Thinking of Doing a 1031 on two SFRs to Multi-Family

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Thinking of Doing a 1031 on two SFRs to Multi-Family

Charles Chang
Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes

I have been reading a lot since joining the forum. Now I am finally ready to pull the trigger after getting over the biggest hurdle... convincing the wife.

So I currently hold 2 SFRs with no mortgage in San Gabriel Valley and Inland Empire region of SoCal. They combine for about 1.2 million in value but return only about $4000 per month in rent.  Obviously, the cap rate is very disappointing.  After doing many hours of reading and research on BiggerPockets, I have realized that I must make a major change in my investment strategy.  

So I have decided to put both SFRs on sale soon.  Unfortunately, I just found out that I must give my tenants 60 days notice to vacate the property since they have lived there longer than a year.  So it will take me a few more months before I can list my properties for sale.

I would like to get everyone's opinion on the following questions...

1.  What is the best time to put the SFRs in the market?

2.  I am mainly looking for the best cap rate.  Fresno seems to be pretty good.  Any other cities I should look into?

3.  How do I go about validating the effectiveness of a property manager?

4.  Should I pay for the multi-family in cash or buy multiple apartment buildings by leveraging the proceeds from the SFRs?

Looking forward to hear everyone's opinion! 

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Soh Tanaka
Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
8y

I personally feel comfortable to those who are active at BiggerPockets. I worked with @Dave Foster in the past, and I had a good experience with him.

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  • Soh Tanaka
    Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
    8y

    I know this is not what you are asking, but make sure you use a good reputable qualified intermediary when you do the 1031 exchange.

    0Reply
  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    Originally posted by @Soh Tanaka:

    I know this is not what you are asking, but make sure you use a good reputable qualified intermediary when you do the 1031 exchange.

    I have talked to an intermediary, but how do I make sure they are qualified? The firm has decent reviews on Yelp, but what else can I do in terms of research?

    0Reply
  • Soh Tanaka
    Property Manager · Lindenhurst, IL · Member since 2016 · 854 posts · 506 votes
    8y

    I personally feel comfortable to those who are active at BiggerPockets. I worked with @Dave Foster in the past, and I had a good experience with him.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    Thanks for the kind shout out @Soh Tanaka.  I've never paid attention to YELP except for restaurant recommendations - who knew?? :)

    But @Charles Chang, it is a tough thing to vet a provider when your not an expert in the field isn't it?  I feel that way every time I ask a doctor a question.  They give me some multi-syllable reply and I shrug my shoulders and have to decide whether to believe them or not.  Cause I sure don't know.

    So personal experience and verifiable references are probably the gold standard.  Your QI is not limited to a geographical location because 1031 is a federal statute that applies in all 50 states.  You're going to want to find a QI large enough and with experience enough to have good economies of scale and to know what they're talking about.  But you're also going to want a QI where you're actually talking to the senior folks and not just sales reps.  

    With the biggest firms your experience will be limited to the experience and quality of the sales rep assigned to you.  But with a small one person deal you're probably going to pay the price of their learning curve.

    Biggest difference between Bigger Pockets and Yelp I suppose would be that you can look at reviews on profiles and actually reach out to those folks through BP private messaging so you can verify they're not a robot.

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  • Nabil SuleimanBusiness Member
    Real Estate Agent · Los Angeles, CA · Member since 2016 · 596 posts · 299 votes
    8y

    @Charles Chang

    I too have used a lot of referrals from people on BP and haven't been disappointed. 

    to answer your questions 

    1. Right now in SoCal there has not been a cycle in which putting your home on the market makes it a bad decision. I have had clients list homes in October/Nov, Jan/Feb and in the start of school and succeeded at selling, most often with multiple offers. For your two homes, Depending on the condition, I have people that would buy them immediately in both locations. 

    2. If you are looking for the "best" cap rate more than anything, CA isn't going to get you that. You are going to need to look outside of CA to find great cap rates. With that said, if you are trying to keep your holdings in CA, then Sacramento would be another location I would look into. If you want to talk more about that subject we can delve deeper into clients I have investing there, as well as ones investing elsewhere, and see how you feel about your options. 

    3. Just like you are validating the effectiveness of your 1030 QI, would be a great way to qualify your property manager. If you can't get a referral (and even when you do) do your due diligence, and find out as much as you can about them. Ask them for references, and talk to people that they represent currently.  Have a list of wants you expect from your property manager and ask if that is within the scope of their service. 

    4. This is like choosing which side of the investor aisle you want to believe in and there is no right answer that anyone can give you. You have to decide on whether or not leveraging debt is something you want to do, and if the calculated risk makes sense to you.then buy multiple... Also if this is your first time investing in multi-family, starting with one and creating your system may be something you want to think about before going Ham on purchasing. 

    Anyways, thats my 2 cents, let me know if you want to discuss any of those topics further. 

