Sell or not to sell in hot CA marekt?

22 Replies

Hello fellow investors, 

I would sell my investment properties in CA if not for challenges in finding decent replacement properties via 1031 exchange.  What are your strategies? Sell now to capture the market appreciation and pay capital gain tax OR try best to find OK replacement properties with compressed cap rate via 1031 exchange to avoid tax?   Maybe many people are wondering the same question. Love to hear from you.

I just sold a condo in Orange County, I was receiving $600 positive cash flow. I am looking at multi-family in Nashville and Cleveland with 10 caps. My cash flow will go to at least $2500 per month, plus I can depreciate which will reduce my taxable income by $25000 per year. We are at the top end of appreciation (or close to it) with affordability index at 23%.  My focus is only on cash flow and any appreciation will be an additional bonus.

Landlording isn't for everyone.  Have you considered fractional ownership in commercial real estate?  I've been hearing many of my landlord friends looking in other directions than buying more rentals.

Originally posted by @Spencer Taylor :

Landlording isn't for everyone.  Have you considered fractional ownership in commercial real estate?  I've been hearing many of my landlord friends looking in other directions than buying more rentals.

Originally posted by @Jack Martin :

I just sold a condo in Orange County, I was receiving $600 positive cash flow. I am looking at multi-family in Nashville and Cleveland with 10 caps. My cash flow will go to at least $2500 per month, plus I can depreciate which will reduce my taxable income by $25000 per year. We are at the top end of appreciation (or close to it) with affordability index at 23%.  My focus is only on cash flow and any appreciation will be an additional bonus.

Hi @Rachel Zhang , the San Francisco Bay Area reached its peak acceleration in the velocity of sales price increases last year. Prices are still going up, but at a lower rate. There's still time to get out, but as a local real estate broker, I would take the money to a different market. There is still good money to be made in AZ, FL, GA, TX and other states, however, picking the right submarkets is key. Hence I recommended looking at syndications (DSTs), if you are qualified as an accredited investor. They can help you diversify into many markets with your gains, and 1031 exchange will help you defer taxes as you diversify for more safety. 

[email protected] Leslie Pappas 

You are right on 2016 reaching the peak! I have invested in DSTs with my after tax money. This time, I plan to use the proceed from a property sale to buy OOS opportunities. But as I understand, most DSTs can not accept 1031 exchange, unless I find my own apartment being the sole owner . If you have good opportunities , I am open.  Thank you. 

Isn’t the slowing or stalled appreciation in San Francisco basically a precursor to what is likely coming down the pike in other areas esp in other states that get discussed here?

I think the answer depends on the numbers behind some of your rentals. When did you buy them, what's the value now, what are the rents, how much have the rents climbed each year, what is your projection for future rents...etc. 

I think a lot of CA investors don't think about what the cost of cashing out now could be in the future. Just imagine all the people kicking themselves for selling at even prior high points. If your properties are in good areas and you have good tenants then I'll bet the rents and values will continue to skyrocket over the long term even though you will most likely experience some downturns here and there. I'd love to own CA property myself. 

Originally posted by @Ryan E. :

I think the answer depends on the numbers behind some of your rentals. When did you buy them, what's the value now, what are the rents, how much have the rents climbed each year, what is your projection for future rents...etc. 

I think a lot of CA investors don't think about what the cost of cashing out now could be in the future. Just imagine all the people kicking themselves for selling at even prior high points. If your properties are in good areas and you have good tenants then I'll bet the rents and values will continue to skyrocket over the long term even though you will most likely experience some downturns here and there. I'd love to own CA property myself. 

The most experienced CA investors I know of would not even entertain selling anything until they are in final stages of life, 80s aged and even then they just might switch to NNN. It is only a buy and really hold game for them, even the first condos they bought.

Good luck!

I am not among the most experienced:) but I feel the same way. I have made the sacrifices to buy in A+ areas in SF and vicinity over the past 10 years and don’t have any intention to sell. Now with this portfolio in place, I may venture to do what I call a “B” investment either in CA or out of state. I still won’t sell the A properties. Likely in time they will be worth more.

Originally posted by @Rachel Zhang :

Hello fellow investors, 

I would sell my investment properties in CA if not for challenges in finding decent replacement properties via 1031 exchange.  What are your strategies? Sell now to capture the market appreciation and pay capital gain tax OR try best to find OK replacement properties with compressed cap rate via 1031 exchange to avoid tax?   Maybe many people are wondering the same question. Love to hear from you.

