Looking to 1031 out of the California market

39 Replies

Hello BP! I am located in Southern California. In order to take advantage of the current market, I am deciding whether to sell my SFH Southern California property I bought in 2014 and do a 1031. As you know, the California market is saturated and is very difficult to get good positive cash flow. If I do decide to 1031, I would like to look for high growth opportunities (residential or commercial) in other states. I haven't done thorough research yet but a few options that I looked into are: Philly, Memphis, Nashville, or Austin.

Any suggestion is appreciated!

@Jason W.

I’m a fan of Philly. I do also have three new construction side by side duplexes that’ll be completed soon and that I’ll be looking to sell. If your interested let me know. They are located in Sharswood/Brewerytown/Girard College area. It’s definitely a growing neighborhood

@Jason W.

That's what i did last year, 1031 out of orange county into Memphis and Florida.

The tricky part is the deadline, you have 45 days to make a list of the replacement properties and 180 days to close. You can only buy what's on your list so if it sells from under you you're stuck.

Plenty of opportunities in all of the markets you mentioned. I may be partial but there is plenty of opportunity for both cashflow and appreciation in and around Philly. @Dave Foster is a great resource for 1031 Exchanges and has helped some of my clients facilitate them for deals I've worked on.

Good luck in wherever you decide to invest!

@Jason W. Perfect. If your planning on staying in California and you are cash flowing I would never sell it. You look young and this could be part of your long term retirement plan like mine.

@Alex Uman , thanks for that shout out.  @Jason W. , this is. as much a philosophical decision as it is logistical.  There's a bitter sweetness for the CA investor.  the appreciation is awesome.  The cash flow - not so much.  So when the appreciation environment stagnates and the local taxation and political scene becomes un landlord friendly this is what folks have to decide to do - exit CA to find better cash flow and maybe lose out on the next great appreciation run up.

CA also wants to make it just a little more difficult for those monies to leave the state with the "California Clawback" whic requires you to annually report on properties you 1031 out of CA.  It won't affect you in the least (other than the annual filing).  But if you ever later sell that property without a 1031 exchange CA will want you to pay tax to them for the amount of gain while it was in CA.  Not a show stopper by any means.  But something to think about.

As far as where to invest - the 1031 lets you go anywhere.  And it will let you change classes of real estate - moving from SF to MF and residential to commercial are all moves you can consider.

One piece of advice though - try to have enough due diligence done so you can be laser and narrowly focused on your replacement type and location before your old property sells. The folks I see having trouble completing 1031s are generally those trying to cast too broad a net and the decision paralyzes them.

Originally posted by @Jason W. :

Hello BP! I am located in Southern California. In order to take advantage of the current market, I am deciding whether to sell my SFH Southern California property I bought in 2014 and do a 1031. As you know, the California market is saturated and is very difficult to get good positive cash flow. If I do decide to 1031, I would like to look for high growth opportunities (residential or commercial) in other states. I haven't done thorough research yet but a few options that I looked into are: Philly, Memphis, Nashville, or Austin.

Any suggestion is appreciated!

Of course I am partial to Kansas City. It's a heck of a market with low taxes, good returns and a recession resistant economy. The other markets you mention are interesting but I don't know much about them. Hope that helps! And Dave Foster ks the best ;)

We did a 1031 exchange with our rental in Long Beach and bought 2 homes in Kansas City, MO and 1 in Birmingham, AL. All of the homes perform even during the pandemic and are giving us an 18% ROI. We're glad we utilized the equity to grow our portfolio out of state.

If you aren't house hacking, have equity, and are looking to cash flow I would move your capital to a different state.  We have high appreciation here but it's hard to cash flow and the equity is useless if you don't tap in to it.  

Let me know if you want to hop on a call to chat more!


Lindsey Iskierka

Real Estate Agent; The David Greene Team

DRE#01989065

(714) 393-1644

@Jason W.

We did that for an apartment in 2019, and we exchanged to Phoenix. The sell high buy lower in terms of banking appreciation will let you buy more dollar for dollar.

Phoenix made sense to me as it was our first out of state deal, and I wanted to be within close driving/flying distance to it. But Phoenix also makes sense for a lot of reasons we all know. It’s really what you’re comfortable with, IMO. Good luck!

We 1031'd last year from San Diego into the central Oregon Coast.   We sold one and bought three, and doubled our cash flow.   It's a somewhat rural area, with minimal industry, but rental demand is very strong.   

  The cash flow was far better east of the Mississippi, but we opted for easier access in a place that we wanted to go.   It's a long day's drive or a quick flight.    If we'd had any draw (relatives in the area, etc)  to a place like Kansas City, or Ohio, we would have chosen there instead since the cash flow can't be beat.   

Originally posted by @Jason W. :

Hello BP! I am located in Southern California. In order to take advantage of the current market, I am deciding whether to sell my SFH Southern California property I bought in 2014 and do a 1031. As you know, the California market is saturated and is very difficult to get good positive cash flow. If I do decide to 1031, I would like to look for high growth opportunities (residential or commercial) in other states. I haven't done thorough research yet but a few options that I looked into are: Philly, Memphis, Nashville, or Austin.

