We showed buyers a lot of homes this week from Encinitas to Point Loma and also launched a couple of exciting new listings. Don’t miss our picks and insights below.

We are Hiring!

Our amazing longtime marketing coordinator, Kaylee, is building her real estate business in Las Vegas, and we couldn’t be happier for her. If you or anyone you know needs a top-notch luxury agent in the Vegas area, please let us know. That being said, we are now searching for a new marketing coordinator and assistant to join our team. This is a prime opportunity for a self-starter looking to break into San Diego luxury real estate. If you know someone who may be a fit, we would love an introduction. See more details of what the role would entail HERE.

A Case Study

A local client owns several investment properties that have appreciated substantially over time. They have been strong rental properties for many years, but after reviewing the portfolio alongside the client’s financial team, it became clear that repositioning some of the equity outside of real estate could make sense for several reasons.

This is part of the big-picture planning we regularly discuss with our clients. We do far more with our lifelong clients than simply “buy” and “sell” homes. This particular scenario is actually quite common, so we wanted to share some of the thought process and analysis behind it.

Property Profile

The properties were built in 1969, so naturally they require ongoing maintenance. Every repair, capital improvement, or unexpected expense cuts into cash flow. The client has had the same property manager for years and has been very happy with the relationship.

The properties have provided stable, reliable income since the day they were purchased. Recently, however, one of the tenants gave notice, making it the perfect opportunity to evaluate whether it made more sense to rent the property again or consider selling.

Financial Analysis

The properties were purchased many years ago and therefore have a very low cost basis. With little to no mortgage remaining, the owner is no longer benefiting significantly from amortization or depreciation, which are two of the major financial advantages of owning investment real estate.

The properties were also originally purchased with a spouse who has since passed away. This is an important detail because of the stepped-up basis rule, which allows the cost basis to be adjusted to current market value at the date of death. This was the key factor in the analysis. In this case, the properties could potentially be sold with little to no capital gains tax exposure.

But does it actually make sense?

To answer that question, we calculated the cash yield, or net return on equity. Here is an example of how the numbers might look:

• $1 million net equity after commissions and closing costs
• Approximately $38,000 net annual rental income after property taxes, HOA fees, and management expenses
• Approximately $38,000 in annual income taxes owed on the rental income

That equates to roughly a 3.8% return on equity.

After consulting with both the CPA and financial advisor, the client recognized that capital gains exposure could potentially be minimal, while the proceeds could be repositioned into investments more aligned with current lifestyle goals and overall financial planning.

At the end of the day, it comes back to the math. In this case, the math made sense.

Additional benefits included improved liquidity, increased diversification, and potentially higher income with fewer management responsibilities. The owner no longer has to deal with tenants, insurance claims, HOA issues, or calls from the property manager about major capital expenses.

There are many strategies and benefits to acquiring real estate, but there can also be significant benefits to strategically planning an exit.

**Bonus: Even without a stepped-up basis, there are still excellent options available for long-time landlords looking for a way out of active property management. If you would like to discuss your situation or long-term plan, give us a call.

Compass is a real estate broker licensed by the State of California operating under multiple entities. License Numbers 01991628, 1527235, 1527365, 1356742, 1443761, 1997075, 1935359, 1961027, 1842987, 1869607, 1866771, 1527205, 1079009, 1272467. All material is intended for informational purposes only and is compiled from sources deemed reliable but is subject to errors, omissions, changes in price, condition, sale, or withdrawal without notice. No statement is made as to the accuracy of any description or measurements (including square footage). This is not intended to solicit property already listed. No financial or legal advice provided. Equal Housing Opportunity. Photos may be virtually staged or digitally enhanced and may not reflect actual property conditions.
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