Your Income Property Is High Priced? Here Are Some Questions For You

Posted @ 1:01 am - Filed under 1031 Exchanges, Boise, Buying Income Property, Cool Info, Real Estate Investing, Real Estate Markets, Retirement, Selling Income Property

Attention San Diego investors: This is primarily addressed to you.

Oh, and if your area is currently getting more than $400,000 for a duplex, this is for you too.

If this was a bull market would you sell or exchange? If the answer is yes, would it still be yes if we’re talking about the real market we’re in? It should be the same answer. Let’s make this even closer to home. Would you buy the San Diego area units you own today? No?

Why?

That’s a trick question. We both know why. It’s because you can’t make sense out of a duplex with a market value of $500-700,000 or a fourplex for $850-1,000,000 — nobody can. And if you wouldn’t buy your La Mesa, or North Park or wherever (San Diego) units for their current value, what makes you think other investors would?

Graduation from M.I.T. isn’t a prerequisite for arriving at a numbers based decision.

This correction may not last too much longer (from my lips to God’s ear ). Who really knows for sure? I don’t. But let’s say by next spring, we’re back on an even keel. It’s time to sell, or probably, exchange.

Here’s why. It’s as simple as A B C.

Yes, it’s a buyer’s market, and yes I’m telling you to sell or exchange — because you’ll be taking your net equity to much more attractive regions which A) Have much lower prices B) will allow for increased leverage with all its benefits, when used prudently and C) will very probably out-appreciate most areas. Even if San Diego enjoys higher appreciation — to what end? To be even less attractive than before? And lest we forget, far off regions are now far more accessible to the relatively smaller investor who. Because of this, they are conducting comparisons that don’t put San Diego, and places like it, in a very good light. (He says, with a straight face.)

Part of the analysis has to include where you’d put your equity if you did sell or exchange. We don’t need to go through each area. Let’s just agree, there are several from which to choose. And the reason to invest in them is because even though you took your equity out of San Diego during a buyer’s market, you’ll also be buying in the same conditions — but for a lot less money — which means a lot more properties.

Take Boise, Denver, or Kansas City as examples. If you sold one
duplex in Lemon Grove and netted say, $200,000 — you’d soon be the proud owner of over $1.5Mil in property. It’s kinda like getting a refund on a real expensive suit at Nordstrom. Imagine being able to buy Nordstrom quality clothing, but being able to find those same clothes in the Dollar Store.

Our experience in taking income property owners from expensive areas to lower priced and solid growth regions, has shown us that analogy is pretty much on point. (OK, it’s a little exaggeration.)

Let’s take a look at what I just said. If you effect a tax deferred (1031) exchange from a duplex yielding a couple hundred grand, you’ll be able to buy at least $1.5Mil in lower priced, growth areas. Now you find yourself with three times the property you left in San Diego. If San Diego bounced back a little more quickly than your new region and appreciated at 5%, while your new stuff went up only 3%, what the result be?

Your old SD duplex was sold for $500,000 — at 5% it went up $25,000.

Your new properties were acquired for $1.5Mil — at 3% they went up $45,000.

Helllooo — 80% better.

Look — what I’m saying here is this: You can stay where you are and stagnate until retirement. Or, you can take control of your situation, and get your net worth jump-started and growing again. Remember when it used to grow so nicely? It can again – but not ’till you realize what, in fact, your real situation is.

Imagine how well you’d be doing at 5%, 7%, or 9% appreciation. It’s far more likely the growth areas with lower prices, an increasing job market, and a predictable long term increase in population, will appreciate at roughly the same level of almost any comparable region — given similar demographics.

This isn’t rocket science. There are many who’d like you to believe it is, but it simply isn’t.

If you’re in San Diego, or any So Cal income property for that matter, you need to seriously review your current situation. Get out while the gettin’ is good. Once this correction runs its course, and your property starts slowly rising in value, remember the question I asked you first:

Would you buy your income property now for today’s value? Of course not.

Some silly questions now — but I guarantee your answers will be dead serious.

Does it make sense to trade into a growth area, while simultaneously doubling or tripling what you own? A trick question if there ever was one. (This isn’t predicated on negative cash flow, by the way. We don’t like it either.)

Can you use another $40-70,000 in depreciation? (Yes, we’re kidding. Who wouldn’t want more?)

Does cranking your capital growth up from a lousy 5-10% up to at least 20-30% or more sound like a prudent move to you? (Come on, smile. These questions are meant to illustrate the obvious.)

Finally: Write down on a piece of paper exactly why you’re not trading your San Diego (So Cal) income properties right now — if not sooner?

My guess is, half the folks who actually do this will end up with either a blank sheet of paper, or one full of squiggles.

Get outta Dodge now — it won’t be long before that option will become much more difficult to execute.

This entry was posted on Tuesday, July 24th, 2007 at 1:01 am and is filed under 1031 Exchanges, Boise, Buying Income Property, Cool Info, Real Estate Investing, Real Estate Markets, Retirement, Selling Income Property. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.