What to do with a ton of Equity

Question

As the title/description states, we have a rental that just had appraisal done that came back really high and now the numbers really don't make sense. Any feedback is always appreciated.

In the mid 90's my grandfather had the foresight to purchase and renovate a four unit property right next to the University of Virginia's football stadium.

Fast Facts (approximate):

• Market Value: $675,000
• Mortgage: $170,000
• Equity (20%): ~$370,000
• Total Rent: $3,600
• Land Assessment: $300,000
•

We rent this particular property through a property manager who says part of the reason why these 2/1 unit's rents are so low are because there aren't in-unit washer/dryers which I get. Some 2/1 college rentals this close to the university can command well over $1200. Even so, the numbers still wouldn't be great.

Our goal is to grow the portfolio. We have a duplex and three other single family homes in the area with some equity. Two of which can be converted to duplexes via additions. We also wouldn't be opposed to taking equity out and investing it out of state.

I also want to take into consideration the intent of the University. They seem to be buying up more property year over year and eminent domain could be a concern in the future (one of the SFH's is next door as well). Saying that, I'd be hesitant to 1031 in case we're able to to build a larger apartment on the land or get a sweet offer from UVa.

I guess my question is what are some options in considering this scenario?

Joe Villeneuve · Answer

This is a simple math problem...unless you let emotions get in the way, and you are for some reason emotionally tied to this property, or irrationally tied to the idea of paying off this property.  Equity is dead money...and worthless...unless you turn it from a "noun" to a "verb".  It has a face value of 1 to 1, meaning if you gave $505k in equity, it has a face value of $505k.

However, it has a practical value of 5 to 1, meaning if you access it, it has a practical value of over 2.5M.

There was no mention of CF (rents don't even tell 1/10th of the story.  Assuming you are clearing at least 2k/month (24k/yr), it will take you at least 24 years of perfect CF to equal the current face value of your equity.  It will take you almost 125 years for it to equal the practical value.

Your asset isn't the property...it's your cash, and the free money (gifted equity) that is buried somewhere on the house...dead.  The property is just a temporary resting place for it until it grows large enough for it to move onto bigger and better things.  In this case, that money has outworn its welcome a long time ago.

Kick its a$$ out...and make it work for you.

Paul Doty · Answer

Could you setup a HELOC and just take out cash to invest as needed?

Ryan Roesch · Answer

Joe, thank you for your response. CF isn't great at all either. Mark, I'm currently in a college town with older stock. Where else would you look?

I appreciate your input Adam.

Adam Nishikawa · Answer

PSA on 1031 Exchange Extensions:

IRS issued Notice 2020-23 which provided extensions to Section 1031 exchange deadlines. This Notice extends any 45-day or 180-day deadlines that occur between April 1, 2020 and July 14, 2020 to July 15, 2020. Please note, this extension applies to all taxpayers with exchange deadlines within this time frame. Previously with other extensions involving natural disasters, the IRS has provided for a longer 120-day extension period but relief was provided only to “affected” taxpayers. This relief is broader as it is being universally applied, and the extension date of July 15, 2020 is the same for everyone.

Taxpayers in a reverse exchange will also receive the extension to July 15, 2020 for their 45-day or 180-day deadlines that fall within the extension window, between April 1, 2020 and July 14, 2020.

The following examples are provided for clarity:

• Taxpayer closed escrow on      the relinquished property on February 20, 2020. The 45-day identification      deadline was April 5, 2020 and the 180-day deadline to complete the      exchange is August 18, 2020.
• Taxpayer would       receive an extension to their 45-day identification deadline to       July 15, 2020 as April 5, 2020 is within the extension window.
• Taxpayer would       not receive an extension to the 180-day deadline as August 18, 2020       falls outside the extension window.
• Taxpayer closed escrow on      the relinquished property on December 18, 2019. The 45-day identification deadline      was February 1, 2020 and the 180-day deadline to complete the exchange is      June 15, 2020.
• Taxpayer would       not receive an extension to their 45-day identification deadline to       July 15, 2020 as February 1, 2020 falls outside the extension window.
• Taxpayer would       receive an extension to the 180-day deadline to complete the       exchange to July 15, 2020 as June 15, 2020 falls within the extension       window.

• Taxpayer would       receive an extension to their 45-day identification deadline to       July 15, 2020 as April 5, 2020 is within the extension window.
• Taxpayer would       not receive an extension to the 180-day deadline as August 18, 2020       falls outside the extension window.

• Taxpayer would       not receive an extension to their 45-day identification deadline to       July 15, 2020 as February 1, 2020 falls outside the extension window.
• Taxpayer would       receive an extension to the 180-day deadline to complete the       exchange to July 15, 2020 as June 15, 2020 falls within the extension       window.

We always recommend involving your tax professional in your exchange, this is especially true in light of this most recent information provided from the IRS.

Mark H. Porter · Answer

I’m with Joe.  1031 them with a goal of at least doubling free cash flow.  There’s simply too many opportunities out there.

I like college towns with older stock and construction restrictions, state capitols, and Queen city’s.

What to do with a ton of Equity

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