Help - Sell or Hold 60 Properies in Bay Area?

Question

I own a portfolio of 60 single family homes in the San Francisco Bay Area.  All are commutable to San Francisco.    My basis is low.

I cash flow about 3% net annually based upon current value of $28 million.  $4.5m debt.

15 properties held free and clear.  15 have 15yr loans with a 15yr amo, sub 4% rate.  The balance have 7yr fixed rate loans averaging 4% (30yr amo) that float in 2020.  No prepay penalty.

I’m 48yrs old. I want to invest passively (after a potential portfolio transition) for the highest return possible via cash flow and growth.

Here is my question:

Should I “HOLD” and stay the course or “SELL” and reinvest elsewhere via 1031?

If I sell what product type do you recommend and what markets are the most attractive on a value basis with good population, job and income growth prospects?

My portfolio has performed beautifully for me in the past but I’m concerned about a future SF earthquake and wondering about the opportunity cost of staying in San Francisco relative to investing elsewhere.

I could really use your advice and help.

Thank you Bigger Pockets.

Jay Hinrichs · Answer

time to sit down with a wealth manager .. your truly wealthy.. I would be attending family office type events where your interacting with those of your same financial standing..

Getting advice on a site like this while there are some super sharp folks here.. others will want you to sell and buy low end rentals other markets so you can get 10%  LOL..

you could also talk to syndicators..

@Brian Burke  Brian is right up the road from you in Santa Rosa.. you may want to chat with him off line.

Wish you the best. n

And if you do nothing not the end of the world you own in one of the strongest markets in the world your debt to equity is outstanding etc etc  you are were many dream to be.. and BP is if nothing full of real estate dreamers who are starting their journey and want to end up where your at.

@Dave Foster  Also Dave is sharp on the exchanges so I would rely on his expertise in that field.

Johnson H. · Answer

@Shannon Phillips - Congrats on your success! It looks like you bought at a great time and have reaped the rewards. I don't think there is one right answer in your situation. There is also nothing wrong with sitting tight either. The high net worth portfolios that I have reviewed all have low leverage, some investors never sell property and continue to accumulate when the time is right. Having low leverage gives you flexibility to take advantage of great opportunities when no one else can. It also gives you staying power for when the next recession hits, whenever that will be. Also, being in CA, prop 13 gives you a great advantage in paying low property taxes versus other states where property taxes continue to increase as it is assessed annually on the value of the property.

If you want to sell, I would sell your most troubled or pain in the neck properties. If you don't have any of those, sell those that are in rougher areas and keep the cream of the crop. I think rent growth and appreciation in the SF Bay Area is why you should stay in the area. I have invested out of state, the values of my homes increased tremendously but rents did not so I sold it all and am looking for long term plays here.

I am sure by this time you have received a lot of marketing messages. Don't be swayed by the high yield numbers some folks pitch. Also, let me know if you need a portfolio lender as I can suggest some as well. Not many here on BP have reached your level of success so be careful to who you listen to. Good luck!

Serge S. · Answer

@Shannon Phillips found myself in a similar situation two years back looking at a portfolio of nearly 50 SFR units in a very high equity position. The key metric here is return on equity. If your cash flow is 3% think about how measly your return on equity is. With the SFRs you have very little in the way of tax avoidance, the same cash flow derived from a large multifamily would produce virtually no taxable income through cost segregation and other means. I have been selling and exchanging out of SFR and hope to own none by the end of next year.

Dave Foster · Answer

@Shannon Phillips, A great exercise for you would be to subcategorize "performance" into three categories.

1. Performance as asset Growth . 2. Performance as NOI .  3. performance as movement to personal life goals.

What I'm hearing at first blush is that Number one has been great to date.  Number 2 is bleh as an ROI but fine as it relates to a gross number to buy groceries with.  And number 3 is concerning to you. If you can get some synchronicity between those three then direction should become clear to you.

It's been hard to bet against CA (and bay area especially) appreciation for the last 30 years.  But cash flow has always lagged.  One thing you may think about doing is starting a process of debt consolidation into the riskiest properties in the most unstable locations (either physically or prone to stagnation or market turnaround).  That would maximize your debt free portfolio and you can then easily transition that via 1031 exchanges .  into superior cash flow to what you've got now.  But at the same time leave some leveraged chips on the table in that crazy appreciation market you love to hate!

The concept is called defensive investing.  I don't think I can post the link to the pod cast here here but I'll pm it to you.  It's a very powerful tool to recession proof your portfolio but still allow for growth.

Brian Burke · Answer

Thanks for the shout-out, @Jay Hinrichs.

@Shannon Phillips I had 120 of them and started selling a year or so ago. Almost done. Happy to chat offline about how that went for us if you’d like.

I did a portfolio loan on a bunch of them a few years back and happy to chat about what I learned from that experience as well.

Michael P. · Answer

Can I have 1 of them?  You'll still have 59.

Shannon Phillips · Answer

Johnson, Thanks for your reply.  I would love your suggestion on portfolio lenders.  Thanks.  - S

Account Closed · Answer

@Shannon Phillips have you ever considered a Delaware Statutory Trust (DST)? From what you said that you wanted it may be a good fit. DSTs allow for investors to 1031 exchange into professionally managed portfolios that are diversified across asset class/sector/geographic, while being a passive owner and earning tax advantage income. It's a very flexible strategy that you may have not heard of before. Happy to explain in more detail if this sounds interesting to you. Best

Kevin Sellers · Answer

Many of my clients are selling their CA residential rental properties at low cap rates and then using the 1031 exchange process to replace with single tenant properties in Midwest and Southeast.  There is a huge inventory of single tenant properties with strong tenants and long term lease contracts.  You can defer the capital gains tax and enjoy passive and reliable cash flows.

Caleb Heimsoth · Answer

@Shannon Phillips. What did you do to acquire so much property? That’s awesome.

I second others go find a good wealth advisor to help you.  You probably have major taxes if you sell at full market value so be aware of that too.

Good luck.  Well done!

Help - Sell or Hold 60 Properies in Bay Area?

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