Buy or sell and reinvest?

[Libby Tucker]

I'm on the fence about a property I own in the south side of the city of Seattle.  The property is 1600 sq ft livable space, with a single car garage on a 6,000 sq. foot lot.  It's 10 minutes to downtown, 10 minutes to the airport, and 10 minutes to the beach.  On a bike trail.  The light rail is expected to go through / close to the area in 2030.  There are many new businesses opening up down the street and younger DINKS moving to the neighborhood.  

The downsides - the house is on a dead end street near the freeway and has freeway noise.  The neighborhood is turning around but there is still petty theft, squatters, and drug houses in the area, even though it feels relatively safe, it's not a high class neighborhood, however, artists have moved in and are making it trendy, the first step I think to good growth.  But this side of town is near a super fund site with polluted soil near the river banks, it's in a valley, which also means it's technically in a flood zone.  The basement plumbing isn't great and I've had issues with some minor flooding.  

I had divided the upstairs and downstairs into 2 separate units, on the same meters, and was renting it out as separate units, which, the city said would be okay apart from the height of the ceiling, which is just a few inches under regulation height.  So, I lost rental income by not renting out the bottom.  And, I lose money in repairs when it floods. 

The area is zoned L2 high-density. I am approved to build either an ADU/DADU or 2 townhomes on the property.

I am in between these decisions: 

1) keep the property.  As-is, it rents for $2,500. 

2) keep the property. Lift the basement, fix it up, return it to 2 rentals 

3) keep the property. Lift the basement, fix it up, build an 800 sq ft 2 bedroom ADU. Rent out as 3 separate units for $2k/each. Cost approx 250k to build/fix so I would need to hold on for 15 years to get money back.

4) sell the property.  take a hit on capital gains and pay off my IRS debt/lien 

5) sell the property. pay off debt. roll proceeds (approx 200k) into a 1031 and find a different market to invest in, with lower growth potential perhaps but no flooding, no construction to manage, no tenant etc.  

I'm also taking care of my mom out of state who is very ill.  I also realize that if I leave the Seattle market, I won't be able to re-invest back into it as prices are soaring.  I also believe that when interest rates go up, the market will stabilize and likely crash in less sustainable areas. 

It's a tough decision and I'd love to hear what this community thinks.  Any thoughts?