Out of state Investing

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Out of state Investing

Brian Koralewski
Real Estate Broker · New York, NY · Member since 2015 · 10 posts · 7 votes

Hi All,

I am from NYC/Long Island area.  My parents currently own a co-op in Queens which I would like to sell, for around 200,000+ (based on previous sales).  They want to sell this co-op to me.  I have other ideas however: I would take the 200,000 and buy 1b/1ba and/or 2b/2ba units in another state (say North Carolina or Florida).  My parents are currently netting $700/month for their co-op - my thinking is to buy 3-5 cheaper units (between 40-60K) in other states for the full amount (no mortgage).  The net cash flow would be considerably higher, and you'd have multiple units instead of just one.

My question would be concerning the tax implications if I transfer the proceeds from the sale of my parents co-op in NYC, to multiple condo/co-op units in another state - will we be taxed or would this somehow qualify for a 1031 exchange??

Additional questions - where are there reasonably priced condos/co-ops that would provide decent cash flow?  (I have been looking in Charlotte, and also Boynton Beach, Florida, but am open to anywhere).  

Additional caveats - I have no steady income (apart from $1600/mo Unemployment) as I just left my professor position after two years, but I do have a large amount of savings (around 50K).  My credit score is perfect, and I have no debt along with minimal expenses.

If all goes well - I also plan to take out a Home Equity loan on my parent's house, since it is also all paid off and worth roughly 7-800K. 

Sincerely appreciate your time and help.  Looking forward to discussing more with you.  

-Brian from Floral Park, NY

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Trevor Ewen
Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
10y

@Brian Koralewski

I invest entirely out-of-state despite living in Queens. We enjoy our careers and options as a child-free couple at the moment, but we have no interest in paying the high price of entry to New York landlord-ship. 

Although I can't speak to your particular tax situation. I have a couple tips on out-of-state investing:

1) Management is everything. The best people (of which I am not one, still pretty new to this) tend to say that I would rather invest in a mediocre area with a great team than a great area with a poor team. My entire investing career so far validates this point beyond a shadow of a doubt. My team(s) is the only thing that allows me to sleep at night. Audition the new market, but audition your management and contractors harder.

2) Condos and coops are a mixed bag for investment. Most (not all) people on the forums steer clear because of bad experiences with an HOA and converted primary residence. This is also known as accidental landlords. HOAs tend to be the kind of organizations that support the will of owner-occupants, and are rarely kind to verifiable landlords in the building. I think this BP podcast with Nazz Wang should give you a balanced perspective on that topic.

3) Some things are too cheap. As an out-of-state landlord, you are subject to a lot of proxy in your transactions. You will spend your time trusting agents, inspectors, plumbers, and electricians about the merchandise. Right now I have a minimum (not max) of 60k. Anything under that is very likely below the class of tenant I can deal with, or too much repair work to make a confident estimation. 

Some people poke fun at the returns out-of-state landlords receive, but it's a reality that some of your money gets eaten up by the prevailing local knowledge. As long as I am beating the stock market (and learning), I am happy.

Always keep in mind that a big part of your advantage is your ability to collect an NYC salary and apply that money to markets where you get more value / dollar. 

Hope that's helpful. Any more thoughts on specifics, feel free to pm.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Brian Koralewski, Yes it is possible to use the 1031 exchange to sell the NY property and buy multiple properties in another state and defer the tax on the gain.  

    However, since your parents own the NY house they would need to purchase the new properties in the same name in which they hold the NY property.  This will probably preclude you from taking title initially.   However there are ways to transfer the title into a business entity or to you using a variety of strategies that a good accountant and qualified intermediary can show you.

    The bottom line for you at this point is that it is possible to do what you are suggesting and is a powerful tool to re-position the equity from the NY property into something that cash flows better for you.

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  • Darrell Shepherd
    Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
    10y

    Different strokes for different folks.  Does Queens have the same increase potential that Brooklyn just went through?  

    You'll be shocked at the difference in taxes in the southern states and what that does for your cash flow on rentals, though.

    From a math perspective, the biggest advantage of real estate over other investments is leverage, especially when the rates are as low as they are.  Hard to harness that without a job, but its there and IMO it doesn't make a lot of sense to buy up a bunch of $60k houses with cash, better to leverage them to like 50-60% and buy a few more.  BTW, $50-$60k will buy you a decent 3/2 in a lot of areas.  1/1's and 2/2's dont really exist down here unless you are talking condos and condos don't make much sense for rentals because you give a lot of control.  I got a $7500 assessment on a townhouse I owned less than 9 months once.  For a new roof I could have done for $3k and didn't really need to be replaced on my unit.

