What should I do with $2M in equity? Sell?

OP

Member since 2019 · 58 posts · 21 votes

4y

@Colton Hahn Thanks Colton. can you explain more on how to going into the syndication can be similar to a 1031? I'm new to all that tax side. If I were to sell 6, I understand I would have to pay the capital gains if I dont have a like-property. I certainly dont want to throw $400k away in taxes. Can I somehow sell and 1031 into a syndication?

Side note, BAM does syndications correct? Can you send me info on that?

https://www.biggerpockets.com/...

Leslie Pappas

Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes

4y

Originally posted by @Chris Hill:

@Colton Hahn Thanks Colton. can you explain more on how to going into the syndication can be similar to a 1031? I'm new to all that tax side. If I were to sell 6, I understand I would have to pay the capital gains if I dont have a like-property. I certainly dont want to throw $400k away in taxes. Can I somehow sell and 1031 into a syndication?

Side note, BAM does syndications correct? Can you send me info on that?

I help investors daily reinvest their 1031 proceeds into syndicated real estate (those who qualify as accredited investors). We view large multi-family apartment investing as very attractive area especially for folks that want to invest w/experts that do value add investing for a living and you can help fund the acquisition and share in the profits. I've written a few blogs you might find of interest

3 Reply

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

4y

Don’t forget to subtract at least $200k for capital gains tax (more if you live in a state with income tax) and another $50k for depreciation recapture. (So your $1.6 becomes $1.3 and your $12k becomes a little less than $10k) Then as long as you’re confident these people you know by name alone won’t lose or steal your money or sell the property and return your money and stop paying 9% you should be back to even in just 5 years. (I’m not counting the higher taxes you’ll be paying on the increased cashflow to keep it simple.)

At least you can give up control to an unknown person, that’s a big step for most real estate investors. But I get your point $11k return on $5mil is pretty bad. Less than 3%.

Ps. It seems like your thinking your market will drop but not the syndicators market? You didn’t say what market you’re in that you think is worse than most?

Pps. If interest rates rise that will hurt big residential a lot more than SFR as buyers will want higher returns resulting in lower offers. I would bet 90% of the syndicators out there haven't experience a rising interest rate market.

13 Reply

David Lilley

Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes

4y

@Chris Hill if you want to start transitioning to a more passive experience, I would pull the trigger on a cashout refi yesterday before rates increase. Spread those refi dollars across several different operators. Then, once you are tired of being in the property management game, sell those townhomes as a portfolio and 1031 into a multifamily asset and put in 3rd party management. You could also 1031 into a multifamily syndication. There are several firms that will allow it, mine is one of them.

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JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

4y

Quote from @Bill B.:

Don’t forget to subtract at least $200k for capital gains tax (more if you live in a state with income tax) and another $50k for depreciation recapture. (So your $1.6 becomes $1.3 and your $12k becomes a little less than $10k) Then as long as you’re confident these people you know by name alone won’t lose or steal your money or sell the property and return your money and stop paying 9% you should be back to even in just 5 years. (I’m not counting the higher taxes you’ll be paying on the increased cashflow to keep it simple.)

At least you can give up control to an unknown person, that’s a big step for most real estate investors. But I get your point $11k return on $5mil is pretty bad. Less than 3%.

Ps. It seems like your thinking your market will drop but not the syndicators market? You didn’t say what market you’re in that you think is worse than most?

Pps. If interest rates rise that will hurt big residential a lot more than SFR as buyers will want higher returns resulting in lower offers. I would bet 90% of the syndicators out there haven't experience a rising interest rate market.

I wish I could vote for Bill's post twice. He's even being generous, because townhouses are almost 100% basis in the structure so you are probably looking at about 270k in depreciation recapture which is about a 90k tax hit @30%

The most reasonable way to get to the cash flow you're talking about is to harvest the gains on the properties and buy more properties, if you can find any that will have a decent cash flow at this point. Because what you are looking for is $19k/month increase, or $228,000 annual, by culling half your herd. Using your numbers, your 1.6 mil is going to be worth about 1.2 mil.

