Best Cash Flow

Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes

Hello BP! I have a client that owns a rental home here in San Diego since the 70's she is ready to do a 1031 exchange and will have 400k after sell. She is retirement age and doesn't want to deal with property managing herself any more. She will need them managed. My question to the community is what would you do if this was you and you had 400k to exchange into more cash flowing property or properties. Should she jump into apartments at her age? Should she buy cash? Use leverage? buy single family or mulit family? What area should she buy? Thanks for the input.

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Justin R.

Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes

10y

@Account Closed named several), the day-to-day reality is that this investment is known, simple, predictable, and low-risk for her. You could do a lot worse than just showing her this calculation and advising her to stay the course. Risk-adjusted returns matter a lot more than absolute returns.

I'll stop there to see if you're in agreement with those numbers. If Grandma really just wants more monthly free cash flow, there's plenty of different directions to go.

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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
75% leverage turns 400k into 1.6 million granny is worth. I was asking you why her being worth more and cash flowing twice as much or more is a bad thing and would cost her millions as you stated it would?
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Originally posted by @Account Closed:

75% leverage turns 400k into 1.6 million granny is worth. I was asking you why her being worth more and cash flowing twice as much or more is a bad thing and would cost her millions as you stated it would?
WHERE DID I STATE IT WOULD COST HER MILLIONS? You are trying to justify churning your grandmothers asset for your benefit. SHAME on you.
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Account Closed
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
http://www.investopedia.com/terms/c/churning.asp
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Peter Vekselman
Real Estate Professional · Atlanta GA · Member since 2015 · 615 posts · 225 votes
10y
@Account Closed I currently I'm doing deals in about 8 states (CA is one of them). without a doubt I would put this persons money into a cash producing property.
the areas I would choose are either Atlanta or Jacksonville. My offices have properties there along with rehab crews if needed along with property managers.
if interested in connecting send me an email (in my signature line).
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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
@Account Closed named several), the day-to-day reality is that this investment is known, simple, predictable, and low-risk for her. You could do a lot worse than just showing her this calculation and advising her to stay the course. Risk-adjusted returns matter a lot more than absolute returns.
I'll stop there to see if you're in agreement with those numbers. If Grandma really just wants more monthly free cash flow, there's plenty of different directions to go.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
10y
@Account Closed, Following this thread has given me a headache but I think you've got the correct analysis on impact of a 1031 exchange. She will defer all capital gains tax and depreciation recapture as long as she purchases at least 400K and uses all 400K of proceeds to do so.
The depreciation on that 400K has been utilized and does not have a reset button. However following your 800K purchase scenario - if she sold the completely depreciated property for 400K and replaced it with 800K of new investment real estate she would indeed get a new depreciation calendar for the additional 400K of basis.
The 1031 Investor5137 Reviews
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@Justin R. @Dave Foster thank you for your input. @Justin R. yes grandma has asked for higher income with the rising economy. Those numbers are accurate however i factored in 5% for cap X are we going higher because of the older building? or should I increase that number? she has replaced a roof and other major items already. She also has another rental with 900 cash flow and 250 in equity and her primary residence with 250k in equity. She can raise rents but will need another 6-800 a month for her lifestyle
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
10y
To summarize her current property is worth a little over $400k and would net your granny $400k and you are looking where to invest that money.
Note the property has returned over 1000% not including its cash flow or in excess of 20% a year not taking into account compounding. Prop 13 results in ~$400/month savings.
The future is not known by anyone and better cash flow can be achieved easily in many parts of the country. However if using the past as an indicator her current investment would be very tough to beat. To ignore potential appreciation and rent appreciation can be a mistake. Note without including appreciation So Cal has been a poor RE investment but due to appreciation it has been the best REI in the nation (along with San Fran).
The point being cash flow is only part of what determines a good REI investment. Appreciation in recent years has been a larger factor.
@Justin R. provided good numbers (someone more conservative than I am on cap expense: I would have used $300/month)).
Use those numbers versus risk in your decision. I invest in San Diego and therefore do not have an alternate area to recommend but will add that I am pro So Cal REI. Traditionally So Cal is tough to beat for REI total return.
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@Account Closed look I will once again agree that I did not post the original question correctly on here and made a mistake, As I stated before I am fairly new and wanted advise from pro's that have been doing it for a long time and have used the 1031 to their advantage on a cash flow opportunity out of state. I figured someone on here has sold there San Diego Property into an apartment complex that cash flows dramatically more. If it is not possible out of state then yes I agree there is no point in selling the house as the prop 13 would be idiotic to give up. But for you to say I want to take advantage of my grandmother for my own personal gain is slander and a personal attack against me. Grandma needs more income monthly to keep up with the economy and rising prices in SD with minimum wage going to 15 dollars prices are rising and she needs a pay increase more than just raising rent. She can downsize her primary also but she doesn't want to move from her 7 bedroom house
