FIVE SIGNS IT MAY BE TIME TO EXCHANGE YOUR RENTAL PROPERTY
If more than a couple of these factors ring true for you, it may be time to consider selling your property and possibly make a 1031 exchange into a passive replacement property.
Sign 1: Your State/Local Landlord Regulations Have Become Intolerable
Oregon and California recently became the first two states to impose statewide rent-control legislation. Not only do these laws cap annual rent increases, but they also impose onerous requirements for removing tenants after 12 months of occupancy.
If you feel like your state or local governments are adversarial to your interests as a rental housing annual provider, you are not alone.
RECENTLY IMPOSED STATE/LOCAL REGULATIONS INCLUDE:
✓ Screening limitations or prohibitions
✓ Security deposit restrictions
✓ Seasonal eviction moratoriums
✓ Late-fee limitations
✓ Forced relocation assistance
✓ Complicated notice and eviction procedures
Sign 2: Your Risk of Legal Liability Has Exceeded Your Comfort Zone
When you own rental real estate, you expose yourself—and your assets—to a whole new world of potential legal liability. In addition to the dozen ways a rental housing provider can trip over federal fair housing laws and local landlord regulations, state premises liability can be devastating.
Courts in California effectively presume that an injury was the result of a breach of duty and shift the burden to the property owner to prove otherwise. This stems from the California Supreme Court’s view that regardless of actual fault, “liability should often be imposed on the party, often a business, most able to implement steps that promote social welfare by enhancing safety, spreading the risk of loss and ensuring compensation.”
In other words, some courts promote the notion that you should pay for more than your fair share of injuries occurring on your property simply because you have more money than your tenants or their customers.
If you are tired of worrying about being sued in a pro-plaintiff state, you may be ready for a “change of venue.”
Sign 3: Demographic Trends May Not Be Positive for Your Area
DEMOGRAPHIC/ECONOMIC FACTORS DRIVING RENTAL PROPERTY PERFORMANCE:
✓ Positive migration
✓ Overall population growth
✓ Job growth
✓ Supply of rental housing relative to demand
Differences in economic prospects and cost of living can drive migratory behavior. Such differences, in turn, reflect differences in tax policies, business friendliness and right-to-work policies.
Click here to see an example of how disparities in living costs impact interstate mobility.
If you live in a state whose employers are leaving (and whose employees are following), you may not be able to count on past patterns of upward population growth.
Sign 4: Your Yield on Equity is TOO LOW
Over the last 12 years, many rental housing providers on the West Coast have watched their equity increase much faster than their rental income. This is particularly true for landlords whose property was once an owner-occupied property, such as an SFR, condo or townhouse. In these examples, prices are driven by the supply/demand for single-family properties, rather than multifamily cap rates.
Twelve years ago, you may have purchased a property with an 8% yield on equity (aka cash-on-cash yield) and today the same property may only generate a 2% yield. Why would you continue to accept such a low cash flow while bearing all of the risks and burdens of individual property ownership?
If you feel your current net cash yield—as a percentage of your property’s equity—is too low, you should consider relocating your equity to a market with potentially higher yields.
Sign 5: The Burdens of Operating Your Property are Affecting Your Life
Sometimes, enough is enough. Younger landlords simply have more energy to cope with the trials and tribulations of property ownership than the older versions of themselves. And sometimes, the wrong property manager simply exacerbates the problem.
Whether your hot button is problem tenants, overwhelming bills/accounting, unending property maintenance or looming capital expenditures, you may be ready to “tap out.”
You are in good company. Each year, thousands of people make the transition from active operators to passive investors. There are multiple options for investing in real estate without the weekly headaches of self-managed rental properties.
RICHARD D. GANN, JD
Managing Partner
1031 Capital Solutions
(800) 445-5908
1031CapitalSolutions.com
Richard (Rick) Gann is an attorney, licensed real-estate broker, and general securities principal
specializing in 1031 exchange solutions and he is co-author of the book How to Retire from Being
a Landlord.
Want to read about our experience with our 1031 exchange?
Recently, we decided to sell farmland in one state and exchange it for a 4-plex multifamily complex in a different state, neither state of which we resided in. Having never done this before, we thought our readers might like to know what our first experience with a 1031 exchange as rental property owners entailed. Where we gained insight and learned a lot, it certainly was not an easy task. Would we do it again? Click HERE to read about our experience to find out and determine if a 1031 exchange is right for you.
Prefer to listen to what we have to say about our 1031 exchange? Listen to our podcast!
Click HERE to listen🎙️