Should I Sell for a $1M profit

Question

Here's what I've got:

Decent size portfolio (60 units now) .... most MF buildings, all long term rentals but most zoned short term and less than a block to the beach. Intentions of growing it to 100 in the next 24 months... all in the same general area.

Most free and clear except two that I pulled equity out on for other purchases. They're not listed, I'm not really interested in selling, though if I did - I'd really want to sell the whole thing.

Fast forward: Recently I've had people pursue me to buy 2 of the properties on the same block - 24 units. The 2 I have the mortgage on. They keep upping their price and we're at a number that reflects about a $1M profit (bought and rehabbed both at the end of 2016). However, because of the mortgage (then taxes, recap dep, etc) I'll only walk away with about 3 years of what would be attained through cash flow.

Benefit? No debt on a portfolio of 36 units.

Pitfall - can't 1031 because of the note payoff, loss of deductions, etc

- Not really enough cash left over to sink into a bigger project.

-These are the two best properties I have which could be used as leverage for a higher overall price for the portfolio.

What would you do?

- Lock in the $1M profit?

- Lease Option it?

- Owner finance it (though they'd have to put down 60% to cover outstanding mortgage- which they will. That won't leave much extra interest income because of how "little" is being financed)?

- Don't sell it?

Thank you in advance for the advice!

Dave Foster · Answer

@Jay Hinrichs, Yeah, that's about the only reason I can think of - preference.  @Steve Stuart, could do a 1031.  Of course then he has to find new property.  And he has to purchase at least as much as he sells  in order to defer all tax- which would involve either new debt or a restructure.  Steve here's a couple thoughts:

1. Do a partial exchange.  If you only used your cash to purchase the new property you would pay tax on the amount of the mortgage paid off. But that may still leave you with a profit that could be deferred in the 1031.

2. Talk to your lender about a transfer of collateral.  Let that debt to to other properties.  Then you're free and clear on the one you want to sell and can purchase your replacement for cash.

3. Take the proceeds and go into a DST or TIC with debt.  The debt on these is usually non-recourse so you lose the layer of personal liability when you 1031 into one.  And you lose the effort of management while still retaining the cash flow and depreciation

4. Speaking of deductions - you mentioned you couldn't do the 1031 because of loss of deductions.  But when you do a 1031 the basis of your old property carries over into the new property so you do continue depreciation.  And if you purchase more than you sell you can actually gain depreciable basis.

I don't think a 1031 has to be off the table at all. Just depends on direction you want to go.

Jay Hinrichs · Answer

why cant you 1031 ?

Jay Hinrichs · Answer

hopefully Dave will pop on .. he will know what to do and how to do it.. it could be the OP with all this free and clear property does not wish to take on any debt.. ( and I don't blame him free and clear is the way to go if you can .. ) although a minority view no doubt.

Henry Lazerow · Answer

De-leveraging is a great long term move. I know BP is all about owning as much as possible which I agree is awesome at first but as you age it's nice to have some nest egg easy properties vs a lot of lower cashflow leveraged deals.

BTW You can always 1031 it regardless of mortgage, etc. 1031 can be good but also can be bad if you end up rushed and aren't as picky of the next acquisition. I have been on the sellers end with buyers doing 1031 before and it's a fact the buyer has way less leverage in the repair negotiations, etc. when seller knows they have to close or taxes!

Joe Splitrock · Answer

@Steve Stuart if you will net cash flow the same amount on those properties over the next three years, I don't see why you would sell today. Look at it another way and if you wait 6 years, you will have twice as much money. Plus you can probably still sell in 6 years and get the same million dollar or more profit.

Really this comes down to strategy. If you need the cash or are selling out of your portfolio, then go for it. If you plan to hold rental properties long term, then hold on to them.

You have 40% equity in those properties, which is a low risk equity position. I would not be concerned with low risk debt on a property in a great location. In a good economy, I would rather sell off my worse performing properties and pay down the debt on my better performing properties. Good properties sell in any economic situation.

Steve Stuart · Answer

Thank you all for the responses...

@Jay Hinrichs

Regarding the 1031- I'm not afraid of new debt- and if the right deal were to be had I would put down 25% on a $3-4M project. The trouble is qualifying for that loan. My (original) main source of income was a marketing company which I sold beginning of 2018- A large chunk down and owner finance the rest... Great income in 2018 and 2019 but classified as long-term cap gains on tax returns which is something the bank isn't going to like and I doubt lend against.

Yes, cash flow from the properties are good but likely not good enough for a $3M loan by themselves.

I have great credit, good cash reserves, etc - so that wouldn't be holding me back.

@Dave Foster I hadn't thought about transferring the collateral. That's a great idea and I'll see if it's a possibility.

As far as not being able to do a 1031 because of deductions - I should've organized my thoughts more clearly. I meant that the loss of deductions (interest, depreciation) was a "pitfall" of selling, not that it has anything to do with the 1031.

Eric Thomson · Answer

I'm also curious why you cannot 1031. I'm not very familiar with exchanges.

Luke Saglimbeni · Answer

@Luke Saglimbeni not enough stated income *

Luke Saglimbeni · Answer

@Steve Stuart

In my opinion, I’ll need more info.  Do you need funds right away?  Can you afford to not sell?  Do they all cash flow?

If it’s no, yes, yes I wouldn’t sell.  But that’s me I’m bias towards long term but and hold.

If a lot of vacancy and rehab work needed, could consider selling too.

Now if you’re doing seller financing make sure you’re getting an interest rate above 2.5% check IRS website on installment sales.  All you’re proceeds will be taxed at regular rates if you have too much stated income.

Good luck

Sunny Shakhawala · Answer

@Steve Stuart

I’d sell. Especially if the cash realized today would be greater than the cashflow over the next 10 years. So unless youre going to make 100k per year from this property (w/o discounting future cashflows), I’d look to sell.

Should I Sell for a $1M profit

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