Do I sell my duplex in Cali to buy multiple doors in Midwest?
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Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
7yWell, wait a minute here...unless this is some sort of 1031 exchange, you're not going to end up with $225K, you're going to end up with significantly less. If this IS a 1031 exchange, you have to find multiple properties to take up as much of the $225K as you can within a small window of time, and you'll have to do it across the country.
While it is certainly possible to find cash-flowing deals here where I live and work for $65K, you're going to be stuck operating these rentals from across the country. That comes with significant problems, especially in the $65K range. Apparently for some people, those problems can be overcome, but they're going to involve turning over a significant amount of responsibility to other people and dealing with a lot of risk, both of which will eat hard into your bottom line. I would read up on long-distance investing before I did anything. This is not a matter of putting up a forum post and taking the plunge the next day.
26 Replies
- Real Estate Broker · Minneapolis, MN · Member since 2016 · 530 posts · 398 votes7y
Your money can possibly go farther in Midwest markets which is a good incentive, i'd just make sure to narrow down a market you want to focus on. You have your Minneapolis's to your Cincinnati's to your Indianapolis's.
- Rental Property Investor · Wiesbaden, Germany · Member since 2019 · 49 posts · 50 votes7y
Personally, I would keep the duplex in California and set aside that $600 per month cash flow into a "down payment fund" and just let that cash flow purchase your next property in the Midwest.
You're getting $7,200 a year now with 0 invested by holding that duplex. That's pretty darn good. Just keep that ball rolling and let it gradually buy you more units over time. That way you don't miss out on potential future California appreciation and you still get to increase your cashflow over time.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes7y
Originally posted by @Dan Hall:
I'm looking for advice, my wife and I have been blessed to inherit a duplex from my father in-law in his passing and share this with her sister so we are 50/50 partners. My dilemma is that we own this 100% and cash flow $1200 a month so each party gets $600 a month once all costs are paid. I know this hardly sounds like a problem but my thoughts are as follows; The value is $450k so if we sell while California real estate is on this unrealistic high we pocket $225k cash and how many homes in the Midwest could we parlay this money with? I see all these posts and podcasts regarding 65k deals in the Midwest with various ways in buying with cash. I'm new to the rental business but am really looking for feedback from some of the pros as to what they would do if given the same choice. Is this a one in hand two in bush thing or should I pull the trigger?
Thanks, Dan
Absolutely, sell immediately! Just ensure you buy in a flyover state with Prop 13 and California appreciation!
Oh, wait.... :P
IRL accomplish your goals via a cash out refi or HELOC, and go from there. Don't let go of any good CA real estate without a REALLY good reason (unless it is to one of my buyers, of course!).
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes7y
Well, wait a minute here...unless this is some sort of 1031 exchange, you're not going to end up with $225K, you're going to end up with significantly less. If this IS a 1031 exchange, you have to find multiple properties to take up as much of the $225K as you can within a small window of time, and you'll have to do it across the country.
While it is certainly possible to find cash-flowing deals here where I live and work for $65K, you're going to be stuck operating these rentals from across the country. That comes with significant problems, especially in the $65K range. Apparently for some people, those problems can be overcome, but they're going to involve turning over a significant amount of responsibility to other people and dealing with a lot of risk, both of which will eat hard into your bottom line. I would read up on long-distance investing before I did anything. This is not a matter of putting up a forum post and taking the plunge the next day.
- 7yDan HallSacramento, CA · Member since 2019 · 4 posts · 1 voteOP
Thank you all for the feed back I have much to learn, I tend to agree with Travis DeForge and Chris Mason on my holding and saving for the next property. Jim K. you have a point to a degree regarding taxes but in this instance since it was a inheritance I only pay taxes on the above appraisal amount at time of purchase which was 385k so we would pay the difference on the current value. Another thing you pointed out is the timeline of reinvesting this money would be daunting for me at this beginning stage of my learning curve.
Thanks
- 7yMichael DangPro MemberRental Property Investor · Houston, TX · Member since 2015 · 454 posts · 273 votes
@Dan Hall Single family homes or smaller properties are just one option or even outside the Midwest. You can scale to a different asset type or partner with trusted folks to remain passive.
A lot of possibilities. You can contact me if you would like to chat. Just trying to share knowledge.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
Some good advice, and to add some more... a few things pop out at me, given how you describe where you are (not physically, but in your REI journey/inquiry):
- Yes, as someone mentioned, make sure you'd be 1031-ing the sale if you do that.
- As someone else said, $65k deals come with some risk. If you spend just a little more and get into the $90-100k range, whole different ballgame and less stress (depending on whether you're rehabbing or something, of course).
- You can pay cash for the cheaper properties but ultimately leveraging will get you higher returns. So if you have $225k, you could buy 2-3 properties for cash, but what if you bough several properties with financing-- 20% down for each. Your cash flow will be a lot higher, more maximized, and more properties (increased tax benefits, appreciation, hedge against vacancies, etc.)
