per month. Thanks to prop 13, my property tax is only around 12K, my mortgage rate is 3% but my HOA is now 1K per month. But still, I am cash flowing and I have a prop manager in place (as the rules in SF are clearly geared towards tenants rights and didn't want to screw anything up) and I have never once even talked to my tenants (they pay rent on time every month). This is as passive income as I can get. So, it's not a bad situation. And in SF, building new residential units is very difficult, and the fact that SF is a peninsula (finite space to build) and there are great jobs here, it should always be a great market.

However, I keep on thinking if my 1M in equity can be better served in a different market buying multiple properties that may appreciate more and generate better cash flow. I did recently take a 400K HELOC out in order to start buying in other states. I am def interested in Cash flow as well as appreciation. I recently sold my businesses (bars in SF) and will have a bit of money from those to bring towards the investing table. But now, my income is sporadic (Im a mortgage loan officer---got my license in 2020 when the pandemic hit and my bars were shut down--- in CA and business is pretty dry at the moment to say the least). My wife makes good income, but I would like to take the equity I have to generate nice cash flow and future appreciation. Just wondering if I should sell SF to generate a lot more money to invest in multiple properties and markets. I am not afraid of Long distance investing (reading David's book as we speak) and wondering what are people's favorite markets. And what people would do in my shoes. Thanks! and sorry for the long post!!

Cheers,

Brian

1Reply
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Most Popular Reply

James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
4y

@Brian Cassanego you asked what we/I would do in your shoes, I will do you 1 better, I will advise as if you were my client. 

Your clearly a smart guy, very much so, maybe too much, and maybe that's why find self stuck in analysis paralysis? So let's start by taking a step back, taking a big breath, and re-framing this into it's core components. 

The real heart of this question is; I have a million+ in invested capital, that I currently have in 1 singular investment making me about 1% annual gross net. Should I keep all my $eggs$ in this 1 singular basket, or diversify into many baskets? 

I think it's very possible we could stop right here, already, at the 35Kft altitude of the situation, right. Maybe read this question a few times if impact of the question alone has not hit as of yet, because the question strongly stand's out the answer for myself. 

Rule #1 is never loose $, rule #2 is to make $, and rule #3 is NEVER forget rule #1.    Risk analysis is a paramount factor in any and every investing, and this situation stands very clear as diversification is the key safety mechanism too lowering risk exposure. 

Is it possible that there is a nostalgic value clouding business decision clarity on this property? Especially having sold other business's so recently. 

I would absolutely encourage diversification, strongly so. You stand to considerably benefit on every investment metric, risk factor lowering, equitable gains potential being compounded, NOI greatly increasing. While yes, this property absolutely could go on with it's current performance, the foundational fact will remain that it is still just 1 property, gaining a return on 1 vs gaining a return on 15. There is simply no comparison when we review the math, by leaps and bounds diversification will aid and amplify your performance and security.

Here in my local market that capital in the pinnacle of "safe" property investments gaining an A+ property with A+ tenant in A+ market, would net at minimum $7k monthly, minimum, NET. 

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  • Logan McKay Zylstra
    Realtor · Provo, UT · Member since 2020 · 374 posts · 270 votes
    4y

    The best possible dilemma to have. 

    Your current return on equity is .1%. That is not a good return. I would recommend utilizing a 1031 exchange (so you won't have to pay the massive capital gains tax and your tax liability will probably already be pretty significant as you mentioned you are selling your bars) into something with more units and cash flow.

    As for what market to choose, I am obviously very biased but I LOVE the Utah market for a mix of appreciation and cash flow. Utah has been ranked as the #1 state economy for consecutive years and has a massive housing shortage (which is great for investors). #2 appreciation last year with the jobs and tech industry to support it.

    As for your inconsistent income, the loan officer I use here has a great program for people in your position.

    Feel free to reach out, even if you don't choose Utah as your market, I love talking about real estate.

    1Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y
    Quote from @Logan McKay Zylstra:

    The best possible dilemma to have. 

    Your current return on equity is .1%. That is not a good return. I would recommend utilizing a 1031 exchange (so you won't have to pay the massive capital gains tax and your tax liability will probably already be pretty significant as you mentioned you are selling your bars) into something with more units and cash flow.

