Should I sell my property and use proceeds to buy in a better area?

Question

Hey BP Community!

I currently have a 5 unit in the Back of the Yards neighborhood that produces $2,000 a month in cash flow. I think I could sell it for about $350k and get net proceeds from the sale of about $148k. I think the neighborhood has a lot of potential and given the planned developments for the neighborhood, I think the property could appreciate by another $100,000 over the next two years. Especially if the real estate market gains some more traction over the next two years.

I was also thinking about taking advantage of the beaten up markets that grew a lot during COVID (Tampa, Las Vegas, Seattle, Austin, Boise) and was specifically thinking about investing in either Austin or Tampa, and would hope that those markets would bounce back sharply in a few years and build my equity positions faster.

What do you all think is the move here?

Ryan Kelly · Answer

@Benjamin Sussman in my opinion, you will be moving from a stronger cash flow market to higher-priced markets that will likely be much harder to cash flow. Yes, I do think the markets you mentioned may see more appreciation in the coming 5-10 years, however, that is speculation and not guaranteed. It's a struggle to find a decent duplex in the Austin metro area for less than $450k-$550k. Do you know what is guaranteed? A 5-unit producing $2,000 a month! Keep the cash and go find more deals like that one.

Kristina Kuba · Answer

@Benjamin Sussman

Don't sell. Go to TD bank and get a RELOC (rental property equity line of credit) and use it to buy in Tampa/ Miami.

Might want to reconsider Austin.

Miami to escape the home price correction in 2023 while ‘overheated’ housing markets like Austin get hammered, says Goldman Sachs

Feel free to reach out if you have any questions.

John Warren · Answer

@Benjamin Sussman I would look at the condition of the property and think through any major CapEx events coming as you make this decision. Do you have an older roof? Do you have an older HVAC system, or maybe plumbing that is end of life? Those are all reasons to sell before you have to catch the proverbial falling knife.

On the other hand, I am a big fan of doing cash out refinances so you can redeploy your capital while keeping your original asset. In this case, you could keep the benefit of potential rent and property appreciation, while also capturing all the benefits of a new property as well!

The only other thing to think about is how you will do management somewhere else. I suspect you self-manage in a neighborhood like Back of the Yards, or at minimum you are very involved in oversight. You will lose this competitive advantage very quickly out of state, and your returns on a cash flow basis will likely correspond with your being out of state.

Eric Fernwood · Answer

Hello @Benjamin Sussman,

If your property generates $2000 per month and you expect a $100,000 increase in the next two years, there is strong demand in the area for housing. Rents should rise along with prices, then holding the property should be a serious consideration.

As a Las Vegas investor services business owner, we observed that investors usually sell assets if they are losing money. The most common causes are issues with the tenant pool, deferred maintenance, or both. Is this why you're considering selling?

If you decide to sell and you have significant gains, a 1031 Exchange may be worth considering. If so, DM me, and I'll send you the names of the three exchange agents we frequently work with.

Some considerations about executing a 1031 exchange. Having completed over seventy exchanges, we know that just identifying potential properties during the identification period can be risky. What if the property falls out? You lose the tax deferment. What we do is to get a replacement property under contract before the relinquished property closes. With this approach, we are often able to close on the replacement property within the first 3-4 weeks of the identification period. And, if the property falls out, we have time to put another under contract and complete due diligence before the identification window closes.

If you decide to sell, select a location based on your goals. If your goal is to get off and stay off the daily worker treadmill, then the location is your most important investment decision. Location determines all long-term income characteristics, including whether rents and prices increase fast enough to offset inflation, the sustainability of rental income, and the overhead costs. Additionally, location affects your ability to control the property through factors such as rent control, tenant selection restrictions, and evictions. If you would like to see our location selection process, let me know.

Dave Skow · Answer

@Benjamin Sussman- if the property you owb  has a realisitc  100K upside  in the next  2 yrs  - I would hold onto it ...plus  148K of capital to  work with - wont get you too far  in some of the  markets  you mention - good luck

Benjamin Sussman · Answer

Thank you so much for all of the thoughtful responses everyone! Given the context from you all, I am going to hold onto the property and will explore the option of doing a RELOC.

Thanks!

Paul De Luca · Answer

@Benjamin Sussman

I agree with the other commenters saying  you should keep the property if you're really getting $2k/mo in cash flow, especially if you think the property will continue to appreciate like that.

Are you having problems with the tenants or the building?

Unless you have a golden opportunity in front of you in one of those markets, I don't think you should rock the boat. Is it realistic for you to find a 5-unit for $350k producing $2k/mo cash flow? I'd imagine that's unlikely. Also, trying to negotiate a discount is fine but then hoping for lots of market appreciation doesn't seem like a good strategy.

Eliott Elias · Answer

Keep the cash flow, this is what will keep you afloat and carry your other notes when you have vacancies.

Chris Davidson · Answer

@Benjamin Sussman this could be a pretty good play. However if you believe the property will gain another 100k over the next two years it might be better to hold. Unless you think you will get more than that in a new investment.

If  I was in your shoes and the 5 unit is the only rental you have I would work on getting some LOC on it and using the money to invest in one of the cites you mentioned. You likely have the 5 unit stabilized unless you were looking at some large capex cost coming up I would hold it pull equity out and buy where you want to. The markets you mentioned will and are bouncing back and will defiantly have some nice appreciation gains for long term holds.

Dylan Speer · Answer

Hey Benjamin,

I work at a real estate investment advisory firm in Denver. We specialize in helping clients with their sales as well as 1031 exchanges. We primarily use DSTs to transfer the client's debt and equity and alternative investments when the investor doesn't mind selling, paying the taxes, and investing in a passive institutional real estate fund (Not REITs, these syndications make investors partial owners in these properties).

One of the funds we do a lot with is an oil and gas mineral rights royalty fund - The investor literally becomes a partial owner of the real estate under the well and receives monthly cash distributions that range from 10-30% when oil is high.

That $148,000 would yield well over $2,000 / mo in one of these funds, which are completely passive.

Let me know if you'd like more info.

Should I sell my property and use proceeds to buy in a better area?

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