How to re-invest funds if I liquidate properties

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How to re-invest funds if I liquidate properties

Felipe Guerra
San Diego, CA · Member since 2017 · 12 posts · 1 vote
Hello my name is Felipe and I'm new to big pockets -I want to get comments or investing ideas on the following. I bought my first multi-fam rental property in 2013 for $465k -I got a 30yr fix loan with 25% down. This property had a 20% cash on cash return since I bought it. I bough a 2nd rental on 2014 for $559k -again with an investment prop loan putting 25% down. This property had a 14% cash on cash return -lower because prices had increased. I bought a 3rd rental a duplex for $400k with same 25% down 30 yr loan -cash on cash return of 8% prices continued to climb therefore lower cash on cash return. At this point a have about $1.2M in equity and I was thinking on liquidating all properties to get the $1.2 and re-invest; however based on how much property cost has climbed I'm not able to get a good return on my investment; if I put the full $1.2M for a down payment the mortgage will be as high as my rents 2) if I buy cash a $1M property it would be around 7% cash on cash and would not get as much equity on property value (also I would not be able to use a 1031 exchange paying cash). Would you have advise on how could I re-invest my available cash or if I should just keep my properties as they are and keep saving for another downpayment or pay-down loans. Properties are located in San Diego CA and the Income I get after all expenses and prop manager fees is aprox $50k / yr. Please let me know if you can help and/or if I left out any information. Thank you! Felipe Guerra
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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
9y

@Felipe Guerra What would you hope to accomplish by selling your existing properties?  Are you trying to increase your ROE (return on equity) and ultimately increase your total return from your investments?

Unless you want to cycle out of real estate (expensive, given the tax consequences) or cycle into a different assset class within real estate, I would continue holding and operating.  And, that's what I AM doing.  :)

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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Felipe Guerra What would you hope to accomplish by selling your existing properties?  Are you trying to increase your ROE (return on equity) and ultimately increase your total return from your investments?

    Unless you want to cycle out of real estate (expensive, given the tax consequences) or cycle into a different assset class within real estate, I would continue holding and operating.  And, that's what I AM doing.  :)

    1Reply
  • Felipe Guerra
    OP
    San Diego, CA · Member since 2017 · 12 posts · 1 vote
    9y
    Justin R. Thank you for your reply -Since I have 1.2M in equity the idea would be to get a return on the equity as it is not generating a return right now.
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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Felipe Guerra Sounds like you benefitted from a general rise in the market, instead of by repositioning or developing or some other strategy that is reproducible now.  That strategy (playing market cycles) means there's no option other than to wait for another cycle or find another location where the cycle is offset.

    Couple options:

    (1) Just keep them. Manage rents higher. Opportunistically pull equity out via small HELOC (I know of 1 local bank that will do it, but limited to $50k). This is what I'm doing with my local B&H portfolio.

    (2) Just keep them, but refi to get tax-free access to that equity.  Put the equity to work in [your choice here].  I personally favor private lending.  May not be worth it if you've got really attractive 30y loans you don't want to touch.

    (2) Sell a portion so you have a cash position. 1031 it into a DST with the intention to later buy more property in the next cycle.

    (3) Find a different market. That's a very different experience for which you may be disadvantaged relative to other investors. 1031 what you've got locally into a different asset class (larger MFR or commercial).

    That equity you've got is basically locked in real estate - refinancing to access it is probably the most attractive option if the equity is very large.

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  • Felipe Guerra
    OP
    San Diego, CA · Member since 2017 · 12 posts · 1 vote
    9y
    Justin R. Thank you; that is truly excellent advice and I appreciate it -as per your first option I tried getting a HELOC loan and it was not approved as I hold a current investment property loan and the lender said that would only apply for owner occupied properties. Is that not the case
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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    9y

    @Felipe Guerra 

    @justin R. Covered the options. 

    I have refinanced various properties twice in the last 3 years. The second time was unfortunately after the recent rate increases (not by intention, I started before the rate increases but we had some unexpected hiccups). The primary reason for the refinancing was to take money out and reposition the refinanced properties at a 70% LTV. Going this route was the easiest option to get significant equity out.

    I think a lot of So Cal investors are in the same boat as you are.  I took cash out so maybe my equity percent is not as high as yours but I purchased properties that have produced better returns than I expeat going forward.  In addition, I have already achieved most of the forced appreciation.  I am keeping the properties with lower expectations of return.  I have even considered purchasing another RE investment property with the lower expectation on return and definitely would have if it were not for the recent rate increases.   

    Your timing was very good on your purchases and therefore the returns on those purchases will be very hard to replicate.   Maintaining the same rate of return should not be what is used to determine if you should sell but instead what rate of return can you expect on what you would do with the equity after taking into account costs (potential taxes, seller costs, etc)  

    Good luck

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  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    9y

    Hi @Felipe Guerra if you're an accredited investor, considering a 1031 exchange and no longer want to be a landlord, consider learning about Delaware Statutory Trust (DST).

    By reinvesting in 1031-qualified DSTs, you purchase ownership interest in multimillion dollar properties across the country that offer long-term income, hands-off management and they allow you the option to diversify. Whether your exchange is $100,000 or $1 million, DST investments can be sized to fit your exchange.

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  • Account Closed
    Real Estate Investor · Rancho Santa Fe , CA · Member since 2016 · 323 posts · 107 votes
    9y
    Yes Felipe Guerra I was gonna bring up what Leslie Pappas said Delaware statutory Trust unless kind off what I understand about your desire, is to grow into a larger equity. $1.2M Down on $4M assets or what ever example you can think. Getting in the big boys game of buying mid-Raise, or 12-20 unit places in some areas, returns might be better, I will point you maybe to areas of Northern California or AZ.
    1Reply
  • Felipe Guerra
    OP
    San Diego, CA · Member since 2017 · 12 posts · 1 vote
    9y
    Justin R. Thanks for your help -would you be able to provide the bank information you indicated you could recommend for a HELOC loan on an investment property.
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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Felipe Guerra:

    Justin R. Thanks for your help -would you be able to provide the bank information you indicated you could recommend for a HELOC loan on an investment property.

    Take a look at Point Loma Credit Union - I know they do it (as of Jan 2017), but limit is $50k HELOC size. I'm actively working with two other commercial banks on other projects - I'll try to remember to ask about it next time I talk with them and post back here.

    1Reply
  • Felipe Guerra
    OP
    San Diego, CA · Member since 2017 · 12 posts · 1 vote
    9y
    Paul Spradling thank you -I'm also looking to sell one of my San Diego, CA properties for about $400k liquid to invest -what areas would you recommend for good cash on cash % and overall market stability (out of state, no problem as long as the math is there) Thanks
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