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Jay DeCima
Redding, CA · Member since 2016 · 224 posts · 143 votes
10y
Why don't you keep it real simple.
Right now she has what I call "pajama money". She can go to the mailbox every month in her PJs to collect the rent checks. This is a nice position to be in for your sunset years. If she does not want to manage it, just hire a property manager.
Better yet, you would gain a lot of street smart experience if you did the managing. With 250 rental homes at my high mark, I do most of my management by mail, with little direct tenant interaction, or headaches.
Good luck.
Fixer Jay DeCima
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Account Closed
Flipper/Rehabber · Miami Beach, FL · Member since 2016 · 23 posts · 5 votes
10y
What about if she sells the old home with owner financing? Would it be a smarter move?
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Steve Moody
Portland, OR · Member since 2008 · 123 posts · 73 votes
10y
@Jay DeCima how would her keeping the property, and paying someone else to PM, help her *increase* her monthly income? It might sound like nice "pajama money" but when it doesn't pay the bills...
It sounds like that's the deal here. Grandma needs more income and has equity in her current rental. She can't raise rent, but by selling she could be giving up a lot in potential appreciation, and property tax. Could the other solution be pulling equity out of this house in order to buy another cash flowing property out of state? Interest rates are low, so she could no doubt buy something with cash and have more cash flow coming in, while still keeping her SD property.
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@Jay DeCima thank you. That is very impressive with 250 homes. You must have done some perfect 1031's. I have been managing the properties and she has been managing me but she recently asked me to exchange the property into a more income producing asset with higher end brand new finishes. She says she no longer wants any phone calls about large repairs ( AC went been 98 degrees out) or anything else and only wants checks. I have shared my very small success with the little money I had with 2 duplexes out of state with her and she got very interested with many questions. She asked me what kind of returns she could get. When I printed for her the pro rental calculators numbers form the site on some properties for sale in places like memphis,TN and other areas and showed her 20 or so properties in different areas D vs A areas. she's been a landlord for 33 years and says to me she wants 2015 build or better with B or A area/tenants and prefers to double her cash flow. Her current rental unit has lots of differed maintenance currently needing upgrading in c minus area south san diego. She exchanged her other current rental property out of that area 20 years ago into the nicer La Mesa Property. Her La Mesa property is a better SF she wants to hold onto and possibly move into. I agree with you guys she needs to downsize into one of her smaller rentals and rent her primary. She just doesn't' want to move and keeps going 300.00 or more negative every month. Thats why she wanted to increase her income. Hopefully she sees it makes more sense and less effort if she down sizes
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Ryan Billingsley
Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes
10y
@Account Closed just did a great podcast on 1031 exchanges that will help you understand your options and how it works.
It sounds like the people giving advice to you did not read the thread correctly haha! I was wondering what the hell was going on here.
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@Ryan Billingsley thank you. She has done a couple in the past and increased her net worth and asked to be focused on cash flow not appreciation like she did last time. When I ask granny to down size it's almost offensive to her. Thank you again I will listen to those podcasts.
@Steve Moody thank you.That is an option to cash out refi at 4.25 today on an investment property. I ran that by her and she is leaning towards the 1031
@Account Closed with the 1031 exchange she will not be able to do owner financing as she will need all of her cash for the future investment
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Jett Rao
Flipper · Calgary, Alberta · Member since 2015 · 99 posts · 15 votes
10y
Thanks for your detailed analysis @Justin R.
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Elizabeth Schellhammer
easton, PA · Member since 2015 · 45 posts · 19 votes
10y
LOL, I love when threads get like this, not for the education, but for the entertainment! Good Luck, Brent, I wish I had advice to offer.
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Leslie Pappas
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
10y
Hi @Account Closed, if she is an accredited investor and moves forward with the 1031 exchange, reinvestment into DSTs would be an option. They are hands-off, institutional grade real estate investments, and they allow for opportunities to diversify. If you think that's something that would interest her, please let me know if I can help. Leslie
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@Leslie Pappas thank you. I will tell her about it. Do you have any more information on it? Will it double her cash flow of 1300? will it qualify as real property for the exchange?
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Leslie Pappas
Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
10y
The IRS issued a revenue procedure in 2002 and another in 2004 that defined the terms under which these investments would, in fact, qualify as "like kind" property in 1031 exchange. Graduating from rental properties to institutional grade properties (DSTs) using 1031 Exchange is something many of my clients have done.
Institutional grade projects in the $50-125M range can be purchased with as little as $100,000 and allow you the opportunity to invest in more than one property and diversify. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. This is the world of Delaware Statutory Trusts.
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Ian Tudor
Specialist · Charlotte, NC · Member since 2013 · 260 posts · 245 votes
10y
@Account Closed Check out mobile home parks. Lower maintenance and turnover than apartments leading to considerable higher cash flow. Most of the parks I look are selling for 8-10 caps.
If you doing it right, you can easily get 20% cash on cash returns. Or if she is an accredited investor, she could invest in a PPM, where she would stay passive and get mailbox money.
Ian
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James MasottiPro Member
Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
10y
Originally posted by @Account Closed:

