LLC with rentals - Buy out, sell, other options?

Question

Hi BP!

As a few of my fellow BPers know, lots has been going on in my life over the past year or so. I've been in the process of splitting up with my husband/partner. We are on good terms. Everything is fine. He has already bought me out of our primary house.

Now, we have a LLC that we own 50/50. This LLC currently owns 3 rental properties. Here's the details on them:

Duplex #1

Apt 1: $825/month rentApt 2: $850/month rentP&I: $616.99/monthInsurance: $627/year ($52.25/month)Property tax: $2,240.04 ($186.67/month)Water: Roughly $50/quarter ($17/month)Remaining mortgage balance:$44,502.74 (as of 02 DEC 2020) 6.14%

Duplex #2Apt 1: $825/month rentApt 2: $850/month rentP&I: $455.04/monthInsurance: $610/year ($50.83/month)Property tax: $2,581.55/year ($215.13/month)Water: Roughly $50/quarter ($17/month)Remaining mortgage balance:  $39,371.83 (as of 02 DEC 2020) 4.75%*For Duplex #1 and Duplex #2, insurance and property tax is paid manually by New Page LLC. It is not wrapped into the mortgages.

Rowhome$1400/month rentPITI: 1,010.86/month (lately has been around $990/month)Water: Roughly $50/quarter ($17/month but tenant is supposed to reimburse)Remaining mortgage balance: $111,252.84 (as of 02 DEC 2020)  7.935%Prepayment Penalty until April 2022 on rowhome property only (not duplexes)

Certain Sprout loan programs, for investor occupancy, offer lower interest rates for loans with prepayment penalties where permitted by applicable law and regulation. If a Loan is sold to Sprout that is subject to a prepayment penalty, then the term of the prepayment penalty must be 3 years, and the prepayment must be for 6 months of interest on such portion of the loan principal that is (i) prepaid within the term of the prepayment penalty, and (ii) exceeds 20% of the original principal amount of the Loan. Prepayment penalties are applicable regardless of the reason for the prepayment of principal and are applicable to prepayments resulting from the sale of the Subject Property (unless prohibited by law or regulation).

As you can see, decent cash-flow and equity on the two duplexes. Not a terribly awesome deal on the rowhome, but we did get it for just $5K out of pocket money.

I'm torn on what to do.

• Sell the properties, split proceeds, and dissolve the LLC. Use this money to buy other rentals on my own. Part of me worries it'll be hard to find good deals especially these days.
• Buy him out and keep all properties, but unsure how much this would change my numbers.
• Let him buy me out (if he is interested).
• Other ideas I haven't thought about? Perhaps he keep some, I keep some? Perhaps if they're refi'd out of the LLC and into my name, I'd get better interest rates?
• Do...nothing?

Apologies for the long post. I could use the help of those smarter--and more creative--than me at this point in my life.

Thank you!

Russell Brazil · Answer

Duplex 1 and 2 sound substantially similar. Each taking one of those, then selling the rowhouse, and you recoup the first $25k from that and split the rest of the proceeds sounds about fair to me.

Of course a lot depends on how amicable things are. If they are more towards the good side of the spectrum, I might use the strategy of asking them what they think first. When we are negotiating, sometimes asking the other side first will lead to them at timea make you an offer that is better for you than what you would initially propose.

Joe Splitrock · Answer

@Nicole A. a couple more questions to help you think this through:

1. What is the expected sale value of these properties? Some markets are hot, so this could be a chance to take the money and run. It doesn't mean getting out of real estate, but maybe moving it to another market.

2. Do either or both of you want to stay in the rental business? You alluded to this, I would ask which one of you pushed harder to get into these in the first place? If you have more real estate interest, he may be willing to sell to you at a minor discount to get out. A private sale to you avoids means 8-10% less expense in the sale after realtors fees and other selling expenses. Maybe you get a 5% discount to market and it helps both of you. Listing properties on the MLS also runs the risk of alienating tenants, so could mean vacancy or other problems.

3. Is the location desirable long term? Are they going to be easy to rent, appreciate and is the location a good area to own rentals from a tax and regulatory standpoint? This might help decide whether to sell.