    As for what market to choose, I am obviously very biased but I LOVE the Utah market for a mix of appreciation and cash flow. Utah has been ranked as the #1 state economy for consecutive years and has a massive housing shortage (which is great for investors). #2 appreciation last year with the jobs and tech industry to support it.

    As for your inconsistent income, the loan officer I use here has a great program for people in your position.

    Feel free to reach out, even if you don't choose Utah as your market, I love talking about real estate.


    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    Thanks Logan. Yes I know I am in a pretty advantageous position.  Just want to make the right moves.  I would love to chat with you for sure.  Anytime next week should be fine.   Brand new to this forum and been listening to the podcast for about a month or so. 

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    4y

    @Logan McKay Zylstra

    @Logan McKay Zylstra has a great idea about doing a 1031 on this property, you're in an ideal situation to do so. When doing a 1031 exchange a couple of the requirements to fully differ all tax are that you must purchase at least as much as you sell and use all your cash proceeds from the initial sale to do so. You can allocate the proceeds from your sale however you want, so, you could use some of the proceeds to buy one property free and clear, then use the remaining funds as a down payment on a second property. You can then take out a HELOC against the home that you own free and clear and look to reinvest that money into other properties that come your way without having to worry about the time constraints of the actual exchange.

    The 1031 Investor5140 Reviews
    WebsiteView Page
    1Reply
  • Andrew Crinnion
    Realtor · Walnut Creek · Member since 2018 · 12 posts · 7 votes
    4y

    Hi @Brian Cassanego

    As Logan mentioned your return on equity is pretty low; however, there are ways to improve that without having to sell if you want to keep your SF condo and the passive cash flow going. I recently worked with PNC to take out a second mortgage on the equity in my home, I pulled out 85% LTV and locked in a 30 year fixed rate at 4.94%. I was in a similar situation as you, my primary mortgage is 2.5% fixed so I didn't want to lose that. As far as generating better cash flow, I am not sure you will find a place that generates more than $1k a month in cash flow.

    You would need to take a look at the numbers to decide the balance between improving your return on equity and keeping the cash flow. I have helped my clients with similar analysis when they are deciding to rent out or sell their homes when they look to move to a lower cost of living area. Let me know if you would like to connect on this. 

    If I was in your shoes, I would look to sell the SF condo. Renting in San Francisco makes me nervous given the tenant favorable rental laws and the potential for HOA special assessments and yearly increases outpacing rental increases could eat into future cash flow. 1031 is a great way to defer capital gains; however, depending on your basis in the property and whether or not you meet the requirements (have you lived in the property 2 out of the last 5 years?) you may be able to avoid paying capital gains tax on $500k of appreciation.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    $1K per month in HOA??

    I'd find a few markets to run your numbers in and see how they compare to your current rentals.

    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    Thanks for the info Andrew!  My tenants just informed me they are leaving when their lease is up (June 30th) so that may be a blessing in disguise.  I am sure I can rent it pretty quickly, but yes SF scares me.  For a multitude of reasons.  So the question now becomes this.  I should have 900-1M free once I sell and pay off realtor fees and transfer taxes and what not.  I have lived in 2 out of 5 years so I do have the 500K exemption.  Even with that, I would have to pay capital gains so if I can 1031 exchange, I will.  

    So the question would be, where to put the 900K? Which markets? I am not afraid of out of state (and I am still afraid of the tenant friendly CA). Utah, Ohio, Alabama, Texas, Az??? I would like to get both good cash flow and good appreciation. Maybe paying cash for a few units that can produce 6-7K total in rental income with the 900K? Do well with those for a bit until rates go down a smidge than cash out refi and buy more? Or maybe buy one rental in a good area and then maybe an STR somewhere near me (Sonoma county Russian River area). Just want to make sure I do the best I can do with the equity I have.

    Would appreciate any insights anyone has.  Thanks!!!

    1Reply
  • Andrew Crinnion
    Realtor · Walnut Creek · Member since 2018 · 12 posts · 7 votes
    4y

    If you are looking to sell that is great news. Just remember a 1031 is a deferral of taxes, while the homeowner exemption is an elimination of taxes. If you do the 1031 exchange it would need to be for another rental in which case you would lose your homeowner exemption. The only way to avoid taxes is death. 

