California Real Estate Investors Using 1031 Exchanges To Turbo Charge Portfolio

Here’s how I explain to real estate investors in other states what it’s like to trade equity from California to much lower priced growth regions.

It’s kinda like buying that killer Norstrom’s dress for yer wife. You honestly thought it was perfect for her. But after she stopped laughing, and could speak English again, you were back in the car, headin’ for a refund. Now, imagine you hafta spend the entire refund at the Dollar Store. That is what the CA real estate investor faces when he exchanges his properties’ equities to another state.


Take a Bay Area, San Jose (Palo Alto), or San Diego income property owner. We’ll use a San Mateo duplex. Let’s say it can sell for $850,000 and with a loan balance of $400,000 the net proceeds would be roughly $385,000 or so. If they paid $600,000 back in the day, their annual tax shelter runs in the neighborhood of $18,000 +/-. (Should be more, but that’s another post.) Their current cash flow is either zip zero nada zilch, or enough to treat the family to a monthly dinner at Sizzler. Oh boy! We’re goin’ to Sizzler!

Here is the ‘before & after’ picture when their 1031 tax deferred exchange has been successfully completed.

They went from an $850,000 older property to +/- $2,000,000 in new or newer properties.

Tax shelter went from about $18,000 to about $50,000. (More likely $60,000+)

Cash flow went from ‘We’re goin’ to Sizzler!’ to well. about the same. (Goin’ for capital growth.)

Now owns 2? times the property in terms of value. They’ve nearly tripled their tax shelter. Also, ‘cuz they now own several properties, their menu’s options have been increased when it comes to future opportunities.

Now let’s have a little crystal ball fun. Mine’s still cracked, but we’ll make do.

Crystal Ball

If the San Mateo duplex owner opts to stay put, what happens down the road? Well, if this owner is typical of our experience in NoCal, they’re convinced double digit appreciation is just around the corner.

Let’s say they’re half right. They recover magnificently from this market correction with 5% appreciation five years running. We tell folks our opinion is the growth regions have the potential to appreciate at 3-7%, give or take. We’ll use the same 5% here.

Stayin’ means their NoCal duplex is now worth about $1.085 Million.

If they’d traded, their new stuff would now be worth about $2.553 Million.

Net proceeds at sale, NoCal: $610,000

Net proceeds at sale, New stuff: $810,000

Forget tax benefits of tax shelter, whether it’s taken against work income, or later through more sophisticated Purposeful Planning. In five short years not movin’ cost the duplex owner $200,000!

Funny Money

That isn’t play money people. Now, stretch that out for the next 15-30 years and the decision to remain in California has cost the income property owner a figure requiring two commas. Don’t just glide over those words. Two commas means millions. Every million dollars of net worth not realized ‘cuz ‘CA real estate is better no matter what’ means $50-80,000 in annual retirement income you won’t be enjoying.

Real estate investing for retirement has as a primary goal, the increase of the investor’s net worth. Duh. This is ‘cuz they realize all cash flow is, when boiled down to it’s simplest terms, a yield on a pile of capital. The bigger the pile of capital, the bigger the cash flow. Again, the congregation says, Duh.

If this makes sense to you, call me or simply Contact Me by way of clicking here. Even if you’re not a CA income property owner, get a hold of me. The numbers work everywhere they’re tried.

12 thoughts on “California Real Estate Investors Using 1031 Exchanges To Turbo Charge Portfolio

  1. Joshua

    I loved the Dollar Store bit and the example figures! I would like to make a future post request:

    The examples help me to understand how all this works and what can be “expected”. My post request is: Can you give us a real life example, from start to finish, in a timeline like format (with explanations along the way) of one of your clients?

    Of course, anoninimity is important and would only be expected. But if one of your clients would volunteer as an example I think it would be really cool to see your genius at work.

    Maybe I’m asking to much but it sounds like a very interesting and educating subject.

  2. Jeff Brown

    Josh — Einstein was Babe Ruth if I’m a genius.

    Though in the past I’ve done detailed case studies, my clients prefer, as you suggested, to avoid being one. Part of the problem is even though I change names, they’re known not only around their town, (many in San Diego) but by each other. They like to keep their business their own.

    Still, I think I have an idea.

  3. Jeff Brown

    Dave — Buffett is one of my role models in the sense that he insists on empirical data, not gut or fluff. His bottom line has always been what is, not what might have always been.

  4. Dennis Fassett

    Are you kidding me? So now everywhere else is a Dollar store compared to California?

