In this final post regarding the Tenant Protection Act of 2019, Paul Getty, founder and CEO of First Guardian Group, discusses other investment options available to landlords dealing with AB1482, including the Delaware Statutory Trust (DST), and why investing outside of California is becoming increasingly popular.
Q. Are there other investment options for landlord’s who simply don’t have the will or desire to meet the new Act’s requirements, yet want to continue to own income producing property?
A. Without a doubt, we are seeing a very large number of landlords in California rethink their strategy of continuing to invest in the state. California had been a very good place to invest historically. We’ve had terrific increases in property values. We have a great climate and good job environment. That all makes for a good investment environment for those who want to wait the required amount of time for properties to appreciate. But again, with rent control coming in, and particularly among older owners, we see a growing number of landlords are now considering selling their California rental properties. A lot of those folks know they’ve had a good run in California but now want to go to some place where they can keep rents at market, pick the tenants they want to keep in their properties, and have the ability to evict them if they prove to not be good tenants. So, we are seeing a significant number of landlords selling properties in California – more than we’ve seen in past years – and reinvesting outside of the state.
Q. What types of investments are these sellers using? Are these 1031 Exchanges? Or the Delaware Statutory Trusts we’ve heard you mention before?
A. A lot of ‘mom & pop’ investors get started by investing in single-family rentals which are probably the most common type of rental property. And they typically invest in properties close to where they live. Why? Because in many cases they are self-managing, or they like to drive by the property, or they like to fix it up or make improvements themselves. That’s a reason a lot of these investors were attracted to real estate, because they enjoy working on their properties. If the property is close to where you live, these are easier tasks. Now, if you feel you must go outside the state, you have the added challenges of finding good property management and it obviously becomes more difficult to visit your properties on a frequent basis. So, when folks now begin to think about investing in an area outside of where they live, property management becomes a much bigger consideration.
Now, a few things come into play here. You mentioned the Delaware Statutory Trust, which is a way in which a group of people can acquire larger properties that are managed by large management companies. In addition, when someone sells a rental property here, the first thing they want to try to avoid, is paying capital gains tax on the appreciation of their property. So they’ll typically sell the property and utilize the 1031 exchange process so they can take the proceeds from that sale, not pay any tax on those proceeds, and then reinvest in another rental property or in a fractional interest such as a Delaware Statutory Trust, or DST. This provides the benefit of ownership outside of the state of California and the benefit of professional management, where they aren’t responsible for any day-to-day interaction with tenants or maintenance. They basically just receive a check each month, so the DST is really growing in popularity. Per a recent study by Mountain Dell Consulting, in 2019, approximately $3 billion in equity was invested in DSTs which is probably the equivalent of $5-6 billion in property value when you factor in the debt. That is an amazing statistic underscoring the growing popularity of DSTs.
Q. Are there any other benefits to the DST?
A. I mentioned earlier that a lot of landlords are moving their rental property equity to landlord-friendly states and states that are inherently good investments. These are states that generally have strong job growth or areas especially in the southern United States where weather is generally better with expanding population. The cities that are attracting many investors are places like the greater Denver area, Austin, Dallas and San Antonio, and Atlanta. Florida, which is one of the states that has no income tax, we see the Orlando-Tampa corridor being a strong area of investment. The Carolina’s, particularly Raleigh-Durham are another terrific area where investors are seeing good cash flow and good appreciation. And, the greater D.C. area and surrounding areas in Maryland and Virginia offer compelling options. This has also been a popular investment region because there is a lot of growth of both government and private enterprise.
Q. How do you have such extensive knowledge of these areas outside of California?
A. We have been affiliated with national real estate companies throughout our history and in the very beginning – 18 years ago – we started out as a management company helping people manage their properties that were out of state. So, over the course of our history, we’ve had significant experience managing properties from coast to coast. As a result of that, we’ve obviously visited many different areas and dealt with brokers and other real estate professionals across the country. We have a very deep network of individuals who are not only in the areas where people are looking to invest outside of California, but we also have first-hand experience in managing properties in all the areas I previously mentioned. This provides us with a very good ground-game in understanding the various sub-markets where many of these attractive investment opportunities are found. If we see an opportunity in an area we’re not as familiar with, we will visit it and we will also work with affiliate brokers and real estate professionals who are on the ground in order to conduct our thorough due diligence before making any recommendations
Q. You’ve had a tremendous response to your educational seminars you offer to those who will be impacted by AB 1482. What do you attribute that to?
A. Mainly, a desire to be better informed. Again, AB 1482 is really a wake-up call, because until that legislation was passed, many people viewed rent control to be somebody else’s problem and not their own. Now, it’s a state-wide issue and there will be more initiatives coming that will sweep the state. So now, landlords realize even if they own a single-family rental and are not impacted immediately by AB 1482, they understand they could be impacted by future legislation. This is causing them to look at their current investment strategy and assess whether they need to make changes or not. Since AB 1482 came on with such surprise, people know other laws could also come down with little warning and they don’t want to be caught unaware. Many of our clients are sitting on hundreds of thousands of dollars, even millions of dollars of investments that they’ve accumulated over the years of owning property in California and a significant amount of their net worth now is potentially being placed in jeopardy.
Q. How can investment property owners learn more or enroll in an FGG1031 seminar?
A. Interested individuals can start by just visiting our website. Also, we encourage California landlords to go to the California Apartment Owners Association website and register to get plugged in to what’s happening. The annual membership fee is very reasonable. The worst thing that can happen is you put your head in the sand and wake up one day to realize your net worth has been significantly impacted because you failed to do something that you could have done. So again, investing in education and increasing awareness is critical for individuals who own California rental property.
Q. Thank you Paul, any final words to share?
A. We’ve had a great run in California, and we can be thankful for the appreciation we’ve had. This is a phenomenal time to take a fresh look at the portfolios we’ve accumulated. It’s a good time to consider selling with interest rates at historic lows and market values at all-time highs. Now is a great time to begin looking at the means of protecting those profits through instruments like a 1031 Exchange and easier types of assets to own like Delaware Statutory Trusts.
If you have any questions, please feel free to reach out to Paul directly at 866-398-1031 or schedule some time on Paul’s calendar.
Want to learn more? Download our latest eBook, California's AB 1482 Rent Control Law & Investment Options for Sellers.