To Sell As-Is, Fix + Hold, or Fully Renovate + Sell?

Question

Hi gang,

Long time listener, first-time caller seeking advice on a 2-family we own north of Boston:

OVERVIEW:

- 2-family w/3bdr 2ba downstairs and 2bdr 1ba upstairs

- Market Value: ~$580k

- Current loan: $118k / 6 years left @ 3.25%

- Current rents: $1900/mo downstairs, $800/mo upstairs

- Tax & Insurance: $700/mo

Notes:

rents are under market value...but it's a trade for "no fuss, no muss" tenants...downstairs family takes care of maintenance, never complains, etc.....and upstairs doesn't have a full kitchen (no stove top) as tenant is 95, grew up in the house and stayed on when we bought it from her son back in 1999 (and her daughter lives in the house next door). Part of the agreement was that she could stay, and we've just never raised rent.

MOVING FORWARD:

As mentioned, upstairs tenant of 20+ years is 95....so she won't be there another 20 years. And we want to start formulating a plan for after she leaves.

Original plan was this house would help fund our 3 kids college costs...but we've got cash to cover our oldest, so we don't NEED the money from a sale.

So, that gives us some options on what to do.

I realize each of them comes with various emotional/time/effort tradeoffs, so I was really wondering if any of the wise folks on Bigger Pockets might be able to help me form a more clear financial view of the various options?

1) Sell As Is? Invest in another multi-family, or, dare I say in this forum, the stock market?

2) Refinance and take out $125k or so to fund improvements? Looking at 2.75% loans with a point....would put full kitchen in upstairs, make roof/boiler set for another 15 years, make cosmetic improvements.....end up with goal of renting unit for more like $2400 and $1200/mo

3) Put roughly $400k in to Fully renovate into 2 3-bdr upper end condos? Goal would be selling each for $575 - 600k (conservative number based on current comps)

THANKS GREATLY FOR YOUR TIME AND THOUGHTS ON THIS!

Birch Norton · Answer

Thanks guys! @Dan Weber: yeah, I agree that Option #3 probably makes the least sense....it'd be fun, but take a lot of time for a fairly minimal upside @Roger Evans: Option #1 w/re-investment in other properties was my original plan (was ideally thinking of putting the $400k towards a single, 8-12 unit property vs. 3 or 4 smaller ones, mainly due to the challenge of finding good deals in our region...especially in current climate, but if you know of a batch of $500k 3-4 unit deals in our area, I'm all ears! Or, maybe it's time for me to stretch a bit and look for deals in southern/western regions...or Costa Rica :) @Joe Rodriguez: Option #2 = I would hold for at least 5 years So, I guess it's sort of coming down to the ease of finding deals these days....and comparing taking the easiest deal available in Ipswich (town on N. Shore of Boston where this house is) to the work to find other deals with higher potential upside in other markets.Also, timing wise - starting to weigh the risk of 1031's getting killed in next round of tax laws?

Joe Rodriguez · Answer

@Birch Norton I agree with a lot that @Dan Weber said. I would really take time to define your short term and long term goals. With options 2 & 3, are you ready to take on project, deal with contractors, etc? How involved do you want to be in this process?Option 1: simplest exit strategy. Sell as is and re-invest.Option 2: would you plan on selling after performing those upgrades? Or keep for the cash flow?Option 3: Whole other ballgame. Again, my thoughts.. what do you currently do for work and do you have time for this commitment? Or are you looking for a project?Hope that helps!

Roger Evans · Answer

@Birch Norton take the $400k come down and buy four 400k 3-4 unit multi families putting $100k/25% down on each.

Dan Weber · Answer

@Birch Norton congrats on being in a great situation with that property! Lots of options. Firstly, I think you need to zoom in on your long term goals as that could make the decision easier. I would start off by crossing out option 3. If you sold two condos for a total of $1.2 million and subtract the $100k loan + $400k renovation from the profit, you wouldn't make that much more than if you sold for $600k as is and you owed $100k on it. It seems like it could be a lot of headaches and risks for not enough of an extra reward. Unless it is a project you WANT to do to get some experience in renovations or flipping or managing contractors - I would skip this. As for option two - I think your projected rent for a 2/1 in Medford of $1200 is a bit light. But let's roll with it. Your updated rents would rent roll a gross $43k per year. Subtract your new PITI (after $125k renovations) and annual capex - what does that leave you with? Is that new annual net income number smaller or larger than if you were to sell, take the $500k and dump it into index funds in the stock market and take your stock market returns? So if your net net rental income is $20k per year and your $500k of stock market investment could throw off $20k per year, which one of those investments would you rather have? You do have the added benefit of future appreciation, equity growth and tax advantages with a rental property that you don't get with the stock market so make sure to factor those in. That's how I would think about it and compare the options.