    It varies by markets, but as a general rule, the lower your rents are the more hands on your management will be.

    Saying that, you can buy houses in Atlanta for $60k that will rent for $700 on Sec8 pretty handily. I bought one for $48k last year, put $5k in a rehab and rented it for $950 or so (then sold it for $81k, I don't like to hold rentals). I'm in the game and well networked, those deals arent in MLS, but they're out there.

    1Reply
  • Xavier Navas
    Centereach, NY · Member since 2015 · 16 posts · 5 votes
    10y

    Have you considered the management of the properties? If you invested in a different state,  it would be wise to hire a prop management company.

    I don't know much about investing outside of NY, but I am considering that as well . But i've heard you should invest in red states  because they favor landlords over tenants. You won't have as much trouble evicting them if that was the case. States like NY are tenant friendly and even if your tenant doesn't pay, they have a lot of leverage because the laws favor them and it could take you up 3 months if not more to evict them

    0Reply
  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
    10y

    @Brian Koralewski

    I invest entirely out-of-state despite living in Queens. We enjoy our careers and options as a child-free couple at the moment, but we have no interest in paying the high price of entry to New York landlord-ship. 

    Although I can't speak to your particular tax situation. I have a couple tips on out-of-state investing:

    1) Management is everything. The best people (of which I am not one, still pretty new to this) tend to say that I would rather invest in a mediocre area with a great team than a great area with a poor team. My entire investing career so far validates this point beyond a shadow of a doubt. My team(s) is the only thing that allows me to sleep at night. Audition the new market, but audition your management and contractors harder.

    2) Condos and coops are a mixed bag for investment. Most (not all) people on the forums steer clear because of bad experiences with an HOA and converted primary residence. This is also known as accidental landlords. HOAs tend to be the kind of organizations that support the will of owner-occupants, and are rarely kind to verifiable landlords in the building. I think this BP podcast with Nazz Wang should give you a balanced perspective on that topic.

    3) Some things are too cheap. As an out-of-state landlord, you are subject to a lot of proxy in your transactions. You will spend your time trusting agents, inspectors, plumbers, and electricians about the merchandise. Right now I have a minimum (not max) of 60k. Anything under that is very likely below the class of tenant I can deal with, or too much repair work to make a confident estimation. 

    Some people poke fun at the returns out-of-state landlords receive, but it's a reality that some of your money gets eaten up by the prevailing local knowledge. As long as I am beating the stock market (and learning), I am happy.

    Always keep in mind that a big part of your advantage is your ability to collect an NYC salary and apply that money to markets where you get more value / dollar. 

    Hope that's helpful. Any more thoughts on specifics, feel free to pm.

    2Reply
  • Timothy Reeb Jr
    Real Estate Agent · Union City, NJ · Member since 2015 · 35 posts · 7 votes
    10y

    Hi Brian,

    Upstate NY, Buffalo in particular has a great entry point as many 2-3 family homes can be bought in entirety for $60,000 or less, some turnkey. In this scenario you wouldn't have the same issues if you were to buy an out of state property but reap the benefits of higher cap rates(10-15%). You could still use 1031 exchange to evade the taxes and always use a 203k for any renovations you may want to include. Elon Musk's, SolarCity, is building a solar panel factory in Buffalo bringing 1,500 or so f/t jobs and it is looking like a great opportunity for green energy developers. Imagine having the only properties right now where you can advertise "all utilities included" and not have to pay it out of pocket. 

    Feel free to pm me with more details about your investment ideas and plans. I would be more than happy to lend a hand. Best of luck with all your future endeavors.

    Tim

    1Reply
  • Ken Quagliata
    Construction Superintendent. Broker. General Contractor. · Middle Village, NY · Member since 2015 · 42 posts · 9 votes
    10y

    Trevor Ewen I live in Queens and am currently invested in multi family homes in Queens Long Island and PA. Where are you investing out of town? How did you find your management team and what's the furthest you'll invest?

