Hold or 1031 Exchange

[Andrew Farrell]

I currently have a moderately profitable 3 bed/2 bath long term SFR that I plan on converting to an STR or an MTR... most likely an MTR as this is right next to a major hospital system with a lot of travel nursing demand. I informed my tenants that I would be unable to renew the lease ending in June but they are motivated to stay and unexpectedly made a good offer to buy the house.

At this point, I'm not sure which direction would be best. I could use a 1031 and roll into a small MF in a similar neighborhood that would be more efficient for the MTR strategy.  Typically, I see single or couple travelers that prefer a private one or two bedroom unit or if it's a shared unit/house they typically request a private bathroom. With my current 3/2, I could rent out only two rooms at a time to allow for private bathrooms and still be much more profitable then I am today with the long term tenants. However, a MF with 2-4 units at 2 bed/1 bath each, I could maximize my revenue per room/unit and be much more efficient.

I feel like I'm in a unique situation where I have motivated buyers with a good offer already in place which would allow me to avoid all of the work required to traditionally list the property, while also entering into a market with more buyer leverage once I sell the property. My concern however is that I haven't identified a replacement property and I worry I won't be able to complete a transaction in the required 180 days because of the low inventory and my specific deal criteria.

I welcome any and all thoughts on this one.

Thanks,

Andy

[Dave Foster]

@Andrew Farrell, a sale to your tenants can be a great advantage to you.

1. As you identified you lose a great deal of the cost of selling a property - commissions and fix up/staging costs. That actually makes your net sale higher than normal.  And the profit also.  But that's what the 1031 is for.

2. Since the tenants already live there it should be very easy to agree on a contract with them that allows you extra time to find your replacement before executing the sale.

3. And you can also use any time before the sale to actually go into contract for your new purchase.  Since you'll be reasonably assured that they will close.

I don't see the normal 1031 timing issues impacting you at all.