Sell or Hold Small Apartment Complex

[Michael Hooper]

Just wanted to get some opinions. I've got a 14 unit apartment complex in Cincinnati. I bought it for $420K ($30K/unit) a little over 2 years ago. I've done about $30K in renovations and raise rent from an average of $550 to $600 since I bought it. By the time I pay everything I make about $15K/year cash flow ($22K if I include mortgage principal). I've got about $110K in the property. Not sure if I should count the $30K in renovations (parking lot and unit turns) as those were paid with cash flow. So I figure I make somewhere around 20% ROI. Well I contacted a realtor and they said my apartment could go for around $700K-$750K given the prices in the area. That would be almost a 300% ROI in 2.5 years. It would take me 10-15 years to make that money with the cash flow from the apartment. I was thinking of 1031 exchanging it for something in my area that was a little bigger. Is this a good idea? I don't know if the Cincinnati market is going to keep going up. This was the second deal I've bought, I've only done 3... so this kind of return is a little overwhelming for me.

[Tyler Weaver]

The comparison between selling, and leveling up or do nothing seems a bit unfair to the hold position. You also have the option of going to a bank with your new financial statements, getting a cash out refinance. Then you can use the money to invest in other projects. 

One major driver of this decision between cash out refinance and 1031 is property taxes. I am guessing with each reassessment your 420k property will be bumped up a couple percent for taxes each time. However, if you 1031 into a larger building you will be paying property taxes on the whole 1mm or whatever your proceeds allows you to leverage up to. That can have a pretty big impact when you are comparing the investment you are holding + a new investment from cash out refi vs selling and 1031 to new investment.