Would you sell this building?

Question

Would you keep for the long term or sell this property?

- Purchased a 1960's vintage building, 18 units, in 2017 for $1.5M
- In a major urban city in the northeast
- Put $400K down and have paid down $100K in loan (so the balance is $1M)
- Purchased it to supplement my 9 - 5 and use it as a resource of income to retire (15 20 years from now)
- It's comprised of studios, 1 bedrooms and 2 bedrooms. General square footage is on the small side.
- It barely squeezes out any money per month. In its best year, 2023 it cash flowed $3,000 a month before increase in property tax and utilities have squandered it down to maybe $1,500. Moderate rent bump this year has prevented it from going down any further.
- It's been well kept
- Between transaction costs (e.g. broker fees, transfer fees), capital expenses, tax recapture I would need to sell it for $1.9M to break even.
- At it's height (2022), it could have sold for but $2.7M. Now it could sell for $2.1M.
- Would you sell for a gross profit of $300K or keep it, with a cash flow of about $1,500 a month?
- I haven't been able to find any 1031 opportunities (buildings or otherwise) to roll the money into

I appreciate learning your thoughts on whether to sell and keep.

Gino Barbaro · Answer

@Nick M.

It's a 1960s property that's only going to get older, and possibly need more cap ex. It sounds as if you're not happy with the asset, the size, the unit mix, and its performance.

You could wait until rates drop, and find someone willing to pay a higher price than now. I think it comes down to if you have an opportunity to role it into another opportunity. 1500 a month is 18000 per year. You would need over 16 years of cash flow to equal 300,000.

Tough call. If you can roll into another deal then I would sell

Good Luck

Gino

Chris Grenzig · Answer

$1500 is $18k per year, on equity that's 6% per year. The question is do you want to spend the time energy and money to find something that you think can do better? Do you think there is even anything better out there right now?

I'm personally choosing to wait on our 16-unit deal in Jacksonville, FL. It was always a longer-term hold (also 60s built) and I feel like we are near or at the bottom of the current cycle, and if I'm not forced to sell then why would I do it during a time that I think is closer to the bottom? The only reason would be to try and find something better, and I don't personally see anything that is, so I choose the property we have. Also, with the property we currently have, I have a much better idea of where the potential or known problems are, versus a new property which you won't know nearly as well.

Sam Applegate · Answer

@Nick M.It sounds like your goal is cash flow, especially since you’re looking to use the property as your retirement plan. If you sold the property and bought another one, could you generate more cash flow? If the answer is yes, then selling it might be worth considering. Look at it from both a pure cash flow perspective (since you'll be realizing your gain) and a return on equity perspective.

Henry T. · Answer

Ive always avoided apts because I always felt the tenants are more transient. Whats a better market demand in your area  apts or houses? Could you buy two SFR's with 300k and make the  same cash flow?  Less turnover, less tenants,  possible better appreciation in the right area. I dont know where you are.

Chris Seveney · Answer

@Nick M.

Making $18k a year on a this investment is not a good return

I am curious how in 7 years rents have not gone up to overcome taxes and insurance - but neither here nor there.

Issue is if it’s not cash flowing at its current value when you look at noi and cap rate what makes it appealing for someone to pay that amount?

Adrian Clapp · Answer

I’ve been in a similar situation with a commercial office building in the northeast.  Two lessons I have learned: 1) CashFlow is critical and 2) Sometimes it’s good to sell when things are going well- I bet you weren’t considering selling when it was worth $2.7M.  At least with residential Multifamily your building is more likely to increase in value again.  With the current positive CF and interest rates hopefully falling in the near future I would hang on for now until the rates come down and values start increasing again.  Especially since you haven’t seen any suitable replacement property.

I will add that you will probably feel really good in a couple of years when you sell it.  It’s probably still a significant amount of work for $1500 per month CF.

Ko Kashiwagi · Answer

If you find a screaming opportunity, it may make sense to sell. Otherwise, given its location you'll probably see the price climb back to 2022 prices at some point. It takes a lot of work to find deals, underwrite, sell this one - so if it's not a much better deal, it's hard to justify it

Nick M. · Answer

Thank you for taking time to share your thoughts.The roof has been largely replaced and a new heating system and water tank was put in a few years ago.  I don't envision any large cap ex.  Just routine maintenance.If I were to take the proceeds from the building and place it into a CD paying 4%, it would more or less amount to the total return I make in monthly cash flow and monthly principal pay off.

Theresa Harris · Answer

Do you have expensive maintenance on the horizon?  While it may only cash flow a set amount each month, don't forget that the principal on your mortgage is also being paid down and (in the long term) the value of the complex is going up.

Are you able to invest that money elsewhere (factoring in cap gains or 1031) and do better?

Would you sell this building?

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