    Typical California arrogance!!!

    I’ve lived in Northern California (on the Peninsula) and Southern California (LA and Pasadena) and I can tell you first hand that the quality of homes here in the midwest far exceeds the quality of the homes that I experienced out there.

    Plus we have brick exteriors and basements, (which don’t get included in the square footage).

    So yes – your dollar goes a LOT further here, AND you get a better built home to boot.

    I understand what you were trying to say, I just don’t appreciate the way that you said it!

  5. BawldGuy Post author

    Dennis — We’re in agreement. I wasn’t addressing quality. This is why I brought up the age differences. I should have been more clear.

    It’s the price AND the quality that should motivate CA income property owners to Get Outa Dodge.

    Thanks so much for your kind correction. Regular readers have already learned to assume a kind hearted intent on my part, so don’t assume any mean spirit.

    Again, you and I are in agreement.

  6. Lani Anglin-Rosales

    Dennis- knowing you on Twitter, I’m quite surprised that the tone you’ve taken here (especially as you address “how something was said”). Jeff has brought great business to us in Texas, to our friends in Kansas (and many other states) and has a wonderful understanding of national investing (and has done it since well before I was born), so I along with his readership agrees with his guidance (none of which was in contradiction to your harsh comment). He would not speak in a condescending tone as I know from his track record, he can prove that his motive is not a negative one as your tone indicated.

    You know what, Dennis? I bet he’d bring investment dollars to your side of town too regardless of the strength or weakness of a dollar (or of the analogies he chooses to write with). :)

  7. Dennis Fassett

    Jeff – I know what you really meant – and I know from our prior interactions that what I took from the analogy was in no way indicative of your thought process or intent.

    My apologies for the harsh response. Lani is absolutely correct.

    So let me try and dig myself out . . . .

    I wanted to offer a different perspective since I have first-hand experience with this “capital flight” topic, because part of my business here in Michigan (called actually involves working with out of state investors as a consultant to help them find properties to either flip or buy and hold.

    A large majority of the inquiries come from Southern California, and I have to say that in some cases I have had to “educate” some of these investors, because it seems that, after having seen pictures of burned-out houses in downtown Detroit (which isn’t much different from South Central LA), they think the whole metropolitan area is like that and begin treating locals here in a very condescending manner. You can imagine how that goes over here, and I have spent many minutes on the phone trying to smooth ruffled feathers.

    So again, having lived in both places I wanted to make the point that it’s important for out-of-state investors to understand and appreciate the fact that some people, like me, choose NOT to live in California, and are very comfortable and prosperous in the areas that we’ve chosen, and that we enjoy living here.

    That being said, bring your money!

    I just bought a 3 bedroom brick ranch with one and a half baths, full finished basement, all appliances and a two car garage for $69,000 – and it’s rented for $1000 per month. And there’s another one just like it down the street that I know they’ll take $70k for.

  8. BawldGuy Post author

    Dennis — No harm, no foul. Lord knows I’m not protecting my perfect record. I accept your apology, though I think from now on I’m gonna be a lot more specific when using that analogy. I can see how those in other states might read the wrong message between the lines. :)

    My track record the last 5 years has been to take CA investors out of CA in large part because of price, but just as importantly because of the quality to which you refer. Price is pretty much an empty suit without that quality.

    I’m friends now with somebody you probably know, Tom Vanderwell, a very solid mortgage guy in Grand Rapids. I’m hopin’ to visit there some day soon.

    I’ve always loved the price/rent ratio in your state, but can’t find data to support current and/or positive employment data. I’m always open to be shown what I’ve been missin’. That’s how I lifted my Texas embargo in the first place.

    Thanks again, Dennis.

  9. Dennis Fassett

    Jeff I’m going to quit while I’m behind – I just re-read my second post and I don’t like that one any better. Serves me right for trying to bungee in and out during work between meetings.

    The issues with the detroit metro area – and the opportunities as well – are complex.

    The area is resilient, though, and it weathered a much more violent economic storm back in the 70′s and 80′s to come storming back in the 90’s and have the highest growth rate and lowest unemployment in the nation. This is, unfortunately, qualitative not quantitative analysis.

    But suffice it to say that the discussion here is all about when, and not if, this area is coming back.

    Me? I’m bullish. I have a waiting list as long as my arm of people that want to rent homes from me, and there’s a ton of supply available at dirt cheap prices. And at these prices I’m still covered if rents tank 20%, although I doubt that they will because at present they’re rising.

    As always keep up the great work on the blog.


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