What is your strategy for this deal?

Question

I have a contract to purchase 3 duplexes with a family trust. All three are on the same street where I currently own 4 duplexes. These are all in the Branson MO area. The terms of the contract are as follows: A separate contract for each duplex @ $100K each, I have 90 days after the death of the second spouse ( the husband passed recently) to purchase any or all the properties. I manage the properties currently and defer all management costs, repair costs and a $500.00 payment fee to be remitted or applied to the sale price of the properties.

These are some options I have considered when exercising the lease to purchase contract

More info: Each property has 3/bed & 2/ bath and approx 1250 sqft with 1 or 2 car garages. Current rents are $600 - $650 per side per month. For an investor the appraised cost would be $140K for the duplex or $80K per side if I wanted to go that route.

1. Sell my right to purchase any or all the properties for a $25K fee. I would walk away with up to $75K cash and of course pay Uncle Sam his share.

2. Purchase all 3 properties to rent and manage myself @ $650 per side (going rate in this area) All are fully rented and tenants pay on time.

3.  Buy 2 properties for $100K each and 1031 them into the property I would want to keep. This would allow purchasing the third for about $20K out of pocket.

4. Sell all 3 properties for a profit of $120K and purchase a small apt. complex that would cost $250K

5. Sell the properties as 6 units with a profit of $180K and buy the lake house my wife wants really bad.

6. I could put the funds toward some first position notes ( I currently have 3) and would enjoy the passive income they generate,

These properties are decent but I call them class C+. They are all on the same street I own 4 duplexes on so managing them would be easy and create decent cash flow. However, the prospect of having $100K + cash on hand would allow me to be creative one some new projects.

SO, these are my thoughts. I would enjoy hearing how some of you would approach this situation.

Thank you for your time and impute,

Guy Yoes · Answer

@Gary Nelson

Gary-

Thank you for the impute.The $500.00 is a payment on all three. It was set up to allow the remaining spouse to have enough income and not have to pay for expensive repairs or loss of income from management fees. I was good friends with the family and they knew I would take good care of the properties.

I continue to flip back and forth on what I think would be the best solution. Here are some things that have come up since I posted earlier.

I have 3 or more REI investors  with cash calling me wanting to see the properties. I have told them I can't do anything until I can exercise the options.

The market is somewhat cooling off and that may effect my decision on keeping or flipping the properties.

I have done several 1031's with @Dave Foster and he's the best at this process.

I am managing more properties than I want to already and would need to cut back on some if I plan to pick up any of the three properties ( they will need some cosmetic work for sure).

The first position notes are one's I hold. They are 5 year notes that pay interest only @9% and then the full note amount returned at the end of the 5th year. They provide decent income with no maintenance.

Need to get some work done. will continue later.

Guy Yoes · Answer

Dave-

Thanks for the comments. I'm leaning toward buying two and then doing a 1031 into the third. Option 2 is paying off the last  mortgage I have on the recent duplex I purchased.

Things may change concerning the lake property. There are too few available and way over priced at the moment.

I'll keep you posted as things move forward.

Gary Nelson · Answer

@Guy Yoes This deal sounds like you’ve negotiated a great price, great terms and most importantly, solved a problem for the Seller. Re: the $500 payment fee, is that total or per duplex for $1,500 total? Option 1 – Not a bad pay day. I’d certainly be interested in this option and buying from you if you end up going this route.Option 2 – I like this option for you the best. If you went this route, you can always hold for at least 1-year and dodge the short-term capital gain tax in favor of long-term capital gains. If you’re already invested in several other properties on that street, I like the idea of having more control over the aesthetics of the neighborhood and who you’re renting to, etc. Based on the numbers, your cashflow would be very strong as well. Down the road, you might want to consider rolling up all the properties into one large loan. Obviously, the sooner the better based on today’s interest rates.Option 3 – I’m not a 1031 expert by any means, but I think that the timeline is going to be an issue. If you have to close on all 3 within 90 days, as it’s mentioned in your description, you’d have to close on 2 of the duplexes, then find a Buyer for both of them, and hope that nothing goes wrong in escrow, which means satisfying inspections for said Buyer, getting appraised on time, which is difficult right now and having zero issues with the title work, so they close on time… Then turn around and buy the third duplex prior to the original agreed upon 90-day deadline. It’s doable, but likely has to move extremely quick and basically seamless. In addition, this sounds this would be “trading down” instead of “up” – again, I’m not a 1031 expert, so this part may or may not warrant some additional research. It's never too early to consult with a 1031 tax exchange attorney, which is probably what I would do first to make sure I'm able to check all the boxes.Option 4 – Another good idea, but at the end of the day, you have bird-in-hand via great cash flow in properties you’re already very familiar with. Giving that up for an unknown seems more risky to me...Option 5 – You would need to be able to parcel the units out individually and your traditional lender may have an issue with this.Option 6 – Would $75k in profit fully pay off at least one of your first position notes? If not, you wouldn’t necessarily increase your cashflow until you 100% pay off the loan. Now you’d earn significantly more equity each month as the interest payments on mortgages are front loaded. With interest rates as low as they are right now, usually it favors the investor to leverage the property and realize a higher percentage of ROI or CCR. However, everyone’s risk tolerance is different, so you just have to commit to what’s right for you.Bonus option 1 – What I would do is bring in a private money lender on the deal with the intention to flip. Go ahead and close on the properties asap using 100% private money. You’ll probably pay around $30k in total fees, but you’re not using any of your own money in this scenario. Have the units parceled out individually and sell in this hot market and get retail of $80k/unit. That’s $480k in gross sales, less the $30k in private money fees, less the $300k borrowed, for a $150k gain, less commissions and closing costs. This doesn’t account for the $500/mo. equity payments your currently making, so your margins are going to be slightly better.Bonus option 2 – simply reposition the assets… this is the same concept as above, except you just refi the properties instead of selling for retail. If the set appraises for $420k, and you go 80% LTV, you'll recapture $336,000 which is enough to payback the private money lender their $30k and any closing costs. Congrats! Now you’ve just acquired 3 duplexes using none of your own money.

Either way, congrats on landing the deal! Let me know if there's anything I can do to help.

Dave Foster · Answer

@Guy Yoes, There's no bad scenarios.  The lake house should probably be the front runner because you know who wants it!

But there may be a way to get both with just a little runway.  I think your idea of buying two now and then later 1031ing them into the 3rd one is good.  But you may be selling for more than that 3rd one would absorb.

So this is where the lake front home (investment that you convert to primary if you want) comes in.  Either

1. Do what you said and 1031 two of those properties into the third one and the lake front.

or

2. Buy all right now. Stabilize, And then do a cash out refi to get the lake property. Or after evaluating for a while, sell one or more of them and 1031 into the lake property.

It's very interesting to think of ways to synergize those properties since you have such a concentration of them.