    I looked at Arizona for while for out of state rentals, but that was awhile ago so I forgot how the numbers looked. I also looked at Indianapolis, some of my friends invested heavily in that area and I believe they are doing well. Not that much appreciation in that market but had projected cash flow of $100-150 per month and cash on cash return of 7-10%. I eventually purchased a place in Portland Oregon, possible the second tenant friendliest laws but I am generating $500 cash flow a month. The current housing market in Portland is crazy, my place that I purchased at the end of 2019 for $390k is now worth $650k. If you are looking to invest locally maybe consider purchasing a place near you that is set up well to have an ADU added to it. I am having an an ADU built on my place in Walnut Creek, homes in my area are worth roughly $800 per sq ft and the budgeted cost of the ADU is $350 per sq ft. My plan is to do short term rentals (30 day minimum) to generate around $1k per month in cash flow.

    I like your idea of doing an all cash purchase in these higher interest rate and volatile market times. 

    0Reply
  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    4y
    Quote from @Brian Cassanego:

    Hello,

    Brand new here and would love anyone's input on this. I own a condo in San Francisco. Bought it in 2004 and it has appreciated quite a bit. I have a little over 1M in equity and I am currently renting it and cash flowing a little over 1K per month. Thanks to prop 13, my property tax is only around 12K, my mortgage rate is 3% but my HOA is now 1K per month. But still, I am cash flowing and I have a prop manager in place (as the rules in SF are clearly geared towards tenants rights and didn't want to screw anything up) and I have never once even talked to my tenants (they pay rent on time every month). This is as passive income as I can get. So, it's not a bad situation. And in SF, building new residential units is very difficult, and the fact that SF is a peninsula (finite space to build) and there are great jobs here, it should always be a great market.

    However, I keep on thinking if my 1M in equity can be better served in a different market buying multiple properties that may appreciate more and generate better cash flow. I did recently take a 400K HELOC out in order to start buying in other states. I am def interested in Cash flow as well as appreciation. I recently sold my businesses (bars in SF) and will have a bit of money from those to bring towards the investing table. But now, my income is sporadic (Im a mortgage loan officer---got my license in 2020 when the pandemic hit and my bars were shut down--- in CA and business is pretty dry at the moment to say the least). My wife makes good income, but I would like to take the equity I have to generate nice cash flow and future appreciation. Just wondering if I should sell SF to generate a lot more money to invest in multiple properties and markets. I am not afraid of Long distance investing (reading David's book as we speak) and wondering what are people's favorite markets. And what people would do in my shoes. Thanks! and sorry for the long post!!

    Cheers,

    Brian


     Property is worth a little over $1 Million and your net cashflow is $1,000/month? I almost stopped reading right there.

    On a serious note if you want cashflow AND appreciation that usually doesn't go hand in hand as much as you may think. There are plenty of people who will pipe in from other states, but I would suggest you look right across the bay. Specifically the East Bay. Oakland, CA.  

    You can buy a multifamily property Oakland that will certainly provide appreciation. There are triplexes and Furplexes you can buy in East Oakland that will give you both. Some people may laugh and say don't buy in "that area", but you will certainly get both. 

    0Reply
  • Christian Espana
    Member since 2021 · 46 posts · 29 votes
    4y

    Hi @Brian Cassanego,

    I live just north of SF, last year I purchased a property in Nashville which is currently cash flowing as an STR, pretty much hands off. One thing you should consider if buying out of state, would you like to visit? That way it makes the entire process more fun and it's not solely an investment property. My next move is in Tahoe now that it seems to be cooling a bit and I can rent 30 day plus and use in the winter. I also sold a property in CA and 1031 didn't make too much sense based on my income and opportunity cost.

    Good luck with your investment! 

    1Reply
  • John Collado
    Investor · Member since 2015 · 3 posts · 2 votes
    4y

    Hi @Brian Cassanego i'm wondering why not look at short term rental investments in California? From what I understand, a STR will or should provide 3X the cash flow than a traditional long term rental provides. If somehow you can get away with it, I would first do it using your condo. If not, then the areas i would look at in California are Joshua tree and Three Rivers. These two locations have excellent profiles for short term rental properties and income potential, based on my research. Note, however, that I presently do not own any STR, but I'm leaning heavily towards making an investment in this space. Wondering what the group has to stay on this topic. Good luck!

    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y
    Quote from @Theresa Harris:

    $1K per month in HOA??

