Where should I go from here?
I’m looking to grow wealth and cash flow.  I have a good income and savings.  I got lucky in 2011 and bought an REO duplex.  It appreciated in value from 760k to 1.8m.  LA market.  I currently owe 525k at 3.625% fixed 30 year.  I live in one unit and am planning to buy an SFR for my wife and I shortly.  Property will then be fully rented.  The building has a cap rate of about 3.5% with presumably less appreciation prospects than when i bought it in 2011.  Should I

1.  Hold the property at my current LTV of 30% or so?

2.  Sell the property and take the 1.3m of equity and buy a 5m property with a similar cap rate but take a loan of 75% cap rate?  Hoping that similar appreciation will get me more because the property is higher value?  Probably cash flow will be similar depending on the interest rate i can get on a loan.

3.  Use home equity loan to buy another 2m property?  That would probably be fully financed with no real increase in cash flow.

Do i try to find deals out of my market because cap rate is poor?  

Do i talk to commercial brokers?  How do i even get started?  Can i 1031 exchange into a 5m commercial property or do you have to buy only a similar priced property?

Thanks
[{"id": "eovnvbk", "text": "You need to look at your in place cap rate given that your property taxes are low due to prop 13. You could be actually closer to a 4% in place cap. Any buyer will get their taxes reassessed to purchase price so a property is always worth less to the buyer than the seller in CA. Selling your current asset and buying a any comparable investment will mean a property tax assessment equal to your purchase price. \n\nBad news is that you\u2019re not going to get to 75% LTV at a 3.5% cap. No bank will lend you that much money. Best bet is closer to 50% LTV unfortunately given that banks also limit debt to a 1.25x debt coverage ratio which means your cash flow needs to be 1.25 times your mortgage payment. \n\nIf it were me in your situation I would just refinance your existing portfolio and roll the proceeds into a new investment. It rarely makes sense to sell in CA.\n\nRegarding a 1031 exchange you can roll that into a real estate investment(s) of any size.", "replies": [], "depth": 1}, {"id": "eovpl69", "text": "1. There are no cap rates on duplexes.  They are valued by the more accurate method of valuation called sales comparison.\n\n2.  There is no such thing as a \"poor\" cap rate or a \"good\" cap rate.  Cap rates value NOI's and are not a profit metric.\n\n3. You have an advantage over new landlords in that because of Prop 13 you are paying about $12,500 less each year in property taxes.  That gives you some leeway on rents during down markets compared to more recent purchasers.\n\n4.  That 3.625% rate seems nice but do you really think you will never refi in 10-20 years?  If you can pull money out at a decent rate I would do that for the next purchase.\n\nIf you are going to buy commercial properties that are encumbered with long term leases you would profit by learning what direct capitalization actually is and not rely on internet poseurs would are either ignorant or a scammer.", "replies": [], "depth": 1}, {"id": "eovsako", "text": "Answer is simple. Sell the property. Your money is barely at work for you on that duplex. Go buy a solid 10-20 unit with that 5m. cash flow might be the same but you now own a much larger property that will appreciate way more. Go go go", "replies": [{"id": "eovxcrk", "text": "&gt;Your money is barely at work for you on that duplex.\n\n?!?!?!  Are you omitting the fact that he has appreciated about $10,833 a MONTH?  If he'd left it empty he still had a smokin' hot deal!  DON'T KILL THE GOLDEN GOOSE!", "replies": [{"id": "eowuqsj", "text": "This is true but there is way to much left on the table. Refi at the least and put that capital to work", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "eovte7u", "text": "This is a very common situation. Everything revolves around opportunity cost. Real estate are not like stocks where they can be traded for a nominal brokerage fee. Your typical transaction involves 5-6% brokerage fees, transfer and recordation taxes and settlement fees. That is all before the capital gains you have to pay on your gains, which will likely be even more because of depreciation.\n\nSo it comes down to forecasting. What rate of return would you expect to get from the duplex in the future? Does that nominal return beat the nominal return of another investment after all of your transaction taxes. You can do a 1031 exchange for greater than your value of your asset but you still have transaction costs. If you  sell and pay taxes on the gains is there another investment that would have a higher nominal return over the next 5-10 years? Could you refinance your property, pay no taxes on that money and get a higher nominal return somewhere else that beats your new interest rate. \n\nSorry I can\u2019t give you concrete answers but it all comes down to what is the best rate of return you could get after factoring in transactions costs and taxes.", "replies": [], "depth": 1}, {"id": "eowm305", "text": "Thanks for all your help.  I\u2019m trying to learn as much as i can and don\u2019t want to miss out on making my money work for me.  I use cap rate because it helps me think about the alternatives and opportunity costs.  But, yes, taxes and transaction costs can certainly green light or kill a deal as you all point out.  I think i need to nail down realistic numbers better and understand exactly what costs i will incur with each strategy.  What\u2019s tough is actually talking to a broker or a financial advisor who actually has your best interests in mind.  Crazy how the most honest info you can often get is often on Reddit.  Can anyone point me to a resource that gives me the basics on how interest rates and lending work for commercial multi family loans?  I feel like multi family is less risky than retail or office because you depend less on a single long term anchor lease.  I\u2019ve thought about going with a syndicator but i just don\u2019t know who i can trust and i sense that they are eating your gain in fees.", "replies": [{"id": "eoxbues", "text": "&gt;  I use cap rate because it helps me think about the alternatives and opportunity costs.\n\nBut they don't do that.  It is like saying one market sells for $50 a sf and another sells for $1600 a sf.  Which is more profitable?  You can't tell because $ per sf is not a profit metric.  Same with cap rates.  They are an income approach to value called direct capitalization.  In a 10% market you are paying $10 for $1 NOI.  In a 5% market you are paying $20 per $1 NOI.  Which is more profitable?  Again you can't tell because that is not what cap rates do.  They value NOI.  But scammers want you to believe that a cap rate is a return so they can sell you high cap rate properties that are probably not very profitable.  Think about, why would a seller sell $1 NOI for $10 instead of $20 if it was the more \"profitable\" property?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ep0sl64", "text": "But if i have a fixed amount of money to invest and all is the same including appreciation, cap Ex needs, ability to borrow -  isn\u2019t cap rate the best way to understand what i can expect my money to return me?  Is there a better metric?", "replies": [{"id": "erbvan7", "text": "&gt;\\-  isn\u2019t cap rate the best way to understand what i can expect my money to return me?\n\nNO, cap rates are not a return metric.  Direct CAPitalization is an income approach to value.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ep0tcyv", "text": "I'm a commercial agent in NJ. If you're interested in exploring another market, feel free to send me a DM.", "replies": [], "depth": 1}]