Selling high....and buying 2 duplexes?

Question

I currently have a SFR investment property with tenants that want to buy. It is in a market that is very sought after and held its own after the crash. I bought this property, my first, from a family member that has since passed on. I have an offer on the table that would allow me to sell and purchase 2/ 2 unit duplexes, one in Stockton and one in Sacramento. I'm not sure what to do as the current SFR that I have has grown exponentially in equitable terms in only 4 years. I'm afraid of Ietting this one go for fear of regret and not holding onto it's ability to gain equity down the road. It has been rented since the day I started renting it. Its been a super easy ride. And I like that. I have an amazing property manager. I cash flow $100 on the front end and a couple grand from my tax returns. Buying the duplexes would put me ahead $1000 a month- but would their value and equity grow as much as my current SFR. Any advice would be great. And is the exit strategy down the road anything that resembles selling a SFR? Ive heard that it is harder to sell a duplex vs. a SFR.

Thanks

Sean

Thanks

Sean

Catherine A. · Answer

Hi Sean,

Have you thought about doing a refi on your SFR and using the equity for down payment on the duplexes? That way you don't have to sell the SFR.

Generally it takes longer to sell multi-families...smaller group of potential buyers. But it depends on the property, market, etc. If you could do some value added changes to the duplexes to bump your cash flow, that can pay off when you go to sell.

Hope this helps. Good luck to you!

Catherine

Account Closed · Answer

I echo the analysis from @Wes Blackwell. What are your goals? Do you expect appreciation to continue where you are? Do you even want to sell?

I can provide some context from the other side. Duplexes in Sacramento are not difficult to sell at all. And I can speak from experience, they are not difficult to rent (and self-manage) either. So, I would sell and jump into 2 duplexes. By doing so, I would have lowered my risk by diversifying my portfolio among 4 tenants, increase my tax savings, and obtain more property that is paid off by other people!

Either way, you have what I call "good problems." Rest easy knowing either way you go you are in a great position!

Wes Blackwell · Answer

@Sean Mamola

First and foremost, you need to consider what the ultimate goal is.

Is it cash flow? Is it appreciation? Do you plan on selling at the peak of the market? Or holding really long term (like till they're paid off)?

Step back and take a look at the bigger picture and define your goals and then you'll better be able to make the decision.

You will not experience the same level of appreciation you had in the previous years, because you purchased the property towards the latter end of the bottom of the market. In the years immediately following the recession a lot of property values "bounced back" significantly and that's where a lot of investors realized their gains.

That being said, you can still expect appreciation for the next few coming years, at a rate 4-7% as seen here (Sacramento is #4 and Stockton is #28):

http://research.realtor.com/2017-national-housing-forecast/

2-4 units is still considered residential real estate, not commercial like 5+ units or larger apartment complexes. You do have a smaller pool of buyers, but won't have any problems selling it. I just wrote two offers on a duplex and I was competing against 16 other offers, so don't worry about that.

My advice would be that if this is a play for long-term cash-flow (like securing your retirement), then sell the single family home and roll the money into 2 duplexes or a fourplex, whatever is going to make you the most money. You'll be making substantially more money than you're making now.

If this is an appreciation play and you plan to sell at the next peak, then I'd still say sell the home and buy two other properties. You'll get the same increased cash-flow as above, and have twice the gains in appreciation (if the combined value of the duplexes is twice the current value of the single family home).

For example:

$300k SFR x 7% appreciation = $21,000 per year

Sell the SFR and make $150,000 profit

Buy 2 duplexes for $300,000 each with 25% down ($75,000)

Now you get the extra $900 per month, as well as the tax benefits

Two $300,000 duplexes x 7% Appreciation = $42,000 per year

Hope that makes sense. Best of luck!

Chris V. · Answer

You should take into account that if you do a cash out REFI your payments will go up significantly. The rate you will get for a *cash out* REFI will most likely be worse than what you are paying now. And your total amount financed will go up, so even if your rate would stay the same your interest & repayment amounts will go up. If you are currently only cash flowing $100 (which is basically zero if you take into account bigger expenses that will happen from time to time) you are certainly going to get a negative cash flow on that property.

This is not necessarily a show stopper but you should also take this into account what this will do to your PITI vs. Income when you are getting ready to buy your next investment...

Just some things to consider.

Best of luck!

Sean Mamola · Answer

@Catherine A. Thank you so much for your response- I did inquire about a refi-cash out. I would get 53k and I need 75k for the down payment. I could tap into my 401k and pay the reminder back tax free. I would essentially need 39k more vs having to come up with 75 on my own. Like this idea of keeping my SFR and getting a duplex as well.

Sean Mamola · Answer

@Wes Blackwell and Account Closed~

Thank you very much for the actual breakdown of numbers. After your post, I listened to the latest podcast. I couldn't help but recognizing that the topic of "just making a move" is what most people get stuck at. So, Im making a move. The house down the street from me closed at 375. Im asking 380 for mine. They are tenants that have wanted to buy this rental for a while but are insisting that they have another house lined up. At 380 I would be netting 161k out the door for a house I purchased for 255 with a 46k down and. Is this considered a good deal if it goes through?  How would I analyze this part of the selling deal to make sure its worth it- thus creating future parameters for future deals. My goals are to turn one door into 4 or 5, hold on for 6 years and then make 5 turn into 8 or 9 and so on then retire with passive income. Does that seem to simple and not thought out enough?Thoughts? and thanks for the push.

Sean

Account Closed · Answer

Netting $161k? That would work in my book. That would give you plenty of options to hop into a multi in Sacramento, Stockton, or Merced.

I would check my new target markets for opportunities there and get my financing lined up to see how much I could realistically leverage that money right now. For example, there is a duplex in Merced for $275k, I need to put 25% down so I'd be looking at an X return there. In Sacramento, there is a quad for sale at X... You get the idea. Forget the mall, this is my kind of shopping!

Feel free to PM or email if you ever want to talk shop. I love bouncing ideas off of others.

Sean Mamola · Answer

@Chadd Chase_ I have tried to get a HELOC and it seems the the cash out- refi would be the better way to go.  My debt to income is a tiny bit askew. After completing the cash-out refi, I would get 53k out and my payments would only go up from 1528 to 1680.  The original mortgage rate would go down from 5.25 to 4.85.

Sean Mamola · Answer

@Pete Rosen, are you saying that this plan would be a good one?

Pete Rosen · Answer

Make this happen

Selling high....and buying 2 duplexes?

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