    I'd find a few markets to run your numbers in and see how they compare to your current rentals.

    Wow!!!  Thanks Theresa!!
    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y
    Quote from @John Collado:

    Hi @Brian Cassanego i'm wondering why not look at short term rental investments in California? From what I understand, a STR will or should provide 3X the cash flow than a traditional long term rental provides. If somehow you can get away with it, I would first do it using your condo. If not, then the areas i would look at in California are Joshua tree and Three Rivers. These two locations have excellent profiles for short term rental properties and income potential, based on my research. Note, however, that I presently do not own any STR, but I'm leaning heavily towards making an investment in this space. Wondering what the group has to stay on this topic. Good luck!

    I’m definitely thinking about that. I live in Santa Rosa now and Sonoma County by the Russian River is a huge STR market. 
    0Reply
  • Tyler LingleBusiness Member
    Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes
    4y

    Hey Brian, good to e-meet you. I'd make the case for Indianapolis. Even admidst the crazy appreciation happening nation-wide it is still a relatively undervalued market (fastest growing city in the Midwest on average, strong diversified economy, small but growing tech sphere, relatively strong GDP, and yet 2nd most affordable large metro area after Memphis). I'm helping some OOS investors in your shoes purchase small 1-4 unit residential multifamily units. There are plenty of nice duplexes to quads for 200-500K that can pull the 1% rule, still.  

    [email protected]
    Roots Realty Co. 564 Reviews
    WebsiteView Page
    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y
    Quote from @Tyler Lingle:

    Hey Brian, good to e-meet you. I'd make the case for Indianapolis. Even admidst the crazy appreciation happening nation-wide it is still a relatively undervalued market (fastest growing city in the Midwest on average, strong diversified economy, small but growing tech sphere, relatively strong GDP, and yet 2nd most affordable large metro area after Memphis). I'm helping some OOS investors in your shoes purchase small 1-4 unit residential multifamily units. There are plenty of nice duplexes to quads for 200-500K that can pull the 1% rule, still.  


    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    Tyler, I have heard great things about Indianapolis. A friend of a friend is a major investor there and has done well.  

    0Reply
  • Duane Richards
    Cedar Hills, UT · Member since 2019 · 68 posts · 43 votes
    4y

    @Brian Cassanego I'm an investor in my local market in Utah (Utah and Salt Lake Counties), and while prices are going up here pretty quickly, we have still found a few deals that will cash flow $300-700/mo. At 20-25% down, you can get a reasonable cash flow and expected appreciation. Our properties over the last two years have increased our portfolio value by over 34% (thanks to increased values)! Most rents are now increasing enough that any property sub $500k can return cash per month, but it's getting harder with the increased interest rates. If you're interested, I can give you some more information - I love investing here and am always looking for new opportunities. 

    1Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    4y

    @Brian Cassanego you asked what we/I would do in your shoes, I will do you 1 better, I will advise as if you were my client. 

    Your clearly a smart guy, very much so, maybe too much, and maybe that's why find self stuck in analysis paralysis? So let's start by taking a step back, taking a big breath, and re-framing this into it's core components. 

    The real heart of this question is; I have a million+ in invested capital, that I currently have in 1 singular investment making me about 1% annual gross net. Should I keep all my $eggs$ in this 1 singular basket, or diversify into many baskets? 

    I think it's very possible we could stop right here, already, at the 35Kft altitude of the situation, right. Maybe read this question a few times if impact of the question alone has not hit as of yet, because the question strongly stand's out the answer for myself. 

    Rule #1 is never loose $, rule #2 is to make $, and rule #3 is NEVER forget rule #1.    Risk analysis is a paramount factor in any and every investing, and this situation stands very clear as diversification is the key safety mechanism too lowering risk exposure. 

    Is it possible that there is a nostalgic value clouding business decision clarity on this property? Especially having sold other business's so recently. 

    I would absolutely encourage diversification, strongly so. You stand to considerably benefit on every investment metric, risk factor lowering, equitable gains potential being compounded, NOI greatly increasing. While yes, this property absolutely could go on with it's current performance, the foundational fact will remain that it is still just 1 property, gaining a return on 1 vs gaining a return on 15. There is simply no comparison when we review the math, by leaps and bounds diversification will aid and amplify your performance and security.

