What would you do if you were me?

Question

Hi all,

Looking for advice. I’m a numbers gal and somewhat long time real estate investor (10 years) but this most recent decision has me in analysis paralysis. I’ve always been able to make decisions quickly with regards to next steps but paralyzed I am I guess..

Current situation:

Have sold 1 property, am in my 45 day window to identify for 1031exchange (this honestly my be up by now, if not, it’s within days) $215k sales price. No loan. Bought for $110k 8 yrs ago.

Under contract to sell on another property. However it didn’t appraise at offer price. We are awaiting appraisal appeal.( It is a non legal duplex that I have rented out for 9 yrs) So I am asking appraiser to use income approach instead of calculating based on sfh. I had planned on 1031 that one too. 600k sale price, 96k loan. Current rent estimates for duplex $3200/mo gross. I bought it for 150k 9 yrs ago, put $100k in rehab.
my plan was to take the sun if both 1031 and buy an income producing asset… multi families, mobile home park, storage units, etc. Been looking for a while but haven’t found anything I felt worth jumping on.

Factors:

My goal is INCOME. I would like income coming in so that we have income coming in in our retirement years (currently 15 yrs away

Here are the options I see:

1) I could keep this duplex and keep renting it out. Note that it is now beautiful after the full rehab so hesitant to do this. I would make $3200/mo gross but obviously there r operating expenses. If the value doesn’t come back at our ask price, this wld be my out . Also, potential to add detached garage with adu to add another rental unit. This cld b now or down the road. Cost to build prob 100-150k? Would rent for 1000-1500/mo. These r guesses and lengthy process woth permits etc. I wld not have to borrow $ to do this.

2) I cld use the $$ as planned to try and find another income producing asset. I may or may not find one in the 45 day time allowance. I have not found one after about a month or more of looking.
I have some leads in some investments in smaller cities with investor friendly agents who have sent me properties that are basically 7-9% cap but they r In cities I’m so so on (Syracuse and Cleveland just to name

3) I could sell both, pay the cap gains and just sit on the $$ until I find a great deal in a soft market (it is starting to soften here in slc and I predict this is happening everywhere)

My gut:

I don’t like option 3. My husband is w-2 and I flip homes and so our tax bill will b painful with these gains. Also, I don’t like cash in bank not working for me. I cld use it to fund my flips (currently using heloc and cash to do) but it’s not necessary and it’s not working toward my goal of INCOME.

I’m edging toward option 1 at this point because at least it’s income. My hesitation is that I’d only make $3200/mo gross income and feel that with that amount of cash to invest, that I cld be making more $$/mo elsewhere (option 2) Ie Cleveland and Syracuse. Markets I know nothing about except on paper, but know their cap rate tends to be higher.

enough of my indecisions, what do u all think? I hopefully I’ve laid out enough background pieces to help the analysis?

Thk u for any insight- it’s greatly appreciated, bc at this point I have a feeling it’s going to end up option 3 bc it’s the ez button/least effort.

Kate

Account Closed · Answer

In this market for the next 6 months I'd hang onto the property for the cash flow. We are moving into a very uncertain time in the economy but you have a sure deal with keeping the duplex. Are you taking into account inflation and the rising cost of real estate going forward, higher interest rates and higher taxes? It wouldn't be long before your sales profit eroded sitting in the bank. Run the numbers using 8% and 12% inflation and 7% interest rates on money for your your next purchase and see if #3 still makes any sense at all.

Paul Riley · Answer

Hi @Kate Weinberg,If you're looking for income and end up going with option 3, then I would suggest looking at performing real estate notes. You get the cashflow and security of real estate without the hassle of repairs or property management.I'm a full time note investor myself so if there's anything I can do to help, please let me know!

Drew Sygit · Answer

@Kate Weinberg you state, "my plan was to take the sun if both 1031 and buy an income producing asset… multi families, mobile home park, storage units, etc."What ROI is the duplex currently giving?How much homework have you done to make sure you can beat that rate of return?Years ago, all real estate investors were told that to scale, they needed to get into multi-family. So, then why does Blackrock own 20k+ SFR's and buying more?

Kate Weinberg · Answer

Account Closed thank you for ur advice! It really helps to hear other perspectives!

Janet Silverman · Answer

you may consider putting the money into a qualified opportunity zone syndicated investment. you can defer cap gains taxes until 2026 and then the gain on that investment (must be held for 10 years) is tax free and once cash flowing, you can still get refi proceeds and cash flow proceeds along the way like any other syndicated investment. there are plenty of QOZ syndicators out there.

