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.
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!
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.