Help me decide whether to swap or sell?

Question

Tristan Wheelock · Answer

After weighing the pros and cons and reading all the helpful advice on this forum. I think I'm going to sell. I'll try and 1031 exchange if I can manage to find something decent in this market, otherwise I may just wait for it to cool or look elsewhere for cap rate.

I have a contractor who's worked on the building in question and he made some good points. Cloth wiring, possible lead paint, cast iron plumbing. These could all lead to huge CapEx costs in the not so near future.

Also I didn't realize that if I were to take over the property the mortgage would have to be redone since it's currently held jointly with my brother. My realtor explained that I would have to start a new mortgage at current rates and pay the costs to process that. All in all it seems like it's probably for the best to just cash out and move on to something else.

Thanks for the solid advice @Dave Foster  @Edwin Epperson and @Patricia Steiner

Edwin Epperson · Answer

@Tristan Wheelock as a Tampa Private Lender, and familiar with all the places you and @Dave Foster are speaking about.  Dave is giving you sound solid advice, and all the "metrics" he is mentioning are important and are creating quite the unique environment here in FL.  I would encourage you to heavily consider his advice, and even sit down with and speak about what he sees in the market and the strategy of using a 1031 exchange for your and your brother's benefit.  Best wishes and much success!

Dave Foster · Answer

@Tristan Wheelock, When the market reaches the point where rents cannot cash flow a property for what they are selling for there is generally a correction coming.  The nice thing is that you do own the properties at a price point where you can continue to generate good revenue no matter what the paper value is of the properties.  But if a move is warranted then 1031ing into something different is at least going to let you carry all that tremendous equity forward into your new properties.   So, for you the pain point you're trying to avoid is critical to identify.  If you're on the south side or old southeast, those age of properties are absolutely going to have looming and ongoing cap expense that could hurt you.  South St. Pete also will be the first shoe to drop when a correction happens.  And while the amazing architecture of ONE, OSE, and Kenwood has a lasting appeal, I do worry about rents and vacancies once all of the cranes come down and inventory geometrically increases near downtown.

A 1031 exchange would let you and your brother separate.  You'll want to discuss with your accountant to make sure they'll let you buy the replacement % from your brother to complete your exchange.  That would be a related party transaction.  Not specifically prohibited but some caution needed.

Dave Foster · Answer

@Tristan Wheelock, It's not original or super mystical.  But I've always seen that appreciation is primarily dependent on supply/demand, and from an investment perspective - NOI and ROI.  When investors can't get NOI or ROI to satisfy them because of what they have to pay for assets then their demand drops.  When demand drops prices follow.  Rent's can only go up as far as wages will take them.  And of course interest rates directly impact ROI and NOI.  So rising interest rates have to impact near term appreciation and prices.

That's only some of the interconnectivity.  Now add inflationary pressure in one direction, and recessionary wage suppression in the other.  And throw in a demographic curve ball that has migration into Florida net positive (while places like OR and CA are net negative).  Good luck figuring that leaves you :)

Uptown is the spillover from Old North East and a very natural transition once they started to deal with the homeless and drug issues around St. Anthony's.  It's probably got the traction to stay strong be cause of its juxtaposition between Old Northeast, Kenwood and downtown.  Much like OSE.  But just remember, the first out of blight are the first back into blight.  Focus on the investment performance first, and asset value only secondarily as it fits into the "why" of why sell that house now.

Tristan Wheelock · Answer

this is interesting and I’ve never really heard of this idea before. Just to make sure I understand what your saying.If the property can’t cash flow at the estimated price say $530k a correction is probably coming?In St Pete specifically they’re working on rent control laws and also the amount of new inventory once all the condos come to market is another concern.

My property is in uptown but it’s one the classic built in “1925” deals that are all over St Pete

Lots of food for thought.

Dave Foster · Answer

I sent a connection request to you neighbor!

Alex Olson · Answer

@Tristan Wheelock When I see some disagreements between family I usually suggest considering a 1031 exchange. It will allow you to defer all taxes until a later time, buy a property that you both like and agree on, grow your wealth because likely buying more units or better units or better cash flowing units. Of course it is stressful but could be a good option rather than cashing out and still owning it with disagreements.

Patricia Steiner · Answer

One BIG question for you:  What's your overall goal?  Building and preserving wealth, increasing disposal income, or just acquiring doors for doors sake, more?  This answer should be your driver on all financial decisions.

For example, if it's to build and preserve wealth, you have one property (the converted apartment) that isn't being utilized...if you're not using it personally, why not rent it as an apartment, office (a lot of remote workers are a little tired of working around kids and dogs), artist studio.  This is the immediate opportunity.  Bottom line here:  what are you waiting for?

The co-owned duplex - if you were to sell it, what would you do with the proceeds?  Again, what is your overall goal? If you sold it, you would more than likely need a cash buyer as A-rated insurers (which lenders require for financing) are not insuring properties with knob & tube.  And, offers are only offers if submitted in writing and vetted.  If you decide to part with it, make sure you have a real deal that won't fall apart due to insurance, financing, more.

Are you getting market rent for the co-owned duplex?  If it's in an appreciating market with year-over-year property appreciation and rent price increases, that defines an excellent investment - if managed as a business.

My recommendations:  get the vacant unit rented at market price with Renter's insurance and a Security Deposit.  Do it right.  Then get with your brother and decide why selling is the best option...it comes down to what is your overall financial goal.

And, congratulations on having these issues...they all result from having done what you did so well from the start.

Benjamin Aaker · Answer

Is your brother wanting to get out of the deal? Sounds like both are doing well, so I'd hate to have them sold off. You should talk to your banker about getting a line of credit on one or both duplexes. You could use some of that to either pay off your brother or to purchase the next one. This avoids any tax and the 1031 exchange is not necessary.,

Help me decide whether to swap or sell?

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