How to upgrade from investment portfolio from Airbnb's.

Question

Hello,

I just want to start off with saying it is an honor to be part of a community with so many like-minded investors willing to share their knowledge.

I currently have two Airbnb single-family properties in Lake Havasu City, Az. Due to the fact I bought them years ago, I still make a decent return of 15%-20% when I factor in pre and post-covid years. I don't like to include 2020 and 2021 due to the fact that everyone was flocking to Arizona since California was closed for Covid bringing it a lot more bookings than in previous years. Lake Havasu City is a beautiful town, but a party town in the summer which can bring many problems. This means I spend many hours dealing with rowdy guests and damaged property on top of managing the properties 200 miles away from where I live in The PHX area. With the long hours, the long drives, and headaches it is still profitable pushing me to think about a third property, but I am already paying two mortgages, two interest rates, two pool guys, two utility bills, and so on.

If I sold both properties and pay the realtor commission I might be able to walk away with $500k that I won't have to pay taxes on. I Know some people have their opinions about Grant Cordone, but one thing that stuck from his story is he started with a single-family home, to two, then multifamily.
Now that I know how to manage much of my time to investment properties and have a good amount of capital, what is my next big move? Continue runnings hotels or move on to something bigger. Maybe something that is closer to where I live and easier to manage.

Brandon Patrick · Answer

Hello Dave,

Thank you for the update. Truthfully I should know this since you helped me out with a 1031 before. Looks like I'll be contacting you soon.

Anthony King · Answer

@Brandon Patrick Also, the 45 day turnover you mention, I think you have that confused as well. You have 45 days to identify up to 3 properties that you plan to purchase and apply the 1031 funds toward. You have 180 days to close on one, two, or all three of those properties. The 45 days and 180 days run concurrently from the date you sold your property. What many people suggest is to get a new property under contract before you close on the sale of your property so you don't get into trouble with the 45 day deadline. It is a firm deadline. Weekends, holidays, or natural disasters are no excuse. The deadline is the deadline.

Anthony King · Answer

@Brandon Patrick if you lived in one of them for 2 of the last 5 years you wouldn't have to pay capital gains. You can only use that exclusion once in a 2 year period. More than likely you will have to pay capital gains on both of these if they have been strictly investments. I suggest a 1031 exchange. I'm not a CPA, but have dealt with those exclusions and 1031's personally. Don't take my word for it, consult a pro.

Kathleen McDowell · Answer

When you're ready to explore your 1031 options, let me know. I have a 1031 exchange company in AZ that I have partnered with and recommend.  You'll need to consider the amount of your sale and purchase. If you sell a property and your new replacement property doesn’t replace the total value of your sold property, the additional value you receive and don’t use (called boot), is taxable. E.g. if your replacement property’s mortgage is $110,000 and your relinquished property’s mortgage is $120,000, then you will have $10,000 in mortgage boot.  Reach out when you're ready for that next step. Kathleen

Brandon Patrick · Answer

Anthony,

Thank you for that update. I guess I had my information wrong. Looks like I'll have to do a 1031 on these two properties.

Dave Foster · Answer

@Brandon Patrick, Great catch by @Anthony King.  Those two properties do not qualify for the tax free primary residence exclusion.  You can however 1031 exchange them into any type of real estate investment property any where in the country.  And since the 1031 also defers depreciation recapture it actually becomes a better deal for you  His timelines for the 1031are spot on.  Just thing to add - you can be under contract for your purchase before you close your sale.  You just have to close the sale before closing your purchase.  This can really help to mitigate the tight timelines.  And can be relatively easy to do when shifting from SF properties to commercial or larger MF as the due diligence periods for each are very different.

What to invest in is a trade off that needs to suit your personality.  Sometimes the trade off is greater return for more work.  Sometimes it's accepting less cash flow for more appreciation.  Or stability in exchange for return.  Bunches of ways to go.

Brandon Patrick · Answer

Hello Kathleen,

Thank you very much for the advice. With the past 5 years of tax returns, I plan on getting a mortgage on the next property. If possible I would like to find a property that needs some improvements. $400k down, $100k in renovations and get a mortgage for the rest. I haven't gotten to that point yet so I could be looking at a duplex or maybe even a fourplex.

Brandon Patrick · Answer

Hello,

I have owned both of my properties for over 5 years and if I am correct with being married we don't pay capital gains on the first $500k. If I am wrong I would do 1031 especially with there being so much inventory in today's market. Definitely hard to achieve that 45 day turn over when its a sellers market

Scott Miner · Answer

How is it that you would not have to pay capital gains taxes on the $500K?  Are you planning to use a 1031 exchange to defer taxes?

Kathleen McDowell · Answer

Hi Brandon. I think you're wise to consider switching asset classes, as time is money and STRs are anything but passive. Once you deduct the value of time you spent from your returns, they may not look quite as good.  I do think MF could be a good next step for you.  Given you live in the PHX valley, there are opportunities in MF that may be easier for you to manage given their location.  Keep in mind, with a $500,000 budget in PHX, you'll likely be investing in more B and C class neighborhoods and assets (most duplexs and tr-plexs are found in Mesa & PHX). But this is not a bad thing, and usually equates to cash flow, especially if you're open to some value add and are able to raise rents and force appreciate the property. You could likely also self manage a duplex/triplex given it's less work than STRs and you're handling that - which saves you on fees.  Over time, as your portfolio grows, you could hire a PM company. Happy to share typical cap rates I am seeing on MF in PHX if that is a helpful data point as you consider your options.

How to upgrade from investment portfolio from Airbnb's.

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