What should I do with this Chicago 2-flat (duplex)?

Question

I bought this Chicago duplex to live in just before the market topped in 2006. Then I lived in it while the market tanked, and I rented both units when I moved to Colorado because I couldn't afford to sell it. Now it's fully rented - never had a vacancy. But since I bought it too high, it's negative cash flow. By the time I file my tax return, it's close to breakeven for the year, but it's negative real cash flow about $500 monthly. This is a terrific neighborhood for rentals, and duplex conversions to SFR are common in this area. (North Center/Lincoln Square if you know Chicago. Major cross streets, Western and Montrose) The market is coming back - it's about 10% down from when I bought it. Finishes are rental level, and I have raised rents on turnover. Equity is about 10%. This market will probably appreciate - it's established and solid - came back much before many other Chicago neighborhoods. But it's not going to be a screamer probably ever.

Bigger picture, my major goal is to build passive cash flow for the long term. This albatross raises my DTI, so adding new rentals to my portfolio is tough (as far as I know).

Two loans on it380k at 5.125% 80k at 4.75% I refi'd it in 2010 when banks were rushing to do refi's before the government made them do something drastic. I would have to bring about 60k to get the loan balance down enough that a 4% loan would bring cash flow to breakeven. That includes discounting the soft expenses (vacancy = 0, which is true, reserve is 0, maintenance is 50/month, management is 120/month). One more kicker. Since I have taken depreciation every year, I will have a sizable tax bill when I sell it even if there are no sales proceeds.

I'm looking for some ideas about what to do with this property. Address is 2471 W. Pensacola Ave., Chicago, IL, 60618.Sell it?

Exchange?

Hold it and raise rents?

Lease option?

Something else?I'm looking for any ideas. Thanks!

Jay Helms · Answer

I'm in a similar situation with one of my properties Rick. Bought SFR in 2006 with 0% down, now have a little equity in it, never refinanced, but been renting for negative 300$ monthly cash flow for the last 4.5 years. I currently have my property on the market to sell. It has taken me a while, but now that I've "seen the light" - negative cash flow is disgusting. At one point I tried to justify holding on to it, IF (which it's wasn't), but if the property was appreciating at $300/month, it might be worth holding onto. It's not. Tax breaks didn't help me either. Tax breaks allowed me to convince myself I was "breaking even", but I was only fooling myself. I'm not in it to break even.

Another rule I picked up on the BP podcast (don't remember which one), that finally pushed me to put it on the market, is it is time to sell if the property rents at 0.5% of the current value. I was at 0.54% and the area want take a substantial rent increase to get to the 1-2% range. Time to move on.

Best of luck. Looking forward to your update.

Another rule I picked up on the BP podcast (don't remember which one), that finally pushed me to put it on the market, is it is time to sell if the property rents at 0.5% of the current value. I was at 0.54% and the area want take a substantial rent increase to get to the 1-2% range. Time to move on.

Best of luck.  Looking forward to your update.

Lumi Ispas · Answer

Rick,

First step, why don't you talk to a CPA to make sure you understand exactly what it will cost you tax wise to sell the property?

Second step, if you sell this property, how can you utilize your credit and your freed cash to purchase another property? If you will buy in your market, will you be able to get immediate cash flow, and how much?

Look at all the options and see if it's worth it to sell now and buy another property with a positive cash flow and 4.25% interest rate. The rates should be staying low for another year from what I've heard, and you will have time to buy a new property still at a low rate.

Good luck to you!

Brie Schmidt · Answer

@Rick Fowler -  I live right down the street from it, great area.  I saw you listed in in 2011 but things have really picked up since then (both rentals and home prices)  If you have not raised rents since that listing, that might be your problem.  I have friends living on that block and pay $1200 for a 1 bedroom

Let me email you some comps and see if that gives you some options.

Rick Fowler · Answer

@Michael Barbari - thanks for your insights.

I can hold onto it, but it's slowing me down (unless I can find other ways to move forward). I am working on fix-n-flips and wholesaling in the meantime.

I'm not a tax expert, but as I understand it, the depreciation reduces the cost basis, and the IRS sees the taxable gain as sale price less the cost basis. So if my loans are more than the cost basis, then I have a taxable gain that is greater than my sale proceeds. Am I seeing this right?

Michael Barbari · Answer

@Rick Fowler

Great neighborhood to buy. Since you plan on buying more properties I would do an exchange for tax purposes. If you can hold out for another year or so it might be worth the appreciation when you sell. Why would you have a sizable tax bill for depreciating? From my experience depreciation doesn't come back to haunt you come selling.

What should I do with this Chicago 2-flat (duplex)?

Most Popular Reply