California Real Estate Investors: Prefer A Clean $10 Or A Dirty $20?
Posted on August 5, 2008 @ 11:13 am - Written by BawldGuy
It amazes me every time I see it, but some folks are so tied to either appearance or what others think, that it affects their judgment. Seriously, if I offered you the choice between a clean 10 dollar bill and dirty 20, wouldn’t you choose the 20?
Of course you would. Investment choices in real estate force this kind of decision all the time. Here’s an example one of my clients faced a few years ago.
In the San Diego area, La Mesa (LM) is a very attractive investor destination — or was ’till the current market correction took the shine off. People, whether owners or renters, tend to live there on purpose as opposed to for financial reasons. East San Diego (ESD) is one of the oldest, almost original SD areas that in the ’60’s was where your grandparents might have lived, but not today. ESD’s reputation became one of neighborhoods for low income families, with relatively high crime, poorly performing schools, and not one national grocery chain.
I’ve taken my clients to LM to invest in income property over ESD for decades at a 20/1 pace. This was especially true when it came to capital growth. Historically, LM has attracted higher quality tenants, demanded higher rents, experienced much better appreciation, was much more in demand, and sold about a half hour after the decision to sell was made.
Several years ago, maybe around 2002, things began to change in ESD. The government decided it needed massive redevelopment, and the private sector then followed with even more capital. New schools were built. Police presence was not only increased, but in a permanent way with new stations and ‘neighborhood’ satellite offices. Albertson’s is there now, the first national chain grocery store of its size in probably 50 years in ESD. And the ultimate indicator that an area has finally arrived?
Drum roll please……..They attracted their very own Starbucks!
The bottom line, hundreds of millions of dollars in both public and private money has been poured into ESD with predictably positive results. At the beginning of this process I began to recommend to some of my clients that they should strongly consider moving some of their equity to ESD. Again, this was about 5-6 years ago.
Jim and Tess did exactly that. I found four units for them that included a couple duplexes on one lot. I also noticed that a split had been almost completed then abandoned several years before. To make a long story short, they followed my advice and traded into the units. They then finished the work on the split, ending up with two separate duplexes on their own lots.
The appreciation for the subsequent years exceeded that of LM, something that hadn’t happened in my experience — and I moved to San Diego in 1967. I traded Jim and Tess out of those duplexes just under two years later. They realized a gain of over $200,000 in roughly 22 months. If they’d have gone to LM they would have made a very solid gain, but nothing like that. Their ESD tenants didn’t speak English very well, and the units required some TLC early on, both not likely to have been factors in LM properties.
I estimate Jim and Tess made an additional $50,000 by going to the so-called ‘inferior’ location. And to their credit they weren’t surprised that a dirty $20 was much better than a clean $10. Imagine that.
This relates to California real estate investors today. They holding on to what they think is their clean $10, and missing out on what they perceive as the dirty $20. The huge irony in all this is the $20 they’re missing? It ain’t dirt at all. It’s well located income property in the path of growth, attracting quality tenants. It’s decades younger, and offers the ability to acquire 2-4 times the property in terms of dollar value for the same amount of equity.
Tax shelter?
Most leaving their high priced, high equity CA income properties are increasing their depreciation by wicked fun amounts. Try 5-10 times what they left. Seriously. This allows the high wage earner to include in their Purposeful Plan a strategy allowing them to exit tax free cash while executing a tax deferred exchange. (1031) Staying in CA will literally cost them millions in net worth over the long haul. Why would folks do that to themselves on purpose? The answer is they wouldn’t. They’re simply unaware of the options on their menus these days.
I can install those options painlessly. Contact me today, and we’ll explore your options. The ability to be ‘Stealth Investor’ is still available. The radar still isn’t picking prudent investors up on the screen. Once everybody realizes what they’ve been missin’ on their own menus, there’s gonna be a lot more buyer competition. Currently, that’s not the case. We like that.
