What is the best approach to this situation??

Question

Hi, so I am in the process of rehabbing my current rental property in hopes of doing a 1031 exchange.  As I am in the midst of the rehab I am realizing that it may be a better option to pull equity out and purchase a multifamily without selling. My mortgage and everything is under $900 and currently in this market (Sacramento, Ca) I can rent it out for $1700 (3 bed 2 bath SFH).  I have quite a bit of equity in the property, over 200k but everything is really overheated in this market.  So recently a home owner approached me and wants to sell a duplex that she owns for $325,000.  It is a 1700 sq ft. property and each side is a 2 bed 1 bath.  She currently has one tenant on Section 8 paying $950 a month, and she is in the process of evicting the other tenant so the other side would be clear, and I would be able to charge $1200 a month in this market at this time.  If the owner puts the duplex up it will probably sell for more, but I am not sure if that is the correct approach in this market.  I am becoming more confused as to what I should do, and I do not want to make a bad move and then limit myself in the future to buy another property if I eat up the equity in my first home, and then do not have a ton of equity in the multifamily.  I need to make a decision soon, but I was just reaching out for some advice.  Thanks for your time.

Account Closed · Answer

From what you laid out, this seems like a great opportunity. Given the rental income you could make. I think pulling out minimal equity that you have in your current property and leveraging towards duplex acquisition is your best strategy. If you make a decision soon you may want to bridge a quick loan and then refi with a longer-term conventional.

Jason D. Lewis · Answer

@Tommy Johnson

Hey Tommy, Not sure I understand the situation.  are you asking if you should use your equity to buy the property?  If you have someone coming directly to you with a purchase that makes sense, I would lock it up in contract, take some time with ensuring it is properly vetted, then after your inspection, renegotiate with the seller and get a lower price based on the deficiencies you find.  I myself always look to buy with 20% equity in a home, so with you having over 65% equity, I'm sure you're leaving yourself enough of a cushion and the possibility to go back into it again, if another sweet deal appears.  Good luck.

I would also add, that the duplex taxes will be higher and those rent rolls don't appear very sexy, but perhaps that is your market.

Jason

Attila Bertalan · Answer

@Tommy Johnson

I read your post. I'm gonna share with you my opinion. I'm going to try to clear a bit your thoughts...

"Hi, so I am in the process of rehabbing my current rental property in hopes of doing a 1031 exchange."  I'm assuming, since you said that you have over 200 K equity, the value of your current rental would exceed 325 K, so you'd have to pay taxes on the difference. Also, the seller (and buyer) would have to be willing to accept your offer as a 1031 exchange.

You don't give much info about the purchase of the duplex: cash needed upfront, terms,time.

Your current rental... is that a new purchase and fix up to rent? You say it could be rented out, so, I'm assuming at this point it isn't. Your "mortgage and everything is under $900" . Do you mean PITI is $900?

What shape is the duplex in? Did you get a chance to look at it? Beside the purchase price, how much cash you'd need to invest to make it rent ready? What is the condition of the unit with the section 8 renter? Would you purchase the property, contingent upon, completed and successful eviction? How motivated is the Seller? You  got a lot of  due diligence in front of you. Once you got all in place, you could make a much more educated opinion as to your ROI.

I, myself, would like better numbers... a lot better. Plus, you said you're interested in a Multifamily. In my opinion, complete the rehab, rent it out (those are great numbers), get a HELOC and use that to purchase a Multi that makes sense financially for you, and is, also, the way you want to go. But, I emphasize, that's because I don't know the terms of the purchase you are considering.

Tommy Johnson · Answer

Thanks everyone for your input!

Gordon Cuffe · Answer

@Tommy JohnsonIt all depends if 325k is a good price or not. If it is worth 335k to 340k and you buy it for 325k then you will not be able to pull cash out unless values go up to 400k or more. If you pay 325k , you will have to put down 82k that will give you a loan of 243k. That gets you a payment of around 2000 per month for piti. You will not have a positive cash flow if the total rents are 2100 per month because you still have water and sewer to pay. You first rental house will have a loan balance of 82k higher which will make your payment around 425 per month higher. less positive cash flow.

I would bet that if a tenant is getting evicted then that side is beat up. Will she remodel that side for you or do you have to do it along with paying the 325k?

If you dont have someone that can run comps for you , you can pm me and I can do it for you to see if 325k is a good price or not.

What is the best approach to this situation??

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