$228,000/$1,200,000 = 19% annual return. I suspect there's a lot of us on here, that if we thought we could sell off some/anything and earn a stable, reliable 19% annual return, we'd probably do it in a second. I know I would for sure. Some of my properties have made me a reliable 15-17% annual return since I bought them, and part of that was just buying in a low price, high appreciation potential environment years ago.

I don't think what you're looking for is achievable without more low capital, high income assets. That either means buy and wait, or higher risk and more work.

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Taylor L.

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

4y

There are syndication deals that you can 1031 into via TIC, but that'll typically require a bigger check size than just straight up investing into a syndication. There are also DSTs to consider, but they will probably not produce the cash flow you're looking for.

My biggest concern would be having so much equity tied up in so few properties, all located in (presumably) the same place.

@Adam Christopher Zaleski

Adam Christopher Zaleski

Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes

4y

Don't forget about principle paydown. If you have 14 townhouses and you are around $200/month for each unit, that's another $2,800/month.

If you want a more passive experience go for it. However, it's going to take longer to get to $30,000/month going passive. You would most likely get to $30,000/month quicker by just holding.

The quickest way to $30,000/month (and most risk), is doing cash-out re-fi's and buying more townhouses. It's also the most work.

What is more interesting to you? Is it $30,000/month with more work or $10,000/month with less work?

6 Reply

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

4y

Putting the cherry on top. I totally forgot about that.

So now he’s paying $250k+ in tax to go from $6k cashflow and $3k loan paydown ($9k.month) to about $9500 or maybe less from the syndication. Now you’re taking 500 months to break even. Except by that time the loan will be paid off and he’d have more cashflow from what he already has. Lose lose. good catch.

OP

Member since 2019 · 58 posts · 21 votes

4y

@Bill B. I am in Utah, sorry I didnt include that. Our market is super high, but I dont think it will tank anytime soon, probably just level off or small decrease. Yes if i look at return on equity, it is pretty poor. Any other suggestions if you were in my shoes?

I should clarify my "goal" of 30k a month is lofty, way more than I would every need. My goal would be to have that within 10 years. So I'm not sure which method would help me achieve that in next 10 years.

Capital gains appears to be a killer. I dont think i want to go the TIC route/1031, only because I dont understand all of that.

3 of 14 are paid off, so I could potentially cash out refi those for lets say 750k, put that into 2-4 syndications, and that would increase cash flow by $2500 today. Is worth taking on 750k more debt for 2500 a month?

Bottom line, what advice would you give me if you are in my shoes? Its a lot of equity, but I dont know what the right move is. I know how to save up/buy more townhomes, increase cash flow. I have that process down. Some days I wake up and think sell the 14, buy 100 homes in the southeast with a PM and go that route. But I like the idea of 5-10 syndications, and I am willing to put in some work, lets call it 50% active. My full time job pays fine.

Thanks for your comments!

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @Chris Hill:

@Bill B. I am in Utah, sorry I didnt include that. Our market is super high, but I dont think it will tank anytime soon, probably just level off or small decrease. Yes if i look at return on equity, it is pretty poor. Any other suggestions if you were in my shoes?

I should clarify my "goal" of 30k a month is lofty, way more than I would every need. My goal would be to have that within 10 years. So I'm not sure which method would help me achieve that in next 10 years.

Capital gains appears to be a killer. I dont think i want to go the TIC route/1031, only because I dont understand all of that.

3 of 14 are paid off, so I could potentially cash out refi those for lets say 750k, put that into 2-4 syndications, and that would increase cash flow by $2500 today. Is worth taking on 750k more debt for 2500 a month?

Bottom line, what advice would you give me if you are in my shoes? Its a lot of equity, but I dont know what the right move is. I know how to save up/buy more townhomes, increase cash flow. I have that process down. Some days I wake up and think sell the 14, buy 100 homes in the southeast with a PM and go that route. But I like the idea of 5-10 syndications, and I am willing to put in some work, lets call it 50% active. My full time job pays fine.

Thanks for your comments!

ONe thought would be to snow ball your units if your job pays fine and you really dont need the cash flow today.. what will it look like with all 14 units paid for ? i know mathematically with the refi till you die crowd its not the best on paper.. but boy what a safe position to be in.

after all there is untold value in live well sleep well with zero debt.. especially as you get older.

