Local Multifamily into Out of State Multifamily
4973 NARRAGANSETT AVE. 92107 – 4 UNITS (DOWN-LEG)
INTO 1707 (ET AL.) METZLER PL. COLORADO SPRINGS, CO 80905 – 16 UNITS (UP-LEG)
In Q1 of 2019, Palma Commercial secured the assignment to market and sell the 4-unit multifamily property at 4973 Narragansett Avenue in Ocean Beach (Down-Leg/Relinquished Property), well-located within 3 blocks of the OB Pier, with some interior upgrades and some exterior deferred maintenance, featuring all 1br units and four garages, with units renting below market (around $1,450/month each).
The client, Bob, wished to trade out of the 4-units in OB via a 1031 exchange, so as not to trigger any capital gains tax event. Bob decided that he wished to trade into more multifamily units out of state, with the knowledge that in other states the price per unit is typically much lower, and cap rates typically higher than such opportunities in California, even though some of the better out-of-state MSAs have similar or even higher rent increase trends as San Diego. Bob also did not like the direction of the business/political climate in California, and had family in Colorado Springs, which made that region a natural fit for where to look. During and after the Ocean Beach (Down-Leg) property sale was finalized, Palma Commercial remained diligent in sending potentially viable purchase opportunities to Bob, ultimately helping him to secure an Up-Leg/Exchange Property in a good area of Colorado Springs, consisting of four contiguous four-plexes (16 total units), with all 1br/1ba units. At the time, units at the Up-Leg property were renting at around $550/month. Via diligent market research, the client and Palma Commercial agent felt that market rents at this Up-Leg Property should be closer to $700/month, and the client secured a property management company who was confident about this as well. Average rents at the Up-Leg Property were above $700/month within a year or two after acquisition.
The client sold their Down-Leg property in Ocean Beach for $1,400,000, at below a 3% cap rate to the new Buyer, and bought the Up-Leg property in Colorado Springs for $1,520,000, which was performing at around a 5.5% cap rate at time of sale, with immediate upside in rents, and now (2/17/22) operating at a cap rate upwards of 7.5%, in a state with a more neutral political/business climate than California. The client significantly improved upon his cash flow from equity without triggering any capital gains tax event, by pursuing a well-designed and well executed 1031 exchange, out of San Diego multifamily, and into multifamily investments out of state.