To Sell or Not to Sell

Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes

4y

Hey everyone, I don't post here as often as I should, but I've been mulling over something for far too long without asking for advice from actual RE investors. I currently live in Florida but have lived and invested in St. Louis, MO for several years (prior to moving). Because of the incredibly hot market in FL for multifamilies, I ended up actually starting a 4-unit development project that I'll have deeded as condos. As far as I understand, I have 2 options I can't seem to decide between:

1) Sell each of the condos individually and make a significant profit (a few hundred thousand) that I can then take and invest in other projects.

2) Hold onto the 4-units, rent them out with short-term rentals (I have a setup that will cash flow significantly for the area), and then use that property as collateral and a HELOC to purchase other properties.

There are different sides to both, with 1) being that I'd have to pay taxes since I probably won't be able to find a good property (or properties) in the right time for a 1031, but it'll allow me to have the cash right now. While 2) allows me to cash-flow and have livable income, fast-growing equity, but then I'll have to manage the rentals (I'll have a PM for that) pretty closely. That second option also means I have to wait until the property's built while I can pre-sell the condos under option 1.

Can anyone please offer some insights on thoughts you'd have?

Hi Matthew.
My thought process would be:
1st choice: HELOC only if at least 5%-10%+ cash flow and buy more property.
2nd choice: Depends on what cash flow you are receiving. If it's strong, hang onto it and still purchase, with additional financing. If you have to, there are some pretty darn good hard money options for flips or 3-6 month exit strategy projects. I only recommend hard money of conventional or other lower interest and point options are not an option.

RE the 1031 exchange- I broker many of these for my clients. Call me if I can help quickly put something together with strong cash flow for you.

Exciting... go get 'em!

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Travis TimmonsPro Member

Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes

4y

Nice job, first of all. If it were me, I'd sell and find something that gets me excited. I don't know what that is for you, but we all have a natural lean or inclination for different types of properties. It sounds like these were built to be sold rather than to be managed as a short term rental...is that correct? If that is the case, it appears that you would not spend a few hundred thousand dollars on a 4 unit development tp be used as a STR if that opportunity presented itself outside of this project. If you don't consider this project as the best way to deploy a few hundred thousand dollars, then selling appears to be the best course of action. If tomorrow you inherited $300k, how would you invest that money? That's how I would look at it, though it isn't entirely that simple. I'm making some assumptions based on incomplete information, but that's my take, which is worth what you paid for it. It's a fun decision and congrats on your success.

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Matthew Spiers

OP

Rental Property Investor · Vero Beach, FL · Member since 2015 · 42 posts · 13 votes

4y

Quote from @Travis Timmons:

Nice job, first of all. If it were me, I'd sell and find something that gets me excited. I don't know what that is for you, but we all have a natural lean or inclination for different types of properties. It sounds like these were built to be sold rather than to be managed as a short term rental...is that correct? If that is the case, it appears that you would not spend a few hundred thousand dollars on a 4 unit development tp be used as a STR if that opportunity presented itself outside of this project. If you don't consider this project as the best way to deploy a few hundred thousand dollars, then selling appears to be the best course of action. If tomorrow you inherited $300k, how would you invest that money? That's how I would look at it, though it isn't entirely that simple. I'm making some assumptions based on incomplete information, but that's my take, which is worth what you paid for it. It's a fun decision and congrats on your success.

Thank you for your reply! You're right it's probably better to post some real numbers:

Cost to Build: $650,000

Total for 4 Units: $1.2 million (each is $300,000)

Renting it out under short-term will be under a specific program (H-2B employees for SWFL), that will provide about $150,000-$250,000/year in gross income. Net cash flow would be at least about $90,000-100,000/year. So covering the mortgage in the meantime will not be an issue.

I totally agree I'd like to do something I enjoy more (much larger multis) but it just seems like a lot of the larger multifamilies out there are drastically overprice and cap rates seem too low. That's my main concern.

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Matthew Spiers

OP

Rental Property Investor · Vero Beach, FL · Member since 2015 · 42 posts · 13 votes

4y

Quote from @Chad McMahan:

Quote from @Matthew Spiers:

Hey everyone, I don't post here as often as I should, but I've been mulling over something for far too long without asking for advice from actual RE investors. I currently live in Florida but have lived and invested in St. Louis, MO for several years (prior to moving). Because of the incredibly hot market in FL for multifamilies, I ended up actually starting a 4-unit development project that I'll have deeded as condos. As far as I understand, I have 2 options I can't seem to decide between:

1) Sell each of the condos individually and make a significant profit (a few hundred thousand) that I can then take and invest in other projects.