Hello BP! I have a client that owns a rental home here in San Diego since the 70's she is ready to do a 1031 exchange and will have 400k after sell. She is retirement age and doesn't want to deal with property managing herself any more. She will need them managed. My question to the community is what would you do if this was you and you had 400k to exchange into more cash flowing property or properties. Should she jump into apartments at her age? Should she buy cash? Use leverage? buy single family or mulit family? What area should she buy? Thanks for the input.
Brent - I don't know that I have nearly as much experience as the other folks who have commented on this thread, but my queestion would be not necessarily what's best for your grandmother from a financial perspective, but at this stage in her life what is it that she's looking for? I know that a 1031 exchange would save her on the capital gains, but there is potentially more headaches and setup involved with investing at a distance. I'd invest as much time, if not more, having your grandmother set up her team in a market before starting her 1031 clock. Then again there's the question of whether or not paying the long term capital gains tax, would actually be a benefit, and then to invest the cash in something more low maintenance, like notes. Where you can still get a similar return, but with far less of a headache.
These aren't necessarily questions that an objective audience on the forums can answer, but more so a subjective question that needs to be answered based on a serious conversation with your grandmother.
My .02 for what it's worth.
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Dean Weltman
Investor · The Colony, TX · Member since 2014 · 192 posts · 66 votes
10y
@Account Closed, I don't know why Bob goes on these tirades, but he's easily ignored. The other 99.99% of people on here are more helpful, or at the very least they're more polite.
You were very clear and your idea makes sense. I would double check with a 1031 expert/CPA to ensure you correctly understand all the tax ramifications of a 1031, but it's my understanding that if you trade-up everything is deferred, and you begin depreciating the difference in the larger property. If your grandmother is no longer able to depreciate the property she currently owns that removes one of the advantages of a rental, which could be helpful in shielding some of her other income from taxes.
How you invest her $400k depends a lot on what she wants, but if she's looking for cashflow it would seem that small apartments in a more affordable corner of the country that aren't over-leveraged would be the right call. I have a similar situation with my mother, who is looking to 1031 some properties to put into a small apartment building to make everything easier on her, but I think it's time for a property manager to take over. I saw some mentions of the continued property appreciation, but I feel that someone towards the end of life isn't concerned with that unless they are more concerned with their heirs than their living expenses. Certainly, you will have to take into account rent appreciation and the difference in property taxes to get a good assessment, but finding the right deal should prove easy as long as you're not in a hurry.
Good luck!
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Account Closed
OP
Realtor/Investor · San Diego, CA · Member since 2015 · 133 posts · 73 votes
10y
@James Masotti thank you for your two cents. You are absolutely correct. My grandmother is very conservative so I dought she will use full leverage to her advantage. She is looking for a pay raise only as she needs about another 600 a month.
@Dean Weltman Yes I learned my lesson on here and will not be posting these for some time again. Clearly some people do not like Realtors. Luckily I am also a part time Medic so I can introduce myself either way. lol. I just signed up for Pro and was going to post different client scenarios as they came along. I have had some weird transactions in the little 3 years experience I have and thought it would be good learning for myself and others. Good thing I didn't post the last 1031 I did for a client some of these people would have lost a lid on the cash flow and equity gains they got from out of SD,CA
I was simply trying to ask the BP community what they would do with the money. Maybe even get a story about someone who made millions doing this very thing. We all know it is possible to 10 times that cash flow. I gave a underhand pitch to someone with experience to encourage others to take the big leap into that next level. thank you for the advise to take her time as that is exactly what she will do looking for the perfect property this is a great time for grandma and the 1031 exchange. I would encourage anyone else looking to exchange to get on the train this year. With interest at 4% this is a perfect time to pyramid up. This is a classic strategy of taking fully depreciated assets from a market near the peak and placing it into another rising market riding a rise with higher cash flow. Almost text book 1031
I knew some people would have different ideas on what to invest in but thought we would get some really strong opinions on the benefits of the 1031 exchange. Thank you all for your input
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Sunny D.
Pleasanton, CA · Member since 2015 · 246 posts · 115 votes
10y
I have not personally done this so plz do your due research. I invest in many crowdfunding sites and noticed that realtymogul from time to time has 1031 eligible properties.
Call them up and find more https://www.realtymogul.com/1031-exchange
If you can get 8-10% relatively safe and non long term investments through crowd funding you can more than double your cashflow with 400K. I have about 200k in crowd funding (mix of debt and equity) and average cash on cash returns is about 8% with rest of equity paid out when properties are sold.
Cheers
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