4. What are you long term goals in real estate? Do you want to continue buying? Do you want to hold what you have for cash flow? Are you sick of it and want out? No wrong answer, but be truthful with yourself. Now is your chance to change path. Don't be stuck in what you are comfortable with.

Looking at your interest rates, should you choose to keep the properties, you have an opportunity to refinance the debt at a much lower rate. I am doing cash out refinances at 2.875% for 15 years right now. One strategy could be keeping some or all the properties and doing a cash out refinance to fund more real estate.

I wouldn't let the penalty on the row home have any effect on your plans. It is better to pay the penalty and walk away, then hold on and being tied to something you don't want. This may be obvious, but whatever you do, make it a full break from your husband. I would personally try to hold on to the real estate and buy him out if I could. That assumes fair purchase prices. If his buy out is unreasonable, splitting or selling is a better option.

Whatever happens, best of luck to you moving forward. I know COVID has accelerated relationship problems, with added stress and more time together, so many people are in a similar boat. Dating apps are going to do well in the coming months! I was traveling a week a month for my job and have been stuck home for a year. I think my wife would be happy if I was gone again, haha.

Good advice from @JD Martin and @Dawn Brenengen (good luck with your separation).

Yizhen Su · Answer

The NASDAQ made a 30% gain last year.  There was no repairs to be made for it.  My point in RE is to INVEST, so keep that in your mind too. Are you making gains without much more effort?  If you can sell and take that money and put it into another mode of investment, make more money, less liability as a landlord, why NOT do it?

That being said, if your properties are meeting 1% monthly rent of the property value, it's worth, keep it and hold it and take care of it!  You're making 12% annual + property appreciation % - taxes and fees.  This ideally would land somewhere around 18+% for a "Good Deal".

If your monthly rent is less than 1% of the property value and the value keeps going up, your long term cost will go up IF the rent does not simultaneously go up with the property value because you're going to get more taxes, pay more interest (assuming you don't sell, you're living off borrowed money instead of just ending your obligation and responsibilities, if you have to borrow mortgage for another positive cash flow property then that's different), and put more into repairs.

Your rowhouse will need to be liquidated by that logic, the duplexes may need to be split, I think you should have the one you want more.  It's not about value, it's about how you feel about managing it.  Do you have a better set of tenants, better locale, better ...?

If you're going to make moves, make Money while you're doing it.  RE is great, I love the feel of decorating and flipping a house that was a disaster zone.  I love making money while doing it.  Maybe the market will change, I see it as being saturated for now.  I ask myself: What kind of market supports increasing property prices without increasing the rental prices?  People who are buying to rent flooding the market because they want to get in on the low interest rate mortgage and build equity.  Stimulus down payments are nice, aren't they?  Also make sure you assess your current property value, some in demand places are paying top dollar for location! (Yeah, whatever, show me the numbers!)  There will be a dip, a "correction" of pricing if you will, when the supply outpaces demand or demand simply lowers because anyone who could qualify to purchase will have already purchased.  Maybe a year or two in mutual funds then back into real estate when the rental prices finally catch up to what you're asking and the first time landlords give up dealing with tenants.  It's not everyone's cup of tea for sure.

Dawn Brenengen · Answer

@Nicole A. Must be something in the air.  I'm splitting with my husband too :)

I agree with JD. I would each take a duplex, and I would try to refinance in my own name for a better interest rate.  Or, if you are able to buy him out, I would take both. I would sell the rowhome once the prepayment penalty expires.

Nicole A. · Answer

I might have originally posted this a bit too early in the morning. Tagging a few people to try and get some attention. ;-)

@JD Martin, @Ned Carey, @Russell Brazil, @Dawn Brenengen, @Joe Splitrock

JD Martin · Answer

Hi Nicole,

Looking at those numbers my 5 minute analysis is that I would split the first two properties between you and sell the row home. I don't know what the pre-payment penalty is but it doesn't look like it makes any money anyway and would let you have a clean break. Other than the interest rate the costs & returns on the first two are almost identical. Try to keep duplex #2, assuming capex & maintenance needs are equal, as it has a better interest rate and lower principal.

