4 Townhouses, optimal exit vs long term hold strategy?

[David Cheng]

We have 4 townhouses east of 75 & Haskell (West of Ross), Built ~ 2007. Good condition, 100% occupied. Monthly rent in the ~$1.5/sqft range. I'm currently also the property manager. I'm a professional in another unrelated field and the time I spend to manage the rental properties are not worth my hourly. Also, our portfolio is very heavily concentrated in RE, diversification is seen as a positive at this point. 

I'm exploring several long term strategies:

-Exit:

The townhouses share common walls in the middle. The legal description of the lot states these 4 townhouses are 1 legal property (they are NOT platted as 4 separated properties).

The realtor I use to appraise the property claim that I would maximize the sales price if I had the re-platted as 4 different legal properties. However, he offered no assistance on the re-platting process. 

I spoke to my RE Lawyer, who claimed that re-platting would take much longer than just forming a condo association and selling each individual townhouse as a condo. 

-Long term hold

My rolodex isn't that great for trades (Plumber, Electrician, Roofer, Landscape, or Property Manager). I may have 2 or 3 on that list (no property manager that I trust) of trades that I would trust and keep long term to work on my other properties. This results in me often driving to the property to assess the problem myself and paying a premium to get the work done right. 

I could just get better at establishing relationships with the trades and hope that my cost to manage will go down in the future. Or I may get a trust worthy property manager, but that cost almost would lower the long term returns to below the S&P 500 indexes. 

My questions to the hivemind:

- Have you ever had to re-plat 1 property with 1 legal description into 4 different properties? Any insight on this process or forming condo association would be helpful.
- What would you do if you were in my situation? I feel like this is a good time in the market cycle to exit and diversify? But I may not be as in tune with the market trends as the rest of the professionals. 

[Bruce Lynn]

This is a tough one.

The trick with turning them into condos, will that it will be super tough to sell the first 3 if not all on a 4 unit development if people need financing. You would likely have to owner finance them in my experience to sell them separately.  Typical lending rules are that one person cannot own more than 20% of the units and developer cannot own more than 50%, you probably get around the 20% rule once you sell 3.  There are more issues than this, reserves would be another.  You need budgets and financials, so probably have to pay to get that done.  Plus more and more lenders don't want to lend on condos.

I'm thinking individual townhomes would be a better option, but don't think you can do that with shared roof and sprinkler.   Are they on one water meter or 4 separate?  That could be an issue as well.

All kinds of strange things could happen when you sell 3 and own the 4th. Now you don't have control. They could pass a new resolution not to allow rentals, or no pets in rentals, or no section 8 in rentals, or raise the HOA dues insanely high for a year until you sell it to fund better reserves for themselves at your expense. Probably crazier things have happened.

Replatting would be the job of a surveyor, not your realtor.

I think it is easier to fix your rolodex.  How much maintenance do these require?

If it is just getting too much to handle for you, I understand.  A great PM is going to cost you 10% and your repairs will also likely cost more.   Just a couple of examples.  Tenant calls you to say thermostat not working.  You do it.  $5 for batteries and whatever your time costs.  PM does it and that will be anywhere from $75-$150.  Sure PMs have better rolodexes, but that doesn't mean you will pay less for maintenance.  Chances are you pay more.  You'll shop for a AC unit replacement, you might go with the guy who can save you $2000 if you can wait until the weekend to get it done.  PM isn't going to wait for that.  They're getting it done and tacking their 15% upcharge on it.

It's just one of those dilemmas you face as you grow and get more units.   Do you turn over to PM or do it yourself and how do you simplify things as you move forward.

Also trading real estate for stocks is not just a way to diversify.  One thing you have to think about is risk.  I consider real estate low risk.  Stock market....you can loose 25% or more of your money in one day.   I think it would be pretty rare you could do that in real estate.  Plenty of great stocks have had big drops like this.

While your returns might be lower, sounds like it might just be better to sell this as a 4plex that perhaps it is and not turn it into condos or townhomes.  That probably means selling it to another investor at investor pricing.

Another option is turn over some of your duties.  Can your spouse help, kids help, relatives, one of the young people trying to get started here on BP?  Could one of your tenants help in exchange for reduced rent?   Could you hire one handyman that does it all?

Good luck.  Let us know what you end up doing?