When a Great Property Becomes an Inefficient Investment
- Elaine Kim
- Mar 17
- 2 min read
Many Beach Cities multifamily owners have something genuinely special.
A well-located building.A thoughtful remodel.Tenants who stay for years.
Strong cashflow relative to what they paid.
In places like Hermosa, Redondo, and Manhattan Beach, it’s not unusual for owners to say:
“Why would I ever sell this?”
And honestly, sometimes they shouldn’t.
But there’s another question worth asking — especially for owners who have held a property for decades:
Is the building still working as hard as your equity is?
The Quiet Problem: Trapped Equity
Owners who bought 20–30 years ago often have:
Extremely low tax basis
Little or no depreciation remaining
A large amount of equity tied up in a small building
On paper, the property may look fantastic.
But when you measure return on equity, the numbers sometimes tell a different story.
Example:
A 6-unit building in Hermosa might be worth $4.5M today.
If it produces $150,000 in annual net income, that feels strong.
But on $4.5M of equity, that’s roughly a 3–3.5% return.
Meanwhile, larger properties in other markets may produce 6–7% returns with stronger depreciation benefits.
The property is great.
The equity efficiency may not be.
Why Owners Don’t Think About This
In my experience, many long-time owners aren’t ignoring the math.
They simply see other risks more clearly:
Giving up a great location
Losing a building they know inside and out
The tax hit from selling
Fear of exchanging into something worse
All of those concerns are valid.
Which is why the conversation isn’t about selling a great asset.
It’s about asking a different question:
What would it look like if your equity worked harder without increasing your workload?
The Role of a 1031 Exchange
A properly structured 1031 exchange allows owners to:
Defer capital gains taxes
Move equity into a larger or more efficient asset
Reset depreciation
Potentially increase monthly cashflow
In some cases, owners trade:
One small coastal property
for
A larger multifamily asset with professional management
Multiple properties in diversified markets
Or a passive structure like a Delaware Statutory Trust
The key point is this:
A 1031 isn’t about giving up a great property.
It’s about upgrading what your equity can do.
The Right Way to Think About It
For many Beach Cities owners, the best move is actually to hold forever.
But it’s still useful to know the numbers.
Because sometimes the math reveals an opportunity:
Double the cashflow
Reduce management headaches
Reset depreciation
Improve estate planning
All while deferring taxes.
That doesn’t make the current property bad.
It just means the equity inside it may have outgrown the building.
Final Thought
Some of the best assets in the Beach Cities were bought decades ago and cared for by thoughtful owners.
Those properties deserve respect.
But every once in a while it’s worth asking:
If you were investing that equity fresh today… would you buy the same building again?
If the answer is yes, keep it.
If the answer is “maybe not,” it might be time to explore what else that equity could do.
For additional questions:
Comments