Should You Sell Your California Rental? 1031 Exchanges and Where Investors Are Finding Cash Flow

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Today's topic: investment properties and 1031 exchanges

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. Today I'd like to talk about investment properties. I've had quite a few clients recently reaching out about possibly selling the investment property they have in California — or maybe they're a first-time investor trying to figure out where they should buy their next property. So I want to talk about the 1031 exchange, where many of my clients have been choosing to move their money and repurchase investments, in what states and why, and what is actually giving us the best cash flow.

If you have questions, as always, I welcome you to put them into the chat and ask away. Even if it has nothing to do with today's topic, that's absolutely okay — this is a very open show, and I'm here to pass along any education or information that may be beneficial to you.

Why landlords are rethinking California rentals

Let's first talk about why people would choose not to buy an investment property in California, or want to sell the one they have and move it elsewhere. As I'm sure most of you have heard, the tenant and landlord laws in California can be very strict, and they are very heavily weighted toward the tenant more than the landlord.

I did a quick Google search just to show you what comes up. All I typed was “tenant laws California,” and the AI overview said: California tenants have robust protections including statewide rent caps — the lower of 10% or 5% plus local CPI — just-cause eviction requirements, and a 21-day deadline for security deposit returns. Landlords must maintain habitable premises, and new 2026 laws, AB 628 and SB 610, mandate working refrigerators, stoves, and rent refunds during mandatory disaster-related evacuations.

So there is a lot that is very heavily weighted toward the tenant. For example, if you wanted to sell your rental property, there is a very good chance you are going to be giving your tenant a good amount of money to relocate if the person buying the unit is planning to live in it. I'm not going to get too far into the law on all of those rental guidelines — that is something you really should talk with a real estate attorney about — but I am sure it's something you've heard about, or experienced, if you own rental properties in California.

There are many states out there with more favorable guidelines and fewer restrictions than California. I've had many clients purchase rental properties in states such as Texas, Florida, Arizona, and Nevada. Again, you need to do the research — I am not a real estate attorney and can't tell you which location is best — but there are quite a few with more favorable rules for a landlord.

The $900,000 problem — and how a 1031 exchange really works

So where are my clients going, and how are they doing it without ending up with a huge tax burden when they sell? Let's talk about the 1031 exchange first.

California is through the roof right now on property value. I would say the average-priced home I'm helping clients with throughout most of Southern California is about $900,000. That's sad and great all at the same time. If you bought your home five-plus years ago, you've got a bunch of equity built up — California properties do hold their value, and they've been appreciating. But if you're trying to enter the market as an investor at a $900,000 average price for a single-family home, that can be very difficult. And this goes for duplexes, triplexes, and four-units too — I'm just referencing a single-family price range.

Say you have a property you're thinking about selling. You bought it for $450,000 or $500,000, maybe lived in it at the beginning, turned it into a rental, and went and bought yourself another home. What do you do about the equity that, if you sell, you're going to get taxed on? This is an investment property that should be on your tax returns, that you've been taking depreciation on every year. That is where a 1031 exchange comes in.

A lot of people misunderstand how an exchange works. They think: I bought the home for $500,000, so I need to buy another property for $500,000 — or I only have a loan of $500,000, so I just need another loan for $500,000. That's not how it works. Whatever you sell the property for is what you have to match in a like-for-like exchange. If you sell for $900,000, you need to buy for $900,000.

Clients get a little nervous there — “I don't know if I want to buy something that expensive.” But you are not limited to one purchase to fill that goal. Say you sell the property for $1 million to keep it a round number, you owe $500,000, and — keeping things very simple, setting fees aside — you walk away with $500,000. You sold for a million, so you need to go buy one, two, or three properties that together equal $1 million. I've got a good amount of clients doing just that right now: they're making $400,000 to $600,000 on these investments, and they're turning around and buying two and three more properties to fulfill the total sales price required so they don't get taxed on that money as capital gains. Instead of one investment property, they now have two or three making them money every month.

1031 exchanges are absolutely amazing, and we've worked with some incredible 1031 exchange companies over the years. If you want to get very specific on the guidelines, the rules, and the costs, reach out and I can put you in touch with somebody — more than one, actually, so you can find who you're most comfortable with.

Where the money went: Texas, then Nevada, now Arizona

So where are people going? Everything in the United States is expensive, but California is one of the highest markets there is. For a very long time — I'd say during the years 2018 to 2022 — I was seeing a lot of money being put into Texas. Then that changed a bit and I saw a lot of money going into Nevada. Now, over the last 12 to 18 months, I have seen quite a few purchases going into Arizona — specifically near college campuses, such as ASU in Tempe. Quite a few people have done the same thing in Texas near college campuses. You have to select the area you want your investment in, but that has actually been the very best cash flow we've seen most recently.

The rent-by-the-room numbers

To give you an example: say you buy a property for $600,000 and put 25% down. Your mortgage payment is going to be roughly in the range of $3,200-ish. I say “ish” because interest rates change, homeowners insurance quotes change, and property taxes change depending on where you're looking. In Arizona, property taxes are significantly less expensive than California — and California's, in turn, are significantly less expensive than Texas's.

Here's what my clients are doing. They sold for a million dollars, cashed out $500,000, and they're putting 25% down on purchases around $600,000 — getting two, if not three, properties depending on how far we can stretch the proceeds into the down payments. Those mortgage payments — somewhere between $3,000 and $3,600 — are very well offset, because around those college campuses the homes rent fully furnished, one bedroom at a time. You've got students renting the rooms, with their parents on the lease making the payments, at somewhere around $1,000 a month per room. For a $600,000 to $650,000 purchase in Tempe, you could buy a four- or five-bedroom property. Five bedrooms at $1,000 a month is $5,000 in rents — and I'm giving you very conservative numbers here. Against a payment of $3,000 to $3,600, that's about $1,500 a month in return after the mortgage, property taxes, and insurance. Two properties doing that, and you're bringing home about $3,000 a month.

This strategy has been around a long time — it's been a strategic investment many people have made over time. But the area, the state, and where the campus is located determine the prices. If you tried to buy around a Harvard or a Stanford, those homes are going to be significantly more expensive and not really something you could cash flow from. If you look hard, though, you can find not only a state with better tenant laws, but an opportunity to multiply what you have today. If you've got one rental property now, there's a very good chance you could end up with two or three.

Can California still make sense?

If you've never bought a rental and you're looking to jump into the market, I would highly suggest you look into all of the rental rules and restrictions for landlords and tenants before you decide California is where you want to buy. Now, there can be some really great investment opportunities in California — I'm not telling you to disregard it absolutely. But with the new laws coming into place in 2026, it is getting more and more difficult to sell when you're ready, to give tenants notice to move without paying relocation money, and events like the fires we had a little over a year ago can be very devastating for a landlord. Definitely do your homework and figure out where you want to be, whether it's your first investment or you're moving investments out. I'm happy to share any knowledge I have, and if you'd like the information for the 1031 exchange companies we've worked with, I'll give you two or three places to call.

Wrap-up

I don't see any questions coming in on today's show, so I'm going to wrap up this episode. I would absolutely love to help you guys — go to my website, mortgagemomradio.com. If you like that I bring you different topics every week and you'd like to get on live and ask your questions, text the word LIVE to 844-935-3634 — that's 844-WE-LEND-4, and it's also my office number if you'd like to talk with me or the team. We can help with your purchase, your sale, your refinance, your home equity line of credit, reverse mortgage, hard money, construction — you name it. Talk to you all real soon. Bye-bye.