Getting Out Of A Dead Market — The Case For Taking What’s There And Movin’ On

There of course those who might disagree, but as I’ve said so many times before, buying small residential income properties in San Diego haven’t made sense for quite awhile now. Furthermore, I can envision no scenario resulting in any change so radical that small units become investor friendly in the foreseeable future.

Larger properties offer different dynamics than the little guys, but I still don’t see how the rising rents will have much of an impact with the cap rates remaining so relatively low. You just know though, that with the future rents in San Diego almost sure to be higher than they are now, that investors will be attracted to the larger projects in good to excellent areas. With home prices what they are, more and more folks will be renters — a demand factor guaranteed to raise rents region wide.

The smaller units — 2-4 — are selling for, (throw out the high and low) $450-700,000 for duplexes, on up to $800K-1,000,000 for fourplexes. The owners of these properties wouldn’t buy them again at their current values. Ask ‘em. Some of them would immediately start laughing. I have asked some of them, and the ones who’ve bought in the last 18 months or so regret their decision — sometimes bitterly. But when they think about selling, the thought is quickly squelched. “Just can’t do it” they say. Owners say this even when they bought it two hundred grand ago — and will profit handsomely.

Why?

They aren’t sure of where else they’d take their equity. Most have read or heard from others about the markets investors like these days — but don’t seem to have the confidence, or maybe enough solid info to pull the trigger. I’m guessing many of them are still strong believers in the San Diego real estate market, expecting it to bounce back. You can’t blame ‘em, that’s been their experience the last 40 years or so. Why should this market be different?

Indeed.

The only question now is — how long will it take for them to realize the prices for their type units don’t make any sense whatsoever — and most likely won’t ever again?

So, what should they do?

If they’re still in growth mode, and their equity to value ratio is favorable, (they have a bunch of equity) they should be moving their capital by way of a tax deferred exchange to an area more hospitable to investors. In other words — find the exit sign and take your equity elsewhere. What many of these investors don’t realize is they can easily afford to acquire 2-4 times the property they now own — and with significantly younger buildings to boot.

Here’s a quick example.

One client took a La Mesa duplex and executed a tax deferred (1031) exchange. He sold for just over half a million. He traded into just under $1.3Mil of well located and much younger properties. His tax shelter (depreciation) literally rocketed upward. He now owns five small properties (huge flexibility), his capital growth rate is now turbo-charged, and he’s taken himself out of management. That last one didn’t exactly upset his wife.

You’re in a changing forever-changed market. You can trade yourself into a far better position — in every way you’d want.

I urge small unit owners in San Diego, and the many regions just like it, to think long and hard about their current circumstance. Ask yourself — what reasons compel you to keep putting up with the status quo?

Let’s review.

Increase the value of your portfolio by two to four times.

Move your tax shelter into the stratosphere.

Get your capital growth rate going in the right direction again — and faster

And for dessert — get out of managing the dang things.

There’s no case for a growth oriented investor to keep their equity in San Diego — or any place like it.

What would you do with all the above listed improvements to your investment portfolio and no more management?

I rest my case.

Related posts:

1. Live in Paradise — But Don’t Buy Income Property There
2. In Case You Were Wondering — Who And What Is It All About?
3. Case Study: A Real Life Phoenix — Flying Higher Than Ever
4. 1031 — Tax Deferred Exchanges — 200% Rule
5. Thinking At 30,000 Feet High & 500 MPH