- Buying out-of-state can be done just fine. A lot of people caution against it and say it's risky, but it's all in how you do it. You can buy a dumper that needs work and that's a whole different story than if you buy something nice, possibly turnkey, and have a solid team. Have to have the solid team in place, or everything goes belly-up.
- The other option is to not sell the current property but rather look into a cash-out refi. You get to pull most of the equity out, invest it into the Midwest properties, but get to keep the SD house and benefit from the tax benefits and appreciation still. Whether this is a good option or not depends on the numbers--you'd have to run the numbers on the refi (or HELOC, whichever route you go) to see what kind of payment that would leave you and where that would put you for cash flow. It may not work for that property, but if it does, snowballing properties is one of the best ways to max out your returns. Assuming you're cool with leveraging.
Hope that helps!
- Rental Property Investor · Brooke Park Drive · Member since 2018 · 1k+ posts · 2k+ votes7y
This is not a numbers only consideration there has been a death in the family and a sister in law to consider just do whats best for the whole family.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Dan Hall:
I'm looking for advice, my wife and I have been blessed to inherit a duplex from my father in-law in his passing and share this with her sister so we are 50/50 partners. My dilemma is that we own this 100% and cash flow $1200 a month so each party gets $600 a month once all costs are paid. I know this hardly sounds like a problem but my thoughts are as follows; The value is $450k so if we sell while California real estate is on this unrealistic high we pocket $225k cash and how many homes in the Midwest could we parlay this money with? I see all these posts and podcasts regarding 65k deals in the Midwest with various ways in buying with cash. I'm new to the rental business but am really looking for feedback from some of the pros as to what they would do if given the same choice. Is this a one in hand two in bush thing or should I pull the trigger?
Thanks, Dan
I'd suggest buying with financing. No need to use cash to buy the $65k Midwestern deals. We've got a bunch of them around, so they aren't going anywhere. Here are some other best practices for investing out of state.
- Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
- Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
- Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
- Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
- Make sure your property manager is a licensed real estate brokerage.
- Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.
- Multifamily Syndicator · Conifer, CO · Member since 2018 · 80 posts · 84 votes7y
Have you considered investing that 225K into a large multifamily apartment community (or several to diversify)?
That's the route I'd take.
Here's why...
Leverage the following:
1) The Like-minded Passive Equity Investors and together participate in purchasing more doors vs buying a SFR alone… (soooo many benefits here more below)
2) A Team of Trusted Operators!
Numerous doors beneath 1 roof is certainly notably less risky in comparison to a single family rental property. Having multiple doors under one roof aids to minimize the risk of unpaid rent as well as unexpected vacancy. For this reason, having more doors significantly strengthens the financial investment; the more doors the merrier!
The possibilities and scalability changes instantly when a passive equity investor partners with and rides on the back (experience and track record) of a trusted, dependable, proven team of Operators.
The 100% vacant, or occupied, status of a single family rental is instantly leveraged into a 50, 100, 200, or 300+ unit multifamily apartment community that will throw off cash flow and appreciate while the Operators execute the business plan.
More doors equate to less risk. A vacancy rate of 5% to 10% matters much less to the income available for distribution than does 1 door being vacant on a single family rental; when you turnover a unit it equates to 100% vacancy and absolute zero for income. Furthermore, when the Operators underwrite they should be underwriting with more vacancy than expected therefore this is already factored in to the Net Operating Income (NOI).
50 or more doors can support best in class 3rd party property management and do so at a lower cost than 1 door can. Actually most SFR owners try taking on the management themselves because professional management eats away at the NOI. Smart move? If you want experience as a property manager but if you are trying to generate more time and money being your own property manager isn't the task to tackle. Tagging on to that scalability fact is the decrease in time and closing costs one can achieve by buying 50+ doors in one transaction versus 50+ separate closings.
Hope this was helpful don't hesitate to reach out.
Dino
- 7yDan HallSacramento, CA · Member since 2019 · 4 posts · 1 voteOP
@Ali Boone Thanks for the sound advice, I’m leaning towards the turnkey class B homes as a safer way to start with diligent homework being my first long distance investment. As I gain experience and relationships with agents, contractors and property management I will feel more comfortable with the brrrr method. Thanks
- Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes7y
@Dan Hall $225k in the midwestern market I operate in, when used as 20% down with the bank I work with, will get you about 20-22 B- to B class units total, at right around a 10 cap, which with financing comes out to be a 20% return if you use a 15% long term vacancy and maintenance budget. 20% return on $225k is 45k/year, in comparison to your $7.2k a year. Considering the phase of the market we're in, I think that's a no brainer!
