What should i do??? Your input will be appreciated!! :)

Question

Hello Bp world....I currently own 8 properties free and clear in Orlando Fl.  One of the properties i own is a very nice town home that i bought bank owned for 70k ( I also own this free and clear).  Me and my wife had planned on moving in this town home after are lease is up at the home were currently renting. BUT now that same town home i bought 2 years ago is now worth 125,000. Im thinking about selling this town home and purchasing 2 or 3 more sfh or a duplex to rent out with the 125,000 and continue renting the home we are in.  Or should i just move in the town home and live there free and clear.  What would you do?

Brian Levredge · Answer

Unless you capitalize on the equity, it's not really doing any good sitting there locked up in a property.  I would personally rather turn that money into additional cash flow, but that's me.

Account Closed · Answer

There are a number of issues to consider.  Not the least of which is your financial / retirement goals and how your real estate fits in.

While you can move into the townhouse and live there 2 years you will get a partial gain exclusion assuming that you have been renting it out for a while.  The period of time it was a rental will mean capital gains and perhaps some depreciation recapture.

If you sell the town house and buy three properties you could move into one of the 3 properties you purchase.  If you decide to sell after 3 years you will get your full gain exclusion.

A 1031 exchange can be a good option, but it only defers taxes.  While you may not have to pay taxes currently, you will also have a reduced depreciable basis in the new property(s) so when you go to sell any of them they will have a built-in gain.  Of course if your goal is to hold for ever then a deferral strategy can work well.  Your heirs can get a step up in basis though with the way things are going there is some likelihood that you might have estate taxes to consider.

Seems to me you still need to do the math to figure out what best meets your goals and produces the highest return.

Nigel Dixon · Answer

Jon K. I can buy these homes in GREAT areas anywhere from 40k to 60k.  They will rent anywhere from $900 to $1,100 and after expenses net $600 to $700 plus.  Orlando is REBOUNDING in some some areas for sure.  There is still many bank owned and short sales flooding the market at rock bottom prices.  I have also seen more fierce bidding wars for bank owned homes compared to last year Now I don't even DREAM of going in at asking price anymore everything is going above asking with multiple offers 100 percent of the time on the very good properties.

Ann Bellamy · Answer

Actually I think we can't answer properly without knowing the numbers on rental properties in your area.  What kind of cash flow can you generate on selling a $125K property and buying rentals?

If you move in for two years, you'll save 1.  the rental you're paying now minus the rental you could get for it, and 2.  The capital gains taxes on the gain from 70 to 125 if you sell.  If that is 20% then calculate 20% of $55K or 11K in tax savings.

Of course, you also wouldn't get the rental income for 2 years from what you might buy with that 125K, so you need to know those numbers to run the calculation.

Jon Klaus · Answer

I'd sell the townhome and lever the proceeds into more income properties.  And probably buy a home for my family.

Another thought is that if you do move into the townhome and live in it for two years, you can then sell and have a tax free gain.

Jon Klaus · Answer

Good numbers on those potential rentals.  Another way to avoid the tax hit on selling the townhome is to do a 1031 exchange into the three new rentals.  There are rules to follow so you should get a professional's  help, but it could save you around $10k in taxes.

Gidon Freidfertig · Answer

If you don't want to be a tenant then move into your own home. You can refinance the home then buy a new rental property. At the same time you will save in taxes if you decide to sell after two years.

Ann Bellamy · Answer

Nigel  Dixon,  how much would you net per year from keeping the townhouse and renting it out?  I'm assuming it's less than $23K per year.

From the numbers you just posted, if you sell now, buy three houses, stay in your current rental, in two years you could have saved up enough $ to buy a fourth house.  (it may be harder by then to find the bargains, though)  You'll then have 12 houses free and clear.  Well on your way.

And by the way, if you move into the townhouse, there is a cost, even if you consider it free and clear.  The opportunity cost is the three houses you could have bought with that money.

Think of it like Monopoly - you have to have 4 houses to buy a hotel and get the big money.  But if you stay in the townhouse, that's three houses you won't have.

Joel Owens · Answer

You could always leverage into an apartment building ( 5 units or more ).

Value is based on cash flow and cap rates instead of comparable sales approach.

Economy of scale is easier.

Just depends on long term goals.Right now debt service is cheap.It's easy to take equity out and put it to work for returns above debt service.

When prices and interest rates rise that will be harder to do on the purchasing end.

Michael X. · Answer

Nigel  Dixon
I'm a big fan of owning SFH free and clear.  I say sell and buy 3 more.  This is the time to get the best deals with depressed pricing.  The cash flow from the three new houses will allow you to buy something else OR it will pay for the house you are currently renting.

Pull the trigger and sell, sell, sell!

What should i do??? Your input will be appreciated!! :)

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