Any suggestion is appreciated!

It does not matter where you start as long as you develop your Core 4. The core 4 is David Greene’s strategy for long-distance and made up of a realtor, contractor, property manager, and lender. Once you have this team in place, you should be able to confidently invest in any market.

As for picking a specific market - I would go after one with an increasing job and population growth. I invest and work in Columbus, Ohio.

From your question, it seems you have not done your homework.

When you purchase your investment you need to know your goal and understanding the mathematical equation. Asking whether invest in Austin or Los Angeles, is wrong question.

But if you ask I want cash flow in balanced market, I want cash flow only or I want appreciation only, then you can have something.

Just so you know. In term of cap rate, Austin is already lower than LA.

@Jason W. The grass isn't greener. Our properties average over 30% CoC of equity in California it would be higher but they appreciate so fast it drives my CoC down. CoC is still less than the market appreciation and value add appreciation we do. California is a gold mine and everyone is jumping out for silver in other states. Don't get me wrong there is tons of money to be made in other states also I own in Idaho and they have done well too but nothing is like California in the past present and near future.

@Jason W.

I'm originally from the Philadelphia area. A handful of my close friends own multiple investment properties out there. They have done quite well from a CF & appreciation perspective over the last 10 years. I can connect you w/ a trusted realtor out that way if you need. 

@Jason W.

I'm not from any of those markets, but I like Austin a lot. We're investor-friendly agents in Denver and see a lot of the same things happening in Austin as we do here. Now, like Denver, Austin's not a great cash flow city. It's more a place to park your money, have someone cover your expenses, and bank on appreciation. Yes, I know that's blasphemy here on BP, but I don't see it as any different than picking a stock. Do the fundamentals point to long-term growth? Great, I'm in. Austin's got a diversified economy, a giant university (and numerous other nearby universities), good quality of life, and is a magnet for new and existing companies. (Tesla is building its new trucks there.) 

I like Nashville a lot, too. Don't know about Memphis. I'd steer clear of the east coast, which seems to be shrinking. If you want a contact, I know an awesome investor-friendly agent in Austin.

I'll also throw Colorado Springs in here. An hour south of Denver, big upside potential, lower entry point. 

Wherever you choose, I wish you luck!

@Zachary Beach "The grass isn't greener. Our properties average over 30%CoC of equity in California." Curious how and where you are achieving these numbers? And example illustration using your actual numbers that give you that yield?

@Steve W. Example property STR in big bear CA market value is about 400K I owe 252K on it so 150K equity it's revenue is over 100K, 35K for Jan feb March 2021. Operating and PITI and utilities are around 50K for the year. 50K plus profit on 150K equity. Plus the house value is up about 85K since a year and a half ago when I refinanced. So I only had 65K equity in it plus it was a brrrr and my all in including financing and furniture was 240K. We have a management company and employees that we pay that are included in the operating costs.

@Jason W. I love these questions, because I don't know how one can make a decision when suggestions are given without any hard data as justification. I sure can't.

You mention "high growth" and "good positive cashflow." I am going to assume you are saying you want a growth market (good fundamentals) but can still give you some positive cashflow - in other words you want both but prioritize growth.

I put a chart together from Census and BLS data from 2010-2019, used to compare different MSA. I included the cities you mentioned, plus a few more mentioned so far in this thread. I take "Growth" to mean demand, which is population growth, along with a corresponding job growth. And ideally, those jobs a good high paying jobs, meaning income growth (which allows people to pay more for housing). However there is also supply side, which I take to be permits pulled as a percentage of existing housing units, and general affordability (median income / median house price), the higher the ratio the more people can afford to pay for housing. That's the general idea behind the chart.

The following is my own opinion to help describe the charts, but that's all it is - my own interpretation. I am not saying any are good or bad markets, the question to ask is - do they meet your goals/criteria?

Austin and Nashville look like high growth, Memphis and Philly not so much. Comparing Nashville to Austin, looks like they have comparable affordability, with more permits (supply) being added to Nashville. Therefore at first glance it appears Austin has the better supply/demand growth metrics, of the markets you listed in your opening post. 

Some other markets commentary: Colorado Springs has a good mix of growth and balanced supply, Phoenix's growth seems to be outpacing the permitting, and Columbus though lower growth also looks pretty balanced. 

I think it's also worth to take a look how the markets have handled 2020 job losses and recovery.

Most node-dived pretty hard, but if you compare Memphis vs Philly, which has comparable job growth numbers at the peak, looks like Memphis has essentially recovered whereas Philly is flattening. Nashville and Austin have high job growth and look to be recovering well, Phoenix less so.

Last thing I'll mention is a concept of "shadow supply" or potential hidden supply to come on the market due to fallout of foreclosures from 2020 and moratoriums, as described by Ken McKelroy. This is not a prediction, it's just looking at data and trying to take your best educated guess. Check out his videos on youtube, and here is one of the links he provided. 

U.S. Foreclosure Trends | RealtyTrac