Hints: Don't buy with cash. Use financing. Don't buy a ton of units at once. Go in gradually, a few properties in the first 6 months maybe. Maybe mix in sfr with duplex triplex, and if you feel comfy play around with 4 and above. If you transition slowly you can make sure your properties are stable, you understand the assets you're involved in and have the right expectations. This will help this transition give you a positive experience.
Another big one- do notttttt go pick some major city to invest in. They're so saturated with investors already. Secondary and tertiary markets will help you ensure you're not competing with so many people that are willing to take a worse deal than you are. I recommend you only invest at a 10 cap or above.Hope this helps!
- Rental Property Investor · San Diego, CA · Member since 2014 · 1k+ posts · 2k+ votes7y
Hi Dan,
Feel free to reach out to me and message me. I was on Podcast 238 and did just that what you are wanting to do. That was in 2015 and now I am approaching 10 apartment complexes and approximately 200 units in totality. If I can do this then you can do it too.
This is right up my alley.
Swanny
- Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes7y
Use the equity but don't sell it man. The Midwest generally doesn't appreciate. As you got the home effectively for free just enjoy it. Borrow against it if you want to buy lesser quality elsewhere.
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
In ONE word: No.
Figure something else out.
Priceless advice!
- Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes7y
@Dan Hall Where in Cali is this duplex? If it's in a great location, I'd keep it. There are other ways to invest in the Midwest besides selling/exchanging it. If you're cash strapped consider a cash out refi. Also, be careful of properties in the 60k range and under. Looks amazing on paper, but rarely pens out due to the quality of tenants. If you do end up picking up properties in this lower pricer range, do you're DD. Not just on the property, but the market and immediate neighborhood. Good luck!
- Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes7y
@Chris Mason Are you sure you can HELOC on an investment property? I was always under the impression that it was extremely difficult to do that?
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Dan Hall:
@James Wise thanks for the sound advise, looking on Zillow and seeing what is available at the 85-100k range is a vast difference in some areas compared to the 50-65k range.
Ohhhh yea. Things change rather quickly.
- Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes7y
Originally posted by @Jonathan Oh:
@Chris Mason Are you sure you can HELOC on an investment property? I was always under the impression that it was extremely difficult to do that?
Yup, I've seen a bunch of them. "Extremely difficult" is subjective. You might have to call 20 different regional banks. Some would call that "extremely difficult." Some wouldn't.
- Investor · Las Vegas, NV · Member since 2019 · 499 posts · 259 votes7y
Originally posted by @Chris Mason:
Originally posted by @Jonathan Oh:
@Chris Mason Are you sure you can HELOC on an investment property? I was always under the impression that it was extremely difficult to do that?
Yup, I've seen a bunch of them. "Extremely difficult" is subjective. You might have to call 20 different regional banks. Some would call that "extremely difficult." Some wouldn't.
Good point. It probably was a subjective answer that I got. Thanks!
- Rental Property Investor · NC · Member since 2018 · 776 posts · 776 votes7y
@Dan Hall $7200/$225,000 COC is super low. I would look into selling or pulling out equity. That's a lot of money to risk on a first deal. Also, with cash like that, look into some bigger MFH. An experienced investor will gladly show you the way for a return. Maybe even look into syndication opportunities. Make sure to take the time to figure out the business. Best of luck going forward.
- Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes7y
Originally posted by @Dan Hall:
@Ali Boone Thanks for the sound advice, I’m leaning towards the turnkey class B homes as a safer way to start with diligent homework being my first long distance investment. As I gain experience and relationships with agents, contractors and property management I will feel more comfortable with the brrrr method. Thanks
That's literally the exact process I recommend people do. Not just because I'm biased towards turnkeys because they are what I invest in, but they teach a ton about the fundamentals and then once someone knows those, I can't imagine their BRRRR success not being much higher than it would be otherwise. Great to hear someone else thinks that too.
If you need any help on the turnkey front, don't hesitate to reach out.
- Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes7y
As I read through the comments, I noticed the 1031 suggestions and then the comment about appraisal at purchase. I was thinking a 1031 wasn't needed. Perhaps I misunderstand the situation, but was there not a reset of the basis when your father passed? I would think your basis is current value (value at death). If I have this wrong, would someone that does understand please explain this and correct me.
Second, I am sort-of a one trick pony, I invest passively in MF. That was mentioned above and I think it is a great way to invest funds to make a great return. This solves the Boot on the Ground problem. But one does need to be Sophisticated, even if you are Accredited, as you should not go there unless you understand how it works.
Having never experienced CA appreciation, I can't speak to that, but it does seem nice to have that opportunity with property that has a positive cash-flow.
Lastly, are you and your Aunt going to work together to make this decision?
Regards,
Charles LeMaire
- 7yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Charles LeMaire, exactly right. But any tax is also going to depend on when the estate was settled. Given that this has been in an aggressive market in a crazy place like CA with their taxation structure it wouldn't take long before it was the recommended scenario to 1031 that - even though they hadn't owned it for very long.
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