    0Reply
  • Brian Koralewski
    OP
    Real Estate Broker · New York, NY · Member since 2015 · 10 posts · 7 votes
    10y

    @Dave Foster:

    Thanks a lot - this is great to know.  I do not know personally any accountants/intermediaries -  if you know of any in the NY area that you can refer me to please do.  Additionally logistics of this deal would be another issue to discuss with a qualified intermediary - how to exactly coordinate the sale of the co-op with the purchase of the out-of-state units.  I presume the best move would be to locate several potential units (say 5 or more) and give verbal interest, before listing the co-op.

    @Darrell Shepherd:

    Appreciate your input - thank you.  I am looking for condos/co-ops specifically because I want a hands-off approach - lay down the cash for the unit and have a prop. manager take care of any issues.  Not looking to renovate or remodel and/or flip for now.   Agree about the 3/2 - would be open to them as well.   

    @Xavier Navas

    Agreed.  I would definitely either use a prop. management firm or buy a unit that comes included with maintenance.  

    @Trevor Ewen:

    Thank you for your input.  60K appears to be a good cut-off, although I've seen units in Boynton Beach, FL listed on Zillow appear to look very decent that have been from 30-50K.  Will check out the Nazz podcast you mentioned.  In regards to prevailing local knowledge - that's to be expected for sure.  I would visit the areas of interest and go into the local shops and realty offices, preferably without disclosing that I am an out-of-towner.  (no doubt my accent would be a dead giveaway however).  Am definitely interested in how you created your team and where you are primarily investing currently.  

    Thank you all again for your invaluable input and advice.  Will keep posting updates.   

    -Brian

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    Hi @Brian Koralewski,

    There are a number of issues here.  If your parents sell the property and then give the funds to you or you use them to acquire other property under your name, they have effectively "gifted" you the funds.  There may or may not be any gift tax issues to worry about here, and it may not make any difference, but I would consult with your tax advisors to make sure that you do what is right for you and your parents. 

    The sale of their New York investment property would trigger a taxable gain for them unless they implement some tax planning strategies such as the 1031 Exchange. 

    Your parents could certainly sell their New York investment property (co-op) and then 1031 Exchange into any other state they wish, but they would have to be the ones acquiring the replacement property if they want it to be part of their 1031 Exchange transaction. 

    You could then have them gift part of the acquired property to you each year under the annual limitations.  There are numerous moving parts here and numerous ways to deal with it, so it is important to talk to your tax advisor. 

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  • Brian Koralewski
    OP
    Real Estate Broker · New York, NY · Member since 2015 · 10 posts · 7 votes
    10y

    @Timothy Reeb Jr

    That is great to know.  Thanks a million.  Will pm you soon for sure.  Looking for 1/1, 2/1, 2/2 units as opposed to multi-families, but I am open to any properties that would yield steady cash flow returns.        

    @Bill Exeter

    Really appreciate your input - will have to find a good tax advisor to discuss this with.  If you know of any in the NY area please refer them to me.  Ideally everything would remain under my parents name initially if that is the best way to reduce any taxes on the sale.   

    0Reply
  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    @Brian Koralewski,

    If your parents 1031 Exchange out of the NY co-op and into the new property, they would defer all of the taxable gain into the new property if they follow the 1031 Exchange rules.  The benefit to you is that upon their passing you can receive a complete step-up in cost basis, which means that the taxable gain completely goes away.  There are reasons for parents to gift property, but the deferred gain is also "gifted" to you as well and you would be responsible for paying their taxable gain in the future should you cash out, so generally it is considered better to keep the property at the parents level.  This is why it is critical to meet with a tax advisor to ensure that you check the transaction from all angles to make sure that you go down the path that is best for you.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.726 Reviews
    WebsiteView Page
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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    10y

    @Brian Koralewski

    Welcome to Bigger Pockets community. Be sure to check out “Learn” for all kinds of useful resources and free how to guides.

    0Reply
  • Yifan D.
    Rental Property Investor · Bethlehem, PA · Member since 2015 · 26 posts · 14 votes
    10y

    @Brian

    Can you rent out the co-op? If yes, you can get a cash out from bank using parents as lendees without selling the co-op.

    When you buy another place, ask your parents to issue you a market interest private mortgage note with them being the lender and you the lendee.

    If you have a car, how far you are willing to drive to get deals? You will be hard pressed to get the 2% within 1 hr of nyc.

    0Reply
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