Add to the Portfolio or Swap

[Mark Sullivan]

Looking for some input on how others would approach this situation. 

Currently own two properties under different LLC.

LLC "A" has a commercial property, no loan/debt, with a 15 year NNN left on it valued at 5-6 Million (recently a broker offered us this if we were interestd in selling). The profit is 200k per year with this LLC but only has 1 tenant.

LLC "B" owns a multifamily 2 unit in a highly desireable location. Both Units are rented out, value of property is more than $900k. Property has no loan on it or debt.

Owning the multifamily has it's challenges as everyone knows when you compare NNN to multifamily. I'm more willing to move off "LLC B" property because of the work required to keep this going.

The question: A commerical property in a highly desireable location which could fetch $6+ million and generates about $400k after expenses became available and I'd like to add to our portfolio instead of doing a 1031. The unit has 7+ units and is mostly rently. The leases look like (3) 10+ years and (4) 2-4 year leases

How would you approach and I know there's going to be different schools of thought and that's what I'm looking for. And maybe the answer is it can't happen without selling both to get this one. But love to hear from others

[Tim Delaney]

Quote from @Mark Sullivan:

Quote from @Tim Delaney:

One missing piece of info here is how much cash you have available to invest at the moment.

My initial thought was sell LLC B and hopefully you have a few hundred thousand available on top of that to buy the new building. If you don't have the extra cash, can you get creative with a private lender or partner stacked on bank debt? The problem is that your debt payments are going to basically wipe out that $400K profit unless there is room to increase revenue or reduce expenses. You say that it is "mostly rented" - is that $400K a pro forma assuming 100% occupancy? Or is that actual so you have the ability to add more to the bottom line?

 Thank you Tim for the response. Figured there would be a few data points left out of the equation' that I would need to circle back with :) .

There are additional units not rented at this time which could be rented to increase the income. I'm not factoring this in right now, going based on the numbers I see.

Definitely able to put down additional funds to be creative with a lender, at the numbers you are thinking. Trying to figure out if the juice is worth the squeeze. 

While the debt would whip out most of the profit for 'x' amt of time, it would seem to be logical to take on the risk at a net zero income for x amt of years if after that point, the cashflow is all positive. I'm really looking to add to the portfolio not do a 1-1 or 2 for 1. 

But THANK you for you information and hope to continue the conversation. 

 If you are trying to continue holding the other two properties then you should pull out some equity in the form or a cash out refinance on one or both or use a portfolio loan as @Jimmy Murray suggested. Use that as a downpayment on the new larger asset. Just make sure the other two assets can still cash flow with the debt you put on them.

I have an 10 unit commercial property that is basically cash flow neutral because of large Capex expenses that come up every year. I would not necessarily advise being cash flow neutral or negative before you account for these types of things. Mine may be different though because I am still responsible for HVAC and many other large items on the property. That said, if you can afford it and have the reserves, and more importantly think you have a decent chance of increasing revenue with the vacant units then I'd probably go for it.