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OP

Member since 2019 · 58 posts · 21 votes

4y

@Jay Hinrichs great point. I think of that at least once a year. Right now it would be roughly 8-10 years and they would all be paid off. If rents were to stay the same, gross would 23K/month. At that point, if I took another three years and invested that income, I could probably get it to 30 pretty quickly. At some point, someone told me to keep buying additional properties and snowball later. Not sure which is best. But I do not use or need any of the current cash flow at this point and don’t plan on doing that for at least 10 more years. But if I could get to 30 in the next five years, then it would be a great day to quit my job!

Jay what would you do in my shoes?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @Chris Hill:

@Jay Hinrichs great point. I think of that at least once a year. Right now it would be roughly 8-10 years and they would all be paid off. If rents were to stay the same, gross would 23K/month. At that point, if I took another three years and invested that income, I could probably get it to 30 pretty quickly. At some point, someone told me to keep buying additional properties and snowball later. Not sure which is best. But I do not use or need any of the current cash flow at this point and don’t plan on doing that for at least 10 more years. But if I could get to 30 in the next five years, then it would be a great day to quit my job!

Jay what would you do in my shoes?

well the thought of owning all those properties in a High dollar market ( utah ) compared to some C class mid western rust belt city would be very appealing. you know rents will go up a little over time.. I suspect in 10 years you will be darn close to that 30k a month without having to take on more roofs and other items to fix and worry about.

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OP

Member since 2019 · 58 posts · 21 votes

4y

@Jay Hinrichstotally agree, and I’d rather manage 14 doors than 100 if they bring in the same. So your thought is simply stay the course, no cash out refi etc?

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

4y

Originally posted by @Chris Hill:

@Jay Hinrichstotally agree, and I’d rather manage 14 doors than 100 if they bring in the same. So your thought is simply stay the course, no cash out refi etc?

lOL I cant tell you what you should do.. just pointing out some options your call on what you want to do.. but for now congrats you bought at one of the all time best buying opportunities in the last 75 years.. you bought in a great stable area .. you no doubt have decent tenants so I would be pretty proud of what you have done frankly.

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OP

Member since 2019 · 58 posts · 21 votes

4y

@Jay Hinrichs Thanks for the nice words, however it was just pure luck. Timing and place. And huge rise in rents

I’d sure love any other comments regarding cash out, refi, or other ways to maximize the equity. But maybe just staying the course could also be the best option.

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

4y

Let me just give you a goal then Chris. I am about where you’d be if you paid off those properties. The goal that Jay laid out…

I only own 11 rentals plus my primary. They are all paid off. The cheapest is probably worth $325k the second most expensive maybe $550k. (The most expensive doesn’t count because it’s a future retirement home and has the worst returns, so imagine it’s an average property instead.). That brings in $15k/month with zero drama. It’s not $30k, but my goal was $10k, way more than I needed.

Paying off your mortgages isn’t the “best use of money” but I got there in less than 8 years by putting every rental dollar towards the debt. Now I need 2 people to pay rent to cover rental expenses and another 2 to cover my personal expenses.

There is zero stress if a $5,000 repair comes in, or when the eviction moratorium was enacted and some tenants fell behind on rent. I understand the advantages of leverage and I had $20k/month in mortgage payments at my height. How long could I carry a $20k/mo note if nobody paid rent? Not too long. That’s stressful. (I was a “victim” of the Great Recession and unemployed the entire time I built my rental portfolio.)

What you might be feeling is what I often encounter. Real estate investing done properly is boring. I constantly want to “do something”. Sell something and buy something bigger/nicer fancier.

It sounds like you’re doing fine. Carry on.

12 Reply

Mike Hourihan

Investor · Montgomery Village, MD · Member since 2017 · 31 posts · 9 votes

4y

@Chris Hill just curious.. where did you come up with $30k/month?

George Azita

Los Angeles · Member since 2022 · 97 posts · 96 votes

4y

I always thought that investing for cash flow is the worst business model since cashflow is miniscule compared to profit from appreciation. Collecting rents and cashflow barely keeps up with inflation.

My 2nd worst thought and business model is the risks involved with getting into syndicated real estate deals where someone (not you) controls the investments and controls your money. "No Way, Jose!"

