Selling one expensive property to buy 10+ cheap ones. Thoughts?

Question

I have a house hack FHA fourplex that I'm thinking about selling. I don't currently live there but have lived there for 2 years. If I sell it, I might make around 200k+. My goal is to get a lot of cash flow so that I can live off of it. Currently, I live in a very expensive area where properties appreciate a lot but don't cash flow. My property doesn't cash flow all that much (maybe 1k a month). So, I'm contemplating selling my one property to invest into 10+ cheap properties. For the market, I'm thinking Ohio. Maybe Cleveland/Akron, because it seems like a good cash-flowing market, which is what I'm looking for.

What are some nuances that I could run into with this? I would assume I'd need to do a 1031 exchange on the 3/4 units that I didn't live in, and I can take the other 1/4 profit tax free because it was my primary residence. I read that you need to buy properties within 45 days for the 1031 exchange. What are your suggestions about how to do this? Should I just go on zillow and find 10+ houses that I want to buy? Or do you recommend looking for an investor portfolio? I would like to do this myself without using 3rd party re-sell companies.

I also heard that the value of the properties I buy needs to be no more than 2x the value of my current property. Does that mean if my current property is valued at 700k, the other properties can't be valued more than 1.4 million total? Is that how you count it, or do you have to take mortgages into account somehow?

What lender should I use? I assume I would do 20% down plus closing, and I'd probably buy turn-key houses that don't need rehab since I can't be there in person to remodel anything. Should I just use a well-known bank like Wells Fargo and go with Fannie Mae investment mortgages?

Any other thoughts are appreciated. Thanks.

Marshall Leipprandt · Answer

@Ellie Narie Why buy 10 separate houses? I would look for a multifamily property in those markets that can match your cash flow goals. Having one property makes everything so much easier. One property manager, one handyman, one set of books, one address/property to maintain, etc. I don't think the time commitment on your end stepping from 1 property to 10 would be worth it. This isn't even factoring in the difficulty of trying a 1031 from one property into 10 - if it is even possible.

Doing a 1031 from 1 property to another property will be simpler. Plus you should have the equity for the 20-25% down payment on a commercial loan and can value the property as a multifamily instead of 10 single families. Lastly, the areas that you mentioned in Ohio may look affordable but if you were to acquire 10 SFHs, I would imagine that the turnover and repairs alone would be quite the headache.

Juan V Lopez · Answer

Hey @Ellie Narie, someone already mentioned this, but why not get a bigger multifamily building? 10 individual SFH are a lot to manage - a lot more stress too.

With a $200K down payment, you could afford a $1 mil MF property. If you do end up investing in Cleveland, that could be anywhere between 8-24 units depending on the area.

A single building will be easier to manage, maintain, repair, sell, pass off to your kids, insure, etc. Wish you the best, happy for your situation.

Dave Foster · Answer

@Ellie Narie, The two years of residency has to have been within the 5 years immediately prior to selling it if you want to get 1/4th of the gain tax free.

A 1031 exchange is the way to accomplish your move from a larger more expensive property into several smaller properties.  And buying 10 or 50 is perfectly doable.  The IRS does not care how many properties you actually purchase.  They care about the valuations and how you identify your potential properties (it's weird I know).

If you want to identify more than 3 replacement properties then one of two things must happen

Either

1. The total value of the list of 4 or more properties is less than 200% of the value of what you sold

or

2. You purchase 95% of the value of the list (not the number of properties - the value).  So basically you purchase every one of them.

There's separate challenges with each of these.  What most of our clients will do who are in this situation is to get their new properties under contract before their sale closes.  Then they close on all of their purchases during the 45 day identification period.  So at the end of day 45 they have purchased all of the properties they are going to.  And those properties become their default list.

Theresa Harris · Answer

If you lived in it 2 years ago, talk to an accountant. I think you can sell it and not pay capital gains.  I wouldn't buy 'cheap' properties, but properties that will do well as rentals. Cheap properties look great on paper, however, once you factor in turnover, higher costs due to more problematic tenants, etc...they are not worth it.

Ellie Narie · Answer

I have looked at how the cash flow would work for multi family properties, and I think it would be much less. They require a 25% down as opposed to 20% for SFRs, and usually the landlord has to pay for water and sewer which eats into the cash flow.

Eric Mcginn · Answer

$1k a month positive cashflow is pretty decent. Instead of giving that up, I’d leverage it to buy another one on a 4plex in the area you’ve decided you want to invest in. SFH are a nice investment but they are 4 times more paperwork work per unit than a quadplex.

Jane S. · Answer

Cheap properties attract the worst crap garbage loser "tenants" (my term for them is disgusting thieves who lie their way thru life).

Your strategy needs some very careful due diligence. Especially if you go out of state, you are losing big bucks to the PM's who rrip you off and laugh on the way to the bank plus your rentals will accumulate a very bad smell due to the nonperformance of your PM's who totally ignore the occupants and dont even know they're stuffing the property with squatters.

Alex Olson · Answer

Would need to understand your details more. For a 1031 you can identify up to 3 "properties" which can also include a portfolio of properties by the same owner. Happy to chat through it if you are interested in KC

Mohammed Rahman · Answer

Hey @Ellie Narie - your post had a lot of questions so I just jotted down some of my responses:

- Not sure why you'd need to do 1031 for 3 units... even if you used an FHA loan it was your primary residence for 2+ years so you're entitled to the tax free gains.

- For 1031, it's 180 days. I believe you need to "identify" a property within 45 days.

- I recommend not purchasing 10+ homes... for your own peace of mind. 10 roofs, 10 basements, 10 set of appliances, etc. You should look into a cluster of multifamily homes, or even invest into a platform/fund so you can get exposure without the headache of being a landlord (unless you actually enjoy it)

- I'm not sure what you're referring to interms of property needing to be 2x your current value... was that in reference to 1031? I haven't heard anything like that and am only aware that it needs to be a "like kind" property/properties.

- Strongly recommend using a local lender as they will better understand the market you're investing in. Larger banks are great... but they just don't have the same flexibility that local lenders will be able to work with.

Good luck on the next chapter of your journey and great job on the equity you've built in your current home!

Selling one expensive property to buy 10+ cheap ones. Thoughts?

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