Time to sell my 5-unit after 12 years - How do I do this?

Question

Hello all,A little help on setting a price to sell. Should I use a cap-rate?It's not for sale yet. Considering a 1031 exchange for tax savings...I'm nearing retirement and frankly, if I'm cut short on life, I don't want to leave my wife Lori handling apartments she's doesn't participate in - she's a wonderful nurse.It's time to sell my 5-Unit rentals after 12 years of nurturing and rehabbing.It's 2-duplexes - (two 1-Bdrm and two 2-Bdrm) on a 3/4 acre lotwith an adjoining 1/4 acre lot and a 3-Bdrm 1-1/2 bath single family house.It's a pleasant spacious Country lot about 2 block from the town of Flat Rock, MI.Rents:Two - 1-Bdrm rent for $600 each ($1,200 total)One - 2-Bdrm rents for $725One - 2-Bdrm rents for $9753-Bdrm house rents for $1150Total: $4050 monthly - $46,600 yearlyAll utilities are paid by the tenants.All are rented with 1-year leases.I cut the lawns and pay $33 monthly for garbage pick up ($400 yearly)All units are rehabbed inside and out with minimum deferred maintenance.All rents are collected with online payments and invoicing.Current property taxes are $3,500 and Insurance is $3,200 both are yearly.Zillow estimates on each building totals $317,000, enough said about Zillow:-)I read the good and bad about Cap-rates, so how would you price this property.$48,600 yearly minus ($3,500, $3,200, $400 totals $7,100) Less $7,100 equals $41,500 cash flow for my scenario.A buyer would have to consider debt load and increase of property taxes.These 5-units are bundled into a commercial mortgage - it was an advantage for me anyway.How's the cap-rate work? $41,500 at a 10% cap, does that mean $410,000???An 8% cap-rate would mean a higher selling price or a 15% cap rate a lower selling price, right?And of course: "What a Buyer is will to pay and a Seller willing to sell at" :-)Okay, I'm a die-hard do-it-myself rehabber and held onto this project because my bank suggested I have some holdings for future deals, and that panned out okay.Plus, I always had something to work on between rehab-flips.I have a real estate license in referral and haven't been active with it in over 15 years, so my real estate professional sales statice are very weak.Help please... How to set a fair value to sell? I don't want to carry back a note, and considering to look for a smaller 1031 exchange property.Can I FSBO with my license or would I have to list it (in Michigan)?Are social sites and sites like Zillow and Trulia the way to go?I have little to no familiarity with the "secrete", off-market real estate trading sites.I'm out of my comfort zone on this one! Selling and maintaining privacy for the Tenants about my wanting to sell makes me nervous. Please, no offers. I don't want to break Bigger-Pocket rules.I do need help and guidance on how to sell my 12-year project and figure out the next leap of faith. I do love real estate and need to find my next step after the time comes to sell.Doc says I have to slow down on rehabbing cuz of my joints wearing out... Just when I have every tool I need to rehab entire homes by myself. I'm at a crossroad here...I would love to hear from you and not go through this alone.Thanks for reading:-)

Wayne Brooks · Answer

Your best price, net, with most likely be listing it in the MLS, whether you can do that yourself or not. Otherwise, you'll miss at least 75% of the buyers out there. As for the NOI, an investor will include a vacancy factor, ongoing repairs and maintenance, lawn services, and capex (even though capex is technically "below the line").

Tom Mole · Answer

@Joe Trometer you are wise to ask first when you have such fundamental questions. This is certainly not something to just take a stab in the dark and hope for the best.I could explain to you all about cap rate evaluations, but I get the feeling that this may not be your best direction. You may have an opportunity to create higher gains by selling your portfolio in pieces. Have you given any thought to selling each parcel independently?You did not provide too many details about your financing, but I'm gonna assume that you may be facing a significant capital gain since you're thinking of doing a 1031. Is it possible that you might sell one or two parcels for enough to retire your debt for the entire portfolio leaving the remaining properties free and clear? This could alleviate the need to do a 1031 exchange altogether.For most people a 1031 defers taxes, but it does not get them out of the landlording business. You still have to find an investment to exchange to and often that will be another buy and hold.Another solution that may mitigate your tax burden AND get you out of the business of being a landlord may be to master lease-option your portfolio. The buyer would takeover the landlording and you and Lori would collect a regular cashflow taxed at a rate that you're accustomed to paying. I know you said that you did not want to seller finance, but I would at least look at the advantages before turning up my nose at the benefits.If I were to master lease-option this portfolio, I would focus my buyer on the cash flow potential and calculate my price point to achieve it. If you take payments in this way, you can receive a regular income without the problems associated with tenants, termites and toilets.You sound a bit like a "motivated seller". You may want to consider offering your portfolio in the BiggerPockets Marketplace where fellow BP'ers can legitimately make offers on your properties without violating any of the sites policies and procedures.I hope this gives you some food for thought. Let me know if you have any questions about what I've suggested.Cheers!!