It makes more sense to have a business model where you have 100% control of your investments, 100% control of your money and your business model is to earn both cashflow and profits from appreciation.

If you cashed out today, according to my calculations you would have $3.3 million minus 30% for capital gains leaves you with about $2.1 million. With $2.1 million you could pay yourself $200,000 per year for the next 10 years, or $16,000 per month, or continue to invest for appreciation and maybe in 10 years you can pay yourseld $30,000 per month, or $15,000 per month for 20 years.

It is easy to lose money and I would think you would not want to take any risks when you already got this far.

Jake Wiley

Investor · Charleston, SC · Member since 2022 · 234 posts · 198 votes

4y

@Chris Hill - First of all, congrats - That's a story you should be proud of and one I am sure is foundational for your legacy.

While I know you are asking for specifics based on numbers, I'd advise you to take a breath and think about what you really want or what you are hoping to accomplish. I read two things that you are looking to get your goal is 30k in monthly cash flow and you'd like to move towards a more passive investing strategy.

If you sold the properties and flipped them into a syndication you'd free up your management time. What would you be able to do with that extra capacity that might be able to help you get to your monthly cash flow goals?

FYI - for simplicities sake taking out taxes. I know they are important, but let's assume you 1031 the properties. (FYI - unless you sold them all at once it might be hard to manage the timing requirements but that's another topic.)

Doing the math at 9% as mentioned above you'd need $4.0M in equity to get to the 30k per month. (Or... you find an investment that returns closer to 11 and your $3.3 is all you need.)

You're at $3.3M - so pretty close, but a gap of 700k.

If you still have some life left in your personal investing career - another option would be to sell, take the equity and move into value-add property where you could reap the benefits of forced appreciation and cash flow. Using your numbers above - $4.9 - 1.6 = $3.3 - Assuming you could flip that into a new property, even with leverage of 65% you'd be approaching $10M in a property. Assuming you could add a little value, even 10% you'd close your gap and hit your objectives and then could flip into a 100% passive strategy and ride off into the sunset.

You've definitely got some great options!

At the end of the day, what's your real goal and is your next move the fastest path to hit that goal?

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Paul MoorePro Member

Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes

4y

@Chris Hill you’ve received a lot of fantastic advice here. As someone who has been in all types of real estate over two decades, I will tell you that there is a great value in diversification. Whether you decide to sell or refinance everything and put money into syndications… Or stay the course where you are and add to your portfolio, I recommend diversifying. By asset type, geography, managers, and more.

My firm invests in Syndications across about 10 operators, 30 states, and five asset types. Many of my big mistakes in past years were from too much concentration. Goodness knows I made quite a few. Good luck!

Haresh Patel

Investor · Irving, TX · Member since 2015 · 34 posts · 16 votes

4y

@Chris Hill There are operators who will allow you to 1031 into their syndication if you bring above a threshold (e.g. $750k-$1M).

Reach out to @David Thompson. He works with a lot of operators and I have had good success working with David.

Hope that helps.

OP

Member since 2019 · 58 posts · 21 votes

4y

@Mike Hourihan honestly 30k was a random number. three years ago I thought 20 was the number. As I thought about taxes, I was thinking with 30 I'd actually keep 20, but not sure. We dont have any debt, our expenses are about 7, so that would be more than enough

@George Azita my goal is really long term steady cash flow. i'd love to have 30 rolling in for 40 years, withdrawing funds until theyre gone doesnt appeal as much to me. not right or wrong, just personal preference

@Jake Wiley this is pretty interesting. i have no experience in larger multi fam, but I didnt have experience with sfr either when i bought the first house. I'm sure there are many articles on here about starting with a big project like that, so i just need to educate myself. Can you expand on your comment "you could flip into a 100% passive strategy"? Can you provide a bit more detail on that? 10m property, sell it for 11m, then what happens?

@Paul Moore i love this. this is what I was hoping for, is folks with your experience providing advice! I agree with diversifying. i like the idea of 5-10 syndications, keeping the rentals, and expanding all over the country, storage, residential turnkeys, etc.

i think i will hang on to what i have, and just use my day job funds and rental funds to expand into syndications. for some reason the cash out refi numbers