    [email protected]661-904-1725
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  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    Originally posted by @Dave Foster:

    Thanks for the kind shout out @Soh Tanaka.  I've never paid attention to YELP except for restaurant recommendations - who knew?? :)

    But @Charles Chang, it is a tough thing to vet a provider when your not an expert in the field isn't it?  I feel that way every time I ask a doctor a question.  They give me some multi-syllable reply and I shrug my shoulders and have to decide whether to believe them or not.  Cause I sure don't know.

    So personal experience and verifiable references are probably the gold standard.  Your QI is not limited to a geographical location because 1031 is a federal statute that applies in all 50 states.  You're going to want to find a QI large enough and with experience enough to have good economies of scale and to know what they're talking about.  But you're also going to want a QI where you're actually talking to the senior folks and not just sales reps.  

    With the biggest firms your experience will be limited to the experience and quality of the sales rep assigned to you.  But with a small one person deal you're probably going to pay the price of their learning curve.

    Biggest difference between Bigger Pockets and Yelp I suppose would be that you can look at reviews on profiles and actually reach out to those folks through BP private messaging so you can verify they're not a robot.

    @Dave Foster... I definitely will consider referrals made by seasoned investors from this forum.  I realize that I am such a newbie at real estate investing that I will need lots of help.  It would be greatly appreciated if anyone can give me a recommendation for a qualified intermediary for the 1031 in the San Gabriel Valley area.

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  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y

    @Nabil Suleiman

     Thanks for the reassuring information on SoCal being a seller's market.  I will definitely get going on getting the houses in tip top shape and get them ready for the market.

    I would like to keep my holdings in California in possible, but I am not seeing anything in Sacramento that makes it worthwhile of executing a 1031 exchange at the moment.

    I will definitely do my due diligence and interview property managers along with verifying their references.

    Since this will be my first multifamily investment, I probably will be conservative and used the cash flow generated to amass the capital needed for future investment. 

    0Reply
  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y

    Let's say if I am willing to venture outside of California...are there regions close to California that you guys would recommend for multifamily?  Based on my research, the greater Phoenix area is not much better than Calif when it comes to the cap rate.

    I would like to stay within a 2 hour flight distance if I would ever need to make a visit to take care of business being that I still have a day job and time will be a limited resource.

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  • Nabil SuleimanBusiness Member
    Real Estate Agent · Los Angeles, CA · Member since 2016 · 596 posts · 299 votes
    8y

    @Charles Chang

    It depends what caps you are looking for. Vegas has 6+ caps, and that's a one hour flight. 

    I have a few that invest in Pensylvania & Cleveland currently but that's going outside of your parameters 

    [email protected]661-904-1725
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  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    @Nabil Suleiman Having never been to Pennsylvania and Ohio... What are the advantages of investing in those places?
    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    8y

    snow and ice of course...

    Just kidding. Never been there either. 

    1Reply
  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    8y

    Cap rates are still pretty decent in vegas and rents are increasing. Appreciation rates are better than most areas of the country as well for 2018.

    I would go after condos in vegas because financing is limited currently but expected to loosen by year end which will increase buyer pool and values.

    [email protected]702-349-9175
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  • Nathan Ku
    New to Real Estate · Union City, CA · Member since 2017 · 59 posts · 13 votes
    8y

    @Robert Adams can you  share some more details of such condos and what kind of cap rates are you seeing assuming you deal with those

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y
    Originally posted by @Charles Chang:
    @Nabil Suleiman

    Having never been to Pennsylvania and Ohio... What are the advantages of investing in those places?

    In the world of the 1031 exchange, there is a saying of "swap til you drop" - meaning that a property acquired in a 1031 exchange should only be sold as part of another exchange for the remainder of your life so that the capital gains due never occurs. Now as @Dave Foster will concur, Pennsylvania is the only state out of the 50 that will not allow the capital gains due to the state to be deferred; that means when you sell a Pennsylvania property, even as part of a 1031 exchange, there will be capital gains tax due to the PA Department of Revenue.

    So that is a drawback if you get a property in PA as part of a 1031.

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Steve Babiak  Very true Steve!  And the difference of deferring another 4% of tax on a sale can be a determining factor in choosing a state.  

    But it can also get even more tricky.  In @Charles Chang's case the great state of CA is not going to be left at the door holding their hand out.  Most states will give credit for tax paid in other states but if their tax would have been higher they then assess the difference.  That could also be a factor without the 1031.  And another reason why there's an awful lot of CA license plates in the landfills of NV (and NY plates becoming artificial reefs here in FL).  the tax benefits of eliminating state tax can be monstrous.

    And @Bill B. only thought he was kidding!  It's the removal, the insurance, the wear and tear and the cost of the snow shovel - it all adds up in the Norther states.

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  • Nabil SuleimanBusiness Member
    Real Estate Agent · Los Angeles, CA · Member since 2016 · 596 posts · 299 votes
    8y

    @Charles Chang

    they each have their own reasons. Pennsylvania has a big logistics industry, Ohio can offer strong cap rates. 

    it honestly depends on the investor, what they like, the industries they believe will support the security of their purchase, the distance you are willing to travel, the amount of passivity you want in the investment you make etc. 