Joe Trometer · Answer

@Chris Allard Thank you Chris. I am a long time member at our local REIA group. I haven't said anything to anyone yet. Guess I'll have to break out of my quiet comfort zone and speak up. My observation in our small group, is a lot of looking for distressed properties, way below market values, and very inexpensive helpers. I have learned tremendously from the guest speakers on operating a rental business, tax tips, and abiding the rules (and laws).I'll be sure to speak up on this at next months meeting.Thanks for the reminder Chris.

Chris Allard · Answer

Joe Trometer since you are looking to keep the sale private from you tenants and you're not sure about the sale price, might I suggest attending a local REA and networking with local investors. The will most likely participate in the 1031 and give you a better idea of local cap rate.

Joe Trometer · Answer

@Tom Mole Thank you very much Tom!2-duplexes are on 1 lot, the single family is on the adjoining lot, they are tied together with a shared driveway, parking, and a single water main where I installed 5-submeters to bill tenants independently. However, yes it could be possible to install 2 additional water mains, and cut in additional driveways. I'll keep that in mind over the next couple weeks as this selling process unfolds.You've reopened my thoughts about a lease option with seller financing...... My fear is after 12 years of establishing this property to the best quality of materials and tenants this area supported, would be if my successor could maintain the value and integrity of what I developed. Not that I'm anyone special, just nurtured our investment whole heartedly, I was all in on this one.Great if all went well, but I would not be able to afford the costs of recovery if I had to reclaim the property with extensive damages and vacancies.I could be wrong, (again), for me to carry the financing, how would I assure the success of the buyer? I would think the big-league investors would not mess with this small portfolio. I'll keep an open mind in this area for sure.Thanks for bringing my attention to Bigger Pockets market place. I've been off line for some time rehabbing away and too tired to surf the web.Cheers Tom, I appreciate your time and help on this one!

Joe Trometer · Answer

@Wayne Brooks, Cool, thanks for the details. Yes I do have an emergency fund for expensive replacements. I guess I'm fortunate to replace expensive mechanicals at 1/3 the price; cost with no labor. DIY is how I ended up in the business to begin with:-)I like the plan for the interior inspection clause Wayne, thanks a million!

Wayne Brooks · Answer

@Joe Trometer Yeah, most guys will use 5-8% for fancies, depending on the area. Capex equals capital expenditures, the big things that eventually have to be replaced, whether very 10 or every 20 years....appliances, hoacoa, hot water heaters, roofs, etc. As for the tenants, it is not uncommon when selling to provide fairly detailed expense numbers, and only allow interior inspections after having an executed contract, with an inspection clause for the buyer of course.

Joe Trometer · Answer

@Wayne Brooks Thank you Wayne. I usually cut the grass myself because I live close yet have a guy to back me up at $25 per cut. I guess I'd have to figure in snow removal too even though I plow and each tenant agreed in the lease to shovel their own entrance area.What would you say ongoing repairs are? I screen thoroughly and have been fortunate not have have damage on turnovers. I do some painting on turnovers and complete cleanings.I install all 3/4" hardwood floors and porcelain tile floors so carpeting is never an issue.Everything is newer; furnaces and central air units, plumbing, electrical, and inside and outside structure are all updated. Guess I'll be open minded to a buyer's concern for ongoing repairs and maintenance.I do not know what capex means... little help please?I only had one (1) month vacancy on one unit this year. Apparently I have a nicer than most rentals in the area for those not wanting to live in the big complexes. There probably is a flat rate figure for vacancy factor, I recall 20%. Yet that hasn't been my experience. My tenants say they like my 15 page addendum with a bunch of rules to follow as I explain what they can expect from their neighbors. That's been working for me, so far so good.Thanks for your help Wayne, now I can be prepared to discuss repairs and maintenance better. As a do-it-yourselfer, I've always done the work. Probably not so for a straight up investor - right?