Leo R. · Answer

@Kate Weinberg it seems like a lot of us have been grappling with similar questions lately (I'm in a similar situation myself; I have investments in SLC, and I've been considering acquiring properties in Cleveland or Pittsburgh).A few things I noticed: you said that your main goal is income...you also said that the "duplex" is providing income....so, isn't the duplex already helping you toward your primary goal of cashflow? Unless you can find an opportunity that is both relatively safe, and provides exponentially better cashflow than your duplex, then perhaps keeping the duplex is the way to go?Also, you mentioned building the ADU. I have looked into this myself (I wanted to build a 2 or 3 car garage with a 1 br ADU above at a property in SLC). The quotes I got were quite a bit higher than the numbers you mentioned (I was getting quotes of 150k on the low end, all the way up to 235k on the high end to design, permit, and build it)...I don't know whether the quotes I got were more realistic, or if your numbers are more realistic, or if the reality would be some middle ground...but, point being: if you go the ADU route, just double- and triple-check that your quotes are realistic.Also, what are the prospects for raising rent at the duplex? If it's located in a desirable neighborhood (like Sugarhouse), it's possible that you're already under market value....and even if you're not, it's pretty likely that rents will be increasing in SLC over the next couple years (as they catch up with property values and get pushed even further by inflation).Lastly, if your "duplex" is really more of a SFH, it's worth remembering that in SLC (and in many parts of the country), SFH's tend to have better appreciation than multifamily properties (perhaps this is one of the reasons Blackrock is buying all those SFHs?)...so, I'd suggest remembering to include the appreciation factor in your decision making...Anyway, congrats on your investments --these topics are the "first world problems" we're lucky to have! Feel free to touch base with me if you want to discuss investing in SLC, or the Cleveland or Pittsburgh areas (which is where I'm considering for myself).Happy Friday!

Joseph King · Answer

Kate, Since your property is not designated as a duplex, our experience is its not a duplex but probably a SFR due to non conforming with the city. We purchased a similar property in Florida that was vacant over 90 days, made it Non conforming, this may be an issue with the appraiser. be careful of selling as duplex if not city approved zoning. Based on selling for higher roi, your idea to jump into higher assert class maybe a good idea but has to pencil out. As to Notes, you dont own the property that comes with maintenance expenses but you own/control the paper-Note. If you like more info you can find on BP or free training monthly, go to Revivalbothers.com or have any questions.

Kate Weinberg · Answer

@Drew SygitThe duplex is actually pretty good roi. I have 250K invested and it will gross 3200/mo. Net prob $2000/mo after mortgage, pm, and other expenses. it just feels like a big opportunity cost to tie up that much capital when i feel i could get similar returns, but now on $500K after the sale, elsewhere. I have done a significant amount of searching for a replacement property but its all been on paper...who knows what actual real returns will be. Investments I have seen that are in the running for me are all 9% cap ON PAPER and in midwest. Big leap for me as Im used to my Salt Lake City market and know that it is solid, despite a possible market adjustment on a national level. Im not familiar with the midwest. Thats what im also toying with. I appreciate the point you made about Blackrock! You're right! good insight!

Kate Weinberg · Answer

@Paul Riley I had not heard of note investing- i will check into that...thank you for the idea!!

Kate Weinberg · Answer

@Brad Sand You were so right!!! The appraiser wouldn't take my income approach and held with $570K appraisal value. Which i now understand the reasoning. Buyers still wanted their 10k septic concession in addition to the 30K lower appraisal value (despite us fixing the septic line and showing camera for proof) so we said see you later- no deal. That would have been $560K instead of our ask price of $600k. Plus, i called the city and found out theres a very very good possibility i can split off part of the property into a flag lot and either sell that lot as land or put a duplex or sfh on it. ie theres unrealized value there. You are also right Im stuck with the cap gains on the smaller condo sale as of now. The ADU I don't want to do right now, costs are really high and timing is months out for materials. You are also right on with the heloc idea...i have helocs on all my properties and thats how i fund my flips. Ive started gaining traction on some investments in other cities so i might just pull the trigger. Cap rates are better than keeping my duplex for rental purposes. I just have so much equity tied up there---id like to utilize it to the fullest degree. thanks for your insight!!