2) Hold onto the 4-units, rent them out with short-term rentals (I have a setup that will cash flow significantly for the area), and then use that property as collateral and a HELOC to purchase other properties.

There are different sides to both, with 1) being that I'd have to pay taxes since I probably won't be able to find a good property (or properties) in the right time for a 1031, but it'll allow me to have the cash right now. While 2) allows me to cash-flow and have livable income, fast-growing equity, but then I'll have to manage the rentals (I'll have a PM for that) pretty closely. That second option also means I have to wait until the property's built while I can pre-sell the condos under option 1.

Can anyone please offer some insights on thoughts you'd have?

Hi Matthew.
My thought process would be:
1st choice: HELOC only if at least 5%-10%+ cash flow and buy more property.
2nd choice: Depends on what cash flow you are receiving. If it's strong, hang onto it and still purchase, with additional financing. If you have to, there are some pretty darn good hard money options for flips or 3-6 month exit strategy projects. I only recommend hard money of conventional or other lower interest and point options are not an option.

RE the 1031 exchange- I broker many of these for my clients. Call me if I can help quickly put something together with strong cash flow for you.

Exciting... go get 'em!

Ok, that's more what I'm leaning to. I'm still half and half and like you said it's very exciting but I should probably break ground on the construction first before I decide (still in permitting). I will probably reach out soon on the 1031 part, it seems daunting to do it correctly.

0 Reply

Travis TimmonsPro Member

Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes

4y

Quote from @Matthew Spiers:

Quote from @Travis Timmons:

Nice job, first of all. If it were me, I'd sell and find something that gets me excited. I don't know what that is for you, but we all have a natural lean or inclination for different types of properties. It sounds like these were built to be sold rather than to be managed as a short term rental...is that correct? If that is the case, it appears that you would not spend a few hundred thousand dollars on a 4 unit development tp be used as a STR if that opportunity presented itself outside of this project. If you don't consider this project as the best way to deploy a few hundred thousand dollars, then selling appears to be the best course of action. If tomorrow you inherited $300k, how would you invest that money? That's how I would look at it, though it isn't entirely that simple. I'm making some assumptions based on incomplete information, but that's my take, which is worth what you paid for it. It's a fun decision and congrats on your success.

Thank you for your reply! You're right it's probably better to post some real numbers:

Cost to Build: $650,000

Total for 4 Units: $1.2 million (each is $300,000)

Renting it out under short-term will be under a specific program (H-2B employees for SWFL), that will provide about $150,000-$250,000/year in gross income. Net cash flow would be at least about $90,000-100,000/year. So covering the mortgage in the meantime will not be an issue.

I totally agree I'd like to do something I enjoy more (much larger multis) but it just seems like a lot of the larger multifamilies out there are drastically overprice and cap rates seem too low. That's my main concern.

I have my thoughts from my first post and perhaps I still stand by those; however, $90-100k of cash flow plus a few hundred thousand of equity - and the options that come with that - is really hard to walk away from given current market conditions. I guess the question that I should have asked before is "how likely is it that you will find something that provides an equal or better opportunity with $300k of capital to deploy?". With that kind of cash flow and the working capital that the HELOC provides, I'd be inclined to at least give it a shot. I also wouldn't tap in to the HELOC just because it's there...but it's nice to have as an option. You can always change your mind and sell down the road if you regret your decision, right? It's so much easier to give the "you can always sell if it doesn't work out like you want it to" advice when I'm not the one involved.

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Aaron J Latal

St. Louis, MO · Member since 2018 · 49 posts · 19 votes

4y

Why choose!?! Sell 2 and keep other 2 as STRs, if you own all 4 you can set HOA rules to allow it? Keeps your tax burden lower and allows you to have a smaller and potentially more manageable sum of money to invest.

Con: You still have to manage those 2 STrs and returns will be half what they could be...

Pros maybe you can sell the other 2 STRs after (if) cap rates return to normal, but then maybe the condos wont sell for as much.

Option 3 - seller finance the condos to someone that wants to run them as STRs and get a 10 or 20% down payment from them. They might be interested in that because from what I hear getting financing on STRs is a bit challenging these days. Let me know if you like option 3, maybe we could work together ;-)

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Matt Devincenzo

Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes

4y

I'll throw this in for consideration...if you sell the units as condos you will very likely not be claiming the earnings as 'capital gain' and be able to complete a 1031. Your project is a new development just like any other builder and is the creation of inventory for sale, meaning you will have a hard time defending that your intent was to hold these units as an investment. So that means you'll be paying your marginal income tax rate as well as SE tax etc.

Personally I'd probably hold since I prefer the long term gain.

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To Sell or Not to Sell - 4-Unit

To Sell or Not to Sell - 4-Unit

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