Newbie investor, 1031 exchange and too many choices - ideas?

Question

Hi everyone! I'm brand new to Bigger Pockets and a complete newbie. My husband and I live in Portland, OR and currently own some farmland in another state which is cash rented and brings in 20K per year in income. The only expenses we have on it are the property taxes. It's easy income with no headaches, but we wonder if we could do better with multifamily real estate, plus we'd like to diversify. This land was purchased by family members in the 1950s and, if sold, would bring us about $600K in cash that would need to be rolled over to other RE to avoid significant capital gains. This would still leave us with 10K in yearly income from the remainder of the farmland that we plan on keeping.

We're thinking about taking action next year. I'm learning as much as I can now, but am intimidated by all the choices and complexity. If you were a beginner in this situation, would you purchase a couple of 2-4 plexes free and clear in our own backyard, look out of state in a less expensive area to purchase more properties free and clear or try to leverage some of the money? My husband does not want to leverage too much, since we have zero loans on the RE that we have now and he's getting close to retirement.

As I said, I'm trying to learn as much as I can now on BP, the web, books and have just joined the local REIA, but I'd love any thoughts you guys might have on this particular situation. Thanks so much for any advice you might be able to offer!

Arjun K. · Answer

Why not raise leverage on the existing land?  Keep the land, raise debt against it, and use the proceeds of that debt to invest elsewhere.

Joel Owens · Answer

Hi Jennifer,

Apartments are an option.

If you are worried about managers and (tenants, toilets, termites) then you can look at something like a triple net leasing property.

Corporate rated tenant and the tenant pays taxes, insurance, lease payment, etc. . Many people use these for safer passive investments with no headache. Just like any investment there are bad deals and leases out there and you have to use someone who has knowledge to buy the right property.

Typical is about a 6 to 7 cap going in and rent bumps of 1.5% to 2% annually. Some do not have rent bumps in primary lease term but cap starts out higher in the 8's etc.

With apartments you get stronger annual rent increases and you can leverage your cash more to get a better cash on cash return which you usually cannot do in ( single tenant net lease). You can do MTNL (mutli tenant net lease) for a stronger cap and leverage. You have to ask yourself what it is you really want.

Good luck

Jeremy Cyrier · Answer

It seems to make sense to sell it.  If you can convert $600,000 from earning you $10,000 per year to a 10% dividend of $60,000 per year, that's quite a pay raise.  To own a piece of real estate worth owning, you'll need to put down about 50% of the equity and use some leverage to get the return without the headaches.

Anthony Palmiotto · Answer

Loan amortization is beautiful isn't it?

Jon Holdman · Answer

Jennifer Blume and Marissa LoCascio we do have a 1031 Exchange Forum where issues around that topic can be discussed.

Marissa LoCascio · Answer

Jennifer, I can certainly help answer any questions you may have about 1031 and the process.  1031 can be a great wealth building tool and allows for diversification into properties that require management or even properties that are management free which may be something you and your husband would be interested in since he is nearing retirement.

Marissa

Jason Tinder · Answer

You can definitely get a higher rate of return. If it were me, I would sell the land and use the proceeds as a down payment on something large - an apartment complex. I would start looking for your purchase (after a bit of learning), and make the purchase subject to your selling your land. Use a 1031 exchange, as you mentioned. You could put 25% down on up to $2.4 million in property. From there, you'll need to learn to manage the managers. Using leverage will help you to get better returns. Make money using other people's money.

Jennifer B. · Answer

Thanks for all of your input. All of these points are well taken. We are considering all of this. Not sure if the extra income is worth the headaches we might be in for. I intend learn as much as I can here on BP and by talking with other local investors before making any big decisions.

Tom Goans · Answer

Ben is correct. Most real estate investments require much of your participation or consideration. Even if you hire a property manager, read all the posts concerning problems with property managers.

Ben Leybovich · Answer

This is a personal call.  From a money perspective it is an easy sell, sell, sell.  About $550k net at a 10 CAP (which should be a no-brainer in the right location) you'll triple your NOI on a cash deal, which I am assuming is what you want to do?

But, having no headaches with income-producing residential re is a pipe dream.  What you have now is truly passive.  a 20 unit apartment building is a different game - are you sure the money is worth it to you?

Newbie investor, 1031 exchange and too many choices - ideas?

Most Popular Reply