Unless you sell in a down market, it's always challenging to find a decent replacement property with an appreciation play once that strategy has reached its goal because the market is hot at that point.  You are either in it for the very long haul and ride the market waves or you pivot and switch asset classes along the way.  Good luck with your search.

Have you considered pulling the equity out using a cash out refinance? I only have one rental right now (and it’s in CA) that has experienced some nice appreciation. I plan to hold the property long-term, so harvesting some equity while the market is high seems like it might make sense.

Never heard of a reverse 1031 Exchange. Always learning from the Bigger Pockets Forums! Another way to secure the property is to get an option on a property and to exercise that option when you are ready to sell. I think California still has upside but if you find an emerging Real Estate market to invest in and transfer your profits to that area you will see your wealth explode! Just make sure you understand what you are buying and you are well capitalized.

Rachel,

Definitely like the cash out and refinance idea and spread your money into some out of state markets that are performing well and still offer a total return concept of cash flow and forced appreciation.  This gives you some geographic and perhaps niche diversification.  Cash inside of syndications have opportunities to 1031 within the family sponsor umbrella as they move from one project to the next.  You just can't 1031 in or out of the sponsor umbrella for personal reasons.  Niches like value add apartments in Texas specifically DFW area is where we have had a lot of success.  Couple articles that may help w/your education. 

https://www.biggerpockets.com/blogs/9145/65331-syn...

https://www.biggerpockets.com/blogs/9145/65780-syn...

https://www.biggerpockets.com/blogs/9145/53820-why...

Unless you're hard-pressed for the money, I would not pay the capital gains taxes and would instead 1031 exchange into other cash-flowing properties or DST fractional interest properties. You could even research more exotic uses of the 1031 exchange like vacation properties (where you may be able to live in it for 14 days out of the year), private REIT's, or crowdfunding. However, if your properties are in California, I don't think that we've seen the peak of appreciation yet, so I wouldn't sell.

If you're considering the reverse 1031 exchange, you need to know that there are significantly higher costs and you should factor those higher costs into your decision.

@Rachel Zhang , Actually most if not all DSTs do accept 1031 money. That is specifically why they are structured as Delaware Statutory Trusts. Two other passive 1031 compatible instruments are NNN leases or Ground leases and Tenants In Common projects. All allow you to continue your tax deferral indefinitely and still access your allowable depreciation. DSTs are probably the lowest on the totem pole of returns. But They're all worth exploring as options for your next move that will still allow you to keep your tax deferral alive.

There's been several good options floated here.  Your best bet is a hybrid approach that we're seeing frequently with our clients.  Take the properties that have the least amount of profit and depreciation taken and the greatest amount of equity.  Sell those to access cash to invest where you want after tax or protect from risk.  Then 1031 the properties that have the least amount of equity and highest amount of profit.  This goes into growth properties and leveraged cash flow properties where you can take some risk with the hidey hole properties providing security.

Security without totally shutting off the growth spigot.

Originally posted by @Rachel Zhang :

[email protected] Leslie Pappas 

You are right on 2016 reaching the peak! I have invested in DSTs with my after tax money. This time, I plan to use the proceed from a property sale to buy OOS opportunities. But as I understand, most DSTs can not accept 1031 exchange, unless I find my own apartment being the sole owner . If you have good opportunities , I am open.  Thank you. 

Hi Rachel. All the DSTs opportunities I work with are 1031 eligible and most of my clients are investing through doing an exchange. Happy to answer any other questions.

https://www.biggerpockets.com/blogs/7993/65925-who...

Thanks so much for everyone's inputs and help! I really appreciate you and our community.   Sorry that I did not response earlier,  I was busy getting a house on the market. Yes, Its holiday, but hope that San Francisco is still good to sell. 

The discussion further helps me to clarify my intention. I will keep most of the properties and cash out, and use the funds to buy multi units , probably out of states. But how to get the equity out is another topic. Lengthy loan procedure and documents ! But I will be gladly do it when I get a good percentage of equity out. I wont be thinking of selling properties if not for the difficulties to get cash out. In California , we have a local bank doing no-doc HELOC for investment properties, but they will only lend 50% of the market value. I tried documented loan, but income to debt ratio did not qualify me to borrow against every properties. I do not know how they looked at the numbers.

Will use the proceeds from this sale to 1031 exchange. Because this one I purchased last year, with a higher base. Thanks for reaching out to me, thanks for your information and help.  Will contact you the soonest !  

Rachel