    Here in my local market that capital in the pinnacle of "safe" property investments gaining an A+ property with A+ tenant in A+ market, would net at minimum $7k monthly, minimum, NET. 

    2Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    @James Hamling  Well, there you go!  That's what I was thinking for sure and yes, you are correct that I am emotional about the property.  My wife and I moved north of SF about an hour to wine country (love it) and I have sold both my bars in SF and once I sell my condo (which my wife and I lived in for 12 plus years) I will be completely out.  And if you have heard what's going on in SF with the crime and homeless (pretty much all true), its a real good time to get out, while prices are still high.  And there are so many things I hate about SF right now, but that is/was my home and selling the condo, I know I will more than likely never have any interest in SF ever again.  So, yes, it's a bit emotional, and yes, I should leave that out when investing.  Now the great question is WHERE TO INVEST?  I have been looking at numerous markets and everyone of them has it's positives and negatives and I know I won't get it 100% right, but I really want to make the best decision I can here.  Thanks again!!!  And I really like getting an A plus property in a great market/neighborhood with A plus tenants while netting 7K monthly.  Really like the sound of that!

    0Reply
  • Jared HottleBusiness Member
    Real Estate Agent · Cedar falls IA Waterloo, IA · Member since 2020 · 902 posts · 549 votes
    4y

    @Brian Cassanego

    Some of the greatest problems I have heard. Personally a cash flowing rental with a 3% rate is a huge assest to have. I would just borrow against it with the HELOC and then use that to BRRR in other areas.

    I have been doing alot of opportunity zone research and have a good knowledge base and some ideas for you to differ your tax gains with the sale of your bars if you have interest. Message me, would love to discuss more!

    [email protected]319-288-5382
    Jared Hottle Real Estate59 Reviews
    WebsiteView Page
    1Reply
  • Craig Clinton
    Investor · Nutley, NJ · Member since 2017 · 72 posts · 56 votes
    4y

    Cash flowing a little over 1k per month would take you a long time to get near the 1mm in equity you have right now.  If I were in your shoes, I would definitely sell and 1031 the property.  *****I am not a tax professional**** but I believe the first 500k of profit for a married couple is tax exempt (as long as it's been your primary residence 3 out of the last 5 years).  So the remaining 500k of profit would be taxed if you don't do a 1031 exchange.  Just be prepared that it's not easy finding a property in the 45 days that you have but you do get to list 3 potential properties.  Use the motivation of NOT wanting to pay taxes on 500k gain to get you to find your replacement property.  Ask your 1031 intermediary a lot of questions so nothing is left to interpret because I've found they don't always disclose everything upfront.

    The good thing is that you're willing to invest out of state.  So you're selling in a really high price market and you can  buy (hopefully) in a lower priced market and get more bank for your buck.  I recommend reading material and watching videos on Neil Bawa's website.  He has good info on what parameters to look at when choosing an area to invest in.

    Good luck!

    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    Thanks!  All great information!

    0Reply
  • Loren Polito
    Real Estate Agent · San Antonio, TX · Member since 2017 · 109 posts · 81 votes
    4y
    Quote from @Brian Cassanego:

    Thanks!  All great information!


    Hi Brian, I was born and raised in the Bay Area, lived in SF for many years in my 20’s. There’s a good chance I have been to one of your bars you sold. I may be a little biased because I have been investing here and now I live here as well but San Antonio is a great rental market and still has a ton of growth. Not to mention it’s a very landlord friendly state unlike California. My dad sold his commercial building in San Rafael and we were able to 1031 it into some great properties here in San Antonio and the surrounding areas. Please let me know if I can be of any assistance or if you have any questions on the San Antonio market. As much as I love California and the Bay Area things have really changed and I think there are better markets to put your money. 

    2Reply
  • Account Closed
    PA · Member since 2010 · 339 posts · 168 votes
    4y

    @Brian Cassanego

    Aside from all the money stuff above relates to passive income. You should shoot for a property that is as passive as your current condo. Have you considered commercial Nnn property?

    0Reply
  • Brian Cassanego
    OP
    Member since 2022 · 24 posts · 9 votes
    4y

    @Account Closed

    THanks Blaise.  I have considered it, but it is something I don't know as much about.  I was always interested in Self Storage, however, I would much rather be closer to that so I can run it more efficiently.  You have any takes on that?

    0Reply
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