Check my math! Condo conversion project

[Tyler Munroe]

What's up BP?

I have a few properties around Boston and one of them is a prime condo conversion candidate. Problem is I'm a die hard buy and hold investor so really only like to sell property when it can give me significant gains over holding. I'm trying to rationalize making a decision between condo'ing it and holding, and here's where I ended up with it. I'm evaluating both options over a 10 year time period. Would love some feedback if I'm missing something here!

Scenario 1: Condo conversion

I'll skip all the renovation details and get right to the point - reasonable net profit from this project would get me around $863,000 which, after LTCG tax would be around $733,550. These are luxury, townhouse-style units so that's why the high dollar amounts. I would then safely reinvest this in a low risk option (high yield savings, ETFs, bonds, etc.) and am assuming a relatively reasonable 5% return. After ten years compounding at 5% that amount would be worth $1,348,602, which would really be $1,256,344 after accounting for LTCG @ 15% (1,348,602-733,500 * .15).

Final amount for condo conversion: $1,256,344

Pros: After money is reinvested, passive income

Cons: Taxed twice, once on sale, once when investments are sold, no real control over money once invested

Scenario 2: 10 year hold

I pasted my numbers at the bottom of this post so it's easier to see, but my thought process was as follows:

1) Calculate value based on reasonable appreciation trends, plus cash flow. Yearly cash flow is post tax for simplicity. This amount is fairly predictable year over year, even with repairs.

2) Calculate my loan payoff @ year 10 to find equity at the time of sale.  

3) Multiplied this by LTCG of 15%. I know this would likely be a touch lower since I'd be deducting any renovations or selling expenses, but just left this for simplicity.

4) Added together my after tax sales proceeds and cash flow to arrive at a 10 year number of $1,255,274.

Considerations:

I found it coincidental that both numbers were within $1,000 of each other. If this analysis is accurate enough, in this case I'd most likely hold, since I could 1031 the gain at the sale instead of straight selling. I also prefer real estate over stocks, even though I manage the property myself. I will say having that passive income is tempting but it would come at the cost of doing a full blown condo conversion to free up the capital.

Anyways, am I thinking about this right? Anything else I should consider here? I'm not the best at math so am using, what I think, is a more common sense approach, but seemed to make sense to me. I guess I could probably work in ROE as a metric here but not totally sure.

Year	Value (3%/year)	Post Tax Cash Flow
1	$1,300,000	$40,000
2	$1,339,000	$40,000
3	$1,379,170	$40,000
4	$1,420,545	$40,000
5	$1,463,161	$40,000
6	$1,507,056	$40,000
7	$1,552,268	$40,000
8	$1,598,836	$40,000
9	$1,646,801	$40,000
10	$1,696,205	$40,000
Total	$1,696,205	$400,000
Debt @ year 10	$690,000
Equity	$1,006,205
Tax @ 15%	$150,931
After tax sale	$855,274
Sale + CF	$1,255,274