How to convince my partner to 1031 our properties

Question

My dad and I purchased 3 condos together back in 2011-2012. We paid around 50k each and they are now worth around 100k each. We own them free and clear. My dad is very conservative and happy with the cash flow that they bring in, but I would love to trade them in for something larger.  They are still getting a decent return (8% return on equity, 16% cash on cash) and they have good long term tenants in place also. Any advice on how to convince him to trade up with a 1031 exchange or even refinance to pull some equity out and use that to buy more?

Dave Foster · Answer

@Joseph Labit, I never disagree with @Mike Dymski.  But I gotta - this time only!  16% is totally relevant - to your dad and given his philosophy and choice of direction.

You are two different investors in two very different places with two very different goals.  Sorry to bear tough news.  But there's no future for this partnership - only the risk of hurting the relationship.  Either you will convince him to go your way and if there is a hiccup both you and he will feel incredible regret and guilt and blame.  Or you'll go his path and you'll resent him for holding you back.

The problem is neither of you are wrong.  Your dad is at a point where he has his eyes on preservation of his assets and how they produce.  That is why 16% is relevant to him.  Because in his life now equity is not an asset.  Cash is.  So he wants to preserve cash and getting 16% while preserving the asset is pretty darn good.

You need to focus on an exit strategy that allows you grow the way you want and for him to maintain the way he wants.

One way would be for him to buy you out of your 50%.  If you own the properties as tenants in common that's easy enough.  You sell to him and 1031 your portion into growth.  He keeps the safe buildings and maintains.

If you own as an entity then you've got to be wary of the structure.  You may have to dissolve the LLC first before doing anything else.

Jason Dillard · Answer

@Joseph Labit ask him if he would buy 3 identical properties for 300k cash.  That's what y'all are essentially doing by holding.   24k a year to take 300k our of your bank and put it at risk.  But...make sure your tax shelter (depreciation) is only half as good right now to what you can buy.  Stagnant equity stinks after a while.

Account Closed · Answer

@Joseph Labit

Here’s some top tough ❤️. Desolve the partnership.

Joseph Labit · Answer

@Dave Foster you are 100% correct. We are in 2 different places. He just retired, so he does not want to take any risk and I have a lot more risk tolerance. Unfortunately it is family and realistically I only have 2 options. Do nothing and continue to get a safe decent return or convince him to expand with me. He would not really be able to manage them without me, so splitting them would not work. I have tried to use the rental property calculator to show him the projections, but of course he just keeps thinking the market is going to crash again. Maybe I will try to go the route @Bob E. Suggested and see if he will Refinace or heloc to purchase instead of 1031. That way I can spin it as “diversifying” our portfolio. In the mean time I did start purchasing my own properties with out him, so I can focus on growing as an investor. Thank you all for the suggestions!

Mike Dymski · Answer

Show him a real alternative...with higher returns.

The 16% is no longer relevant...that's a common trap.

Bob E. · Answer

Run the numbers on a new place.  if you pulled 50k out of each one and used it for a down payment on three additional properties how doe your cash flow change?  If your cash flow goes up, how long until you could pay off the 1st HELOC loan, once that is done add that payment to the second HELOC loan, how long to pay that off?  Once the second loan is paid off add that payment to the third HOLOC loan, how long to pay that off?  Now you have 6 properties with small mortgages, either go after the first position liens or do three more.

Show the growth in cash flow and the fact that you don't have to buy everything at once.

If he is not up for that ask if he would consider the LLC taking out a HELOC loan on the properties and making a loan to you to buy something yourself.

How to convince my partner to 1031 our properties

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