Sell or keep renting?

Question

Bought a house last year with a guest house.  We've been renting out the main house long term and the guest house on AirBnB.  We're thinking about either selling the property or renting out both units long term.  How do we go about making the determination on what to do?  Our near term goals are to get more multifamily properties.  It's cashflowing nicely so our questions are do we sell and do a 1031 into a multifamily?  Or do we keep it and find another way to finance a multifamily?

Brian Adzadi · Answer

@Charles Huenergardt

It all depends on how much multi-families are going for in your area. Your in Cali, so I am suspecting it must be pretty high. So a 1031 exchange would be a good bet to get the down payment needed to get into multi-families.

However, I am a believer in having your cake and eating it too. So personally, I would keep the property, use it for whatever generates the most amount of money. Whether its through Airbnb or a long term rental. Start saving the cash flow from the property and use it as a down payment for the next multi-family.

I hope others chime, because I really want to know what they would do.

Jay Helms · Answer

@Charles Huenergardt - true, pulling a HELOC will eat into your cash flow, just need to run the #s to see if it helps you accomplish your goals and increase your overall cash flow. Certainly don’t want to turn an asset into a liability.

Charles Huenergardt · Answer

@Joe Vastola Thanks for the tip!

@Jay Helms  I have not considered pulling a HELOC.  My concern with refinancing or borrowing against that house is that it will eat into the cash-flow that we're getting.  Is the idea that by using it to buy , rehab, and rent out a new place, we'd be bringing even more cash-flow that would cover the hit we'd take?

Jay Helms · Answer

Have you considered pulling a HELOC to use as cash on your next purchase? I'm a cash flow guy, so it's hard for me to sell off a known asset producing good cash flow but will look at leveraging that asset to increase cash flow. Make sense? What course best helps you obtain your goals?

Joe Vastola · Answer

@Charles Huenergardt I would recommend speaking to a real estate attorney, listening to podcasts (BP has a few that talk about it) and reading a book or two. There are a lot of layers to a 1031 but if you get your ducks in a row it can be very lucrative. Lastly, it would probably be in your best interest to have a new property identified as the one you'd like to exchange up to.

Dave Foster · Answer

@Charles Huenergardt, Sounds like you already have a multi family - just of a different stripe.  Should be easy to compare proformas between that and a potential MF purchase.  There's some unique things about your multi that might make it more attractive in an appreciating environment.

But that being said, the 1031 exchange would be the way to sell that and maximize your profit by deferring the tax and depreciation recapture.  There are some moving parts but they're not all that onerous and the cost of one usually makes it worthwhile starting the process even if you don't end up finding the right replacement.

Charles Huenergardt · Answer

@Joe Vastola We have about $100k equity in it.  Likely it would sell higher than the Zestimate so there's perhaps more equity in it than that.  What's the best way to learn more about the 1031 exchange?  Not that I'm going to go for that, but if we sell it, we'd probably want to exchange.  If we keep it, we'll likely have to dump more cash into it to bring the guest house up to code to be permitted.

Joe Vastola · Answer

@Charles Huenergardt How much equity do you have in the house you bought? If you are receiving good cash flow I would recommend holding them and building up equity that you can eventually refinance. You can then use that money to buy more properties. A 1031 exchange could be a great option but as @Matt K. mentioned there are a lot of moving parts that need to be aligned.

Charles Huenergardt · Answer

@Clayton Mobley @Brian Adzadi @Matt K. @Thomas S.  Thanks for the advice guys!  I appreciate it.  The AirBnB is a pain.  So we want to rent both units out long term.  To get the second unit permitted will be in the neighborhood of $20k.  The county is now even talking about require a separate septic tanks for Accessory Dwelling Units and disallowing vacation rentals under 30 days.  So it may be that we have to sell.  We have time.  I think we'd do it in May if we needed to.  Thanks again for the advice!  A lot to think about.

Clayton Mobley · Answer

@Charles Huenergardt I think I would second @Brian Adzadi - it depends on what the opportunity cost of your current investment is. If you're cashflowing but you know you could get an MFR that flows better with the capital you're currently using, then ok. But unless its appreciated by leaps and bounds, its unlikely that one SFR with guesthouse is going to pay for an MFR in CA. Not impossible, but not surefire either.

While I am HUGE fan of the 1031 exchange, you shouldn't use it just because you feel like you need to to *do* something. If your ROI is good and you're flowing well, with consistent tenancy, then how much better would an MFR need to be to be worth the work, additional expense (1031s usually cost maybe $750-$1000, but you'll have closing and inspection costs for the new prop etc), the stress, and then potential for unhappy surprises? Every change has the inherent risk of things not going smoothly, missing a deadline, or ending up with a property with higher vacancy than you planned, etc. You currently have a pretty proven investment in-hand, so you need to decide how much better a new investment would need to be to compensate for the above.

If you were losing money, or even just breaking even, then I would be loudly promoting the 1031 option, but given that its already a profitable investment, I think I'd recommend holding it and using the flow to either pay down the loan faster (if you don't need the income) or save up for your next MFR. Nothing wrong with having a diversified portfolio of SFR and MFR.

Best of luck!

Clayton

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