Second best option is for the LLC to distribute properties 1 & 2 to each of you and hold #3 until the pre-payment penalty expires, then sell it.

Dawn Brenengen · Answer

@Nicole A.  We are amicable as well, so it's fine.  I too should have left 3 (almost 4) years ago (March 2017), but I tried to work it out for the kids' sake.

Ozzy Sirimsi · Answer

Looking at numbers, these could be somewhere in Baltimore City :D)))

If they are couple things matter.

Where they are exactly and who is managing them, are you willing to manage them yourself and do you have to buy him out or just each takes one.

I personally would sell them all.  Market is crazy right now, people are jumping on to 2 units as if there is nothing else to buy in the world :D))

You can get your cash, wait your next purchase cash in hand

Nicole A. · Answer

Thank you all for your thoughts! This really helps a lot to feel confident I'm on the right track, so I really appreciate it.

1. I believe each of the duplexes would be valued at least at $110K if not closer to $130K. I know good comps for multi-units can be a bit tricker and am waiting to hear back from a RE agent I've previously worked with for her thoughts. The rowhome that doesn't cash flow appraised for $141K almost 2 years ago, so I imagine due to the hot market, it'll be worth at least that much still. All of these properties are in Baltimore County Maryland and it has indeed been a pretty hot market.

2. I know that I want to stay in the rental business. I am the one doing most of the work (which looking back, I'm a bit annoyed with myself that we own the LLC 50/50 when he barely did a thing).

In addition to any possible splitting of proceeds, I would get $25K on top because in the past, I put $25K of my own money into the LLC. I definitely agree on leaning towards a private sale if possible and I like the 5% discount idea too.***If I end up buying him out, how do I handle the $25K that I put into the LLC several years ago? It is not currently liquid cash, but was put towards one of the duplexes. (Why does it feel easier to answer these kinds of questions when it's someone else instead of yourself? :-)  )

3. The rowhome is probably the nicest property/most desirable; it has no problems getting rented from what I've seen (just one tenant so far since I've bought/rehabed it about 2 years ago). The duplexes are in a somewhat rough-around-the-edges area, but they've always been easy to rent out, and several tenants have stayed for years therefore lowering my vacancy rate. I have noticed some growth of new businesses and such close by too.

Due to the cash-flow as well as the equity, I think I'm starting to lean towards keeping one--if not both--duplexes if my ex is interested in being bought out. If he is, I would go and talk to my bank about the refi details and if I could refi them into my name (and out of the LLC). LLCs cost $300/year in Maryland. It would be restructured into a sole member LLC if my ex got out. So I'm not really sure if there's much of a point in keeping the LLC if I'm able to refi out into my own name (and get better rates too).

4. My goals with RE are to be able to live off of it in addition to my 401K in retirement. If I can be aggressive enough, I would love to be able to have enough cash flow asap so that I can just work part-time and/or take a lower paying FT job than I currently have. I would need to buy more deals to make this happen. I have no debt and a healthy savings rate currently.

@Dawn Brenengen, I'm sorry to hear that you're also going through a seperation. I hope that the split is as easy as possible and amicable. I'm thankful that mine is amicable so far. Without putting too much detail in a public post, I should have done this in December 2017, but tried for about 3 years to work through our biggest issue before deciding that we sadly should just part ways. It seems that it not being nasty and bitter at times makes it even more difficult because I start to wonder if I made the right decision. But my feelings of lightness and relief outweigh my feelings of doubt.

Basit Siddiqi · Answer

@Nicole A.I would consider potentially distributing the properties to you and your partner.See what value would make it even.Maybe property 1to you and property 2 to him.and you can decide to buy him out for property 3 or he can buy you out for property 3.Transfers from a partnership to an individual will normally not result in a taxable event but something to discuss with your CPA.Also something to consider for a transfer instead of a sale is that a sale results in actual costs(realtor commissions, title work costs, transfer tax, etc) A transfer may also result in some costs, but it should be less overall.

LLC with rentals - Buy out, sell, other options?

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