What would you do? Keep or Sell? (REAL Duplex Scenario)

[Joshua Cook]

Duplex:

-Purchase price: $155,000

-600 sqft 2/1 each unit

-1979 concrete

-Rents for $1,000/unit/mo

-PITI is $940/yr

-Property management fee: 7%

Option 1:

I've put probably $25,000 cash into upgrades and repairs since purchase two years ago. Yet, the water heaters would probably need to be replaced in the next several years in each unit ($3k total), the roof is 10 years (around $8k), and the ACs in 8 years ($8k~ total). 

Yet, here's the big expense I've never accounted for: underground copper pipe replumbing. I had a plumber somewhat recently say that due to corrosion and the age of the duplex, he estimates I'd have to re-pipe both units in 5+ years, briefly estimating the job to cost $12k PER unit. So in addition to the $25,000 of repairs and upgrades I've had to do, I'm anticipating $43,000 more costs in the next, let's say, 9 years due to the aforementioned items. 

If I calculate in my cost-to-close, PITI of $940~, a vacancy rate of 8.5%, an expense rate of 6%, and $68,000 ($25k previously paid and $43k expected) of capital costs as if I paid them now, I get an 8.6% cash on cash return, with a 10.6% overall return if I calculate in principal paydown. If I leave out that $68,000 cash outlay, it's a 25% cash on cash return. Duplexes in my area will never likely go down into a price range again that makes economic sense as rentals. This one cashflow $8.8k/yr.

Option 2:

My realtor/property manager said he'd be interested in buying the property and giving me a flexible closing schedule so I can 1031 exchange ($1.25k fee per property involved, so $3.75k) for two new-build SFHs that I'm in contract to close on in April. I have enough cash to keep the duplex and buy these two new homes (let's hope rates don't rocket up), but doing an exchange will allow me to keep more cash on hand for any market corrections, avoid capital gains, and essentially upgrade to two SFHs that will cash flow nicely. We haven't talked about the price yet, but I'm hoping to get $240,000 or so for it, and asking if he'd be willing to drop any agent commissions in the transaction. 

At this price, I will almost be able to fully fund both new SFHs with the proceeds of this sale. Notice the appreciation for this property has gone up considerably in a little over two years, and I have a roughly $113k mortgage on it, so a good chunk of equity is there.

So,

Would you hold long-term, accept the costs, and essentially have these big capital expenditures eat up most of the profit I make in 9 years once these inevitable repairs come around
OR
Would you sell, take advantage of the rapid equity increase and the timing of the two contracted SFHs, avoiding the upcoming capital expenditures, thereby keeping more cash on the sidelines in case Microsoft and Apple stock nosedive soon (hehe)?

(Please, feel free to correct any misunderstandings or wrong perspectives I might be displaying or ask any questions. I want to learn about your investment philosophy and any beneficial, accurate ways to think about these issues. For instance, am I thinking about these future capital expenditures wrong, especially when adding them to present-day cash on cash calculation?)

[Dave Foster]

@Joshua Cook, that's a good analysis you've done. If you amortize out around $70K of expenses over 10years that would drop your 8.8 NOI to around 2K/year. That's the damage that unrealized cap ex can do to you.

The 1031 into new construction will be a multi year hedge against surprises while the market works through whatever it's going to work through.  And having extra cash to invest in a down turn is a bonus as well.

The real question is how much you like these.  Since you perceive that the price is not likely to adjust down again (btw - never say never.  A lot of folks said that in 07 and 99 and 89 etc)

1031ing away from capex is a common strategy.