    I still know lots of people that continue to invest in CA too. It really depends on you and what you want/ feel comfortable with. 

    [email protected]661-904-1725
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  • Robert AdamsBusiness Member
    Real Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
    8y

    @Nathan Ku

    I would start with an MLS search that are not using "financing considered: FHA". Then you can confirm they are not on the FHA approved list here: https://entp.hud.gov/idapp/html/condlook.cfm

    Then if you find a good deal you can look into the HOA resale package and find out why it is not on the approved list and then see if it is a good fit to become FHA approved once they loosen FHA guidelines on these restrictions. Condo communities are not FHA approved for many reasons. When they loosen these restrictions some will remain restricted and some will become available for financing. I would buy the ones you are expecting to become finance-able. One of the big factors is the owner occupied owners to investor owner ratio. If this restriction is removed or loosened many communities would be added to the approved list.

    You can read more about these restrictions and the pressure on Ben Carson to make changes here: https://www.housingwire.com/articles/43748-congres...

    Hope this helps.

    [email protected]702-349-9175
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  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    Originally posted by @Robert Adams:

    Cap rates are still pretty decent in vegas and rents are increasing. Appreciation rates are better than most areas of the country as well for 2018.

    I would go after condos in vegas because financing is limited currently but expected to loosen by year end which will increase buyer pool and values.

    I see HOA fees as money down the drain. I would rather do SFR over condos.

    0Reply
  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    Originally posted by @Steve Babiak:
    Originally posted by @Charles Chang:
    @Nabil Suleiman

    Having never been to Pennsylvania and Ohio... What are the advantages of investing in those places?

    In the world of the 1031 exchange, there is a saying of "swap til you drop" - meaning that a property acquired in a 1031 exchange should only be sold as part of another exchange for the remainder of your life so that the capital gains due never occurs. Now as @Dave Foster will concur, Pennsylvania is the only state out of the 50 that will not allow the capital gains due to the state to be deferred; that means when you sell a Pennsylvania property, even as part of a 1031 exchange, there will be capital gains tax due to the PA Department of Revenue.

    So that is a drawback if you get a property in PA as part of a 1031.

    Well, that definitely takes Pennsylvania out of running.

    0Reply
  • Charles Chang
    OP
    Investor · San Gabriel, CA · Member since 2017 · 23 posts · 5 votes
    8y
    Originally posted by @Nabil Suleiman:

    @Charles Chang

    I still know lots of people that continue to invest in CA too. It really depends on you and what you want/ feel comfortable with. 

    For me to invest in California, it's gotta be a lot better than the 3.2 cap rate I am getting on my current properties right now.  Otherwise, it wouldn't be worth the trouble to do a 1031. My minimum expectation is a 5 cap rate.

    0Reply
  • Jeff Zimmerman
    Real Estate Agent · Fresno, CA · Member since 2014 · 368 posts · 174 votes
    8y

    Hey @Charles Chang , good luck!  Here are my opinons on your questions, hopefully they are helpful.

    1. When the weather is nice, usually spring and summer.  Fall can be slower due to school starting, holidays, etc...  We get busy again after super bowl usually.

    2. Fresno has been good to me when it comes to CAP rates. In lower income properties you can grab a 7.5 sometimes, most hover around 6.

    3. Ask other owners, they are your best sources of knowledge.  Drive the mangers other properties and see how well they keep them in shape.  

    4. I prefer leverage as it can raise your COC return. However, buying in cash is a much more conservative approach and cash flow will be really high. Stick to your comfort level, you can also put 50% down which could be a happy medium.

    let me know if I can help further.  

    0Reply
  • Wes Blackwell
    Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    8y

    @Charles Chang

    Perhaps this may change your mind about Sacramento:

    https://www.biggerpockets.com/forums/621/topics/590913-rent-growth-in-sacramento-is-triple-the-national-average

    0Reply
  • Shiva Bhaskar
    Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes
    8y
    Originally posted by @Charles Chang:
    Originally posted by @Nabil Suleiman:

    @Charles Chang

    I still know lots of people that continue to invest in CA too. It really depends on you and what you want/ feel comfortable with. 

    For me to invest in California, it's gotta be a lot better than the 3.2 cap rate I am getting on my current properties right now.  Otherwise, it wouldn't be worth the trouble to do a 1031. My minimum expectation is a 5 cap rate.

    Hi Charles, I'm an LA guy like yourself (South Bay), and also hoping to move from SFR to multifamily. I actually think Sacramento has good growth potential for the future, especially with lots of SF folks relocating closer to there, and job growth within the city itself. Fresno obviously is a play a lot of people like, but I"ve been hearing about Stockton as well. The city has been through hell (crime, bankruptcy etc), but you are seeing folks from elsewhere in CA moving there, and it seems like things have improved somewhat economically. If cash flow is what you want, worth a look IMHO.

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