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Updated over 4 years ago on . Most recent reply
Sell or Hold Small Apartment Complex
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.
Most Popular Reply
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.
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.
Hi Michael
Well it depends on you , if you want to get into bigger deals you should sell the property because the $15K a year is low , in fact you don't have to buy a real estate to get $15K a year, you csn get it by working for McDonald's .
sell it for $700k and you will able to borrow $2,8 million dollars and this money can buy you a bigger deal in the same market or maybe in better market.
BUT before you sell call the bank an ask how much you will get if you refinance the deal. And how much the new payments will be and see if the numbers work for you.
If you ask me personally what I would do, I would do sell and get into bigger deals that provide a great cash-flow a year
$15k is not a lot you can get it by working for mcd .
This was my opinion
Have A Great Day , And Good luck :)
@Ali Hussein The difference between working at McDonalds and owning a rental property, is one is a job and the other is a passive investment. I don't have to do anything for the $15k from the rental property. Also, that $15K is the profit after I pay the bills and the mortgage. Since I have $110K invest in the property, that's 13% return, which isn't bad, plus the principal I'm paying down is about another $7K per year. So its a pretty decent investment from the initial numbers. The thing that makes it difficult is the rapid appreciation. Now I have an additional $300K-$400K in equity on the property. So I'm trying to figure out if I sell to cash out on that equity, or keep collecting the passive income. The cash out refi is a good idea. Thought with Covid I'm struggling to find lenders at the moment. Might just have to keep looking. If anyone has any suggestions, PM me.
@Michael Hooper i understand what passive income is and what is the different between passive and an income from a job but my point here is $15k/year is low , it is
$1,250 a month , my opinion was SELL it and buy a new bigger than it that will provide much more than $15k my point is get bigger.
$15k is not a lot in those days, even if it was passive income that was my point
My suggest is call the bank first ask them if you can refinance if the banks refuse to refinance sell the property .
Make sure the bank won't refinance before you sell.
That is my opinion
Good luck
This one of the perpetual questions in real estate - I have built decent cash flow in this property, so now it's worth quite a bit more. Should I hold for cash flow or trade up? The answer lies within you. Which option gets you closer to your goals? They're both good options, IMO. Personally, I would at least explore what it looks like to trade up in greater detail. What size property would you be able to purchase after paying all the transaction costs of a sale? Is there inventory for sale at that price in your target market? Is a 1031 exchange practical, given the short and inflexible timelines? How much in taxes will you be paying if you miss the 45 or 180 day window? How much could you be cash flowing if you pull off the 1031 successfully?
If you do decide to sell, I would be interested in looking at your deal.
You do not mention whether the realtor sent you comps to support the opinion or not. I would get a second opinion before I took action on someone's word regarding value, especially where as here we are talking about a very substantial price difference in 2 years. What accounts for the price rise? Your improvements? Gentrifying neighborhood? General increase in prices city-wide? If the latter, you will buy for $700K what you essentially own now. Unless rents have gone up commensurately (it does not appear to be the case based on your experience) you may end up in a worse position.
@Darius Ogloza I actually contacted them because they sold one down the street from me for a pretty high per unit price and mine seem to be in similar quality. Other than that one, there weren't any comps in my immediate area, but expanding a little further out were apartments that sold for a similar per unit price and were a quality similar to mine. The appreciation is a little from my raising rents, but also just general appreciation in the area.
Hey @Michael Hooper. Good to see your posts here, it's been a while. Ran into the same thing recently and received some sage advice from an old head in the industry. He said two considerations you'll want to make here are using Internal Rate of Return and Return on Equity. As you gain equity in the property, your ROE typically decreases (unless rents are rocketing up year after year) which means, if you're goal is to maximize returns, it will be worth 1031ing into a property whose leverage is better optimized. Often, finding something to 1031 into takes time which results in you collecting that $15k per year. Agreed, McDonalds is a rough comparison but also agreed 1031ing into something larger will be far more financially beneficial to you in the long run. Your IRR will stay highest if you can purchase, renovate, raise rents and 1031 into a new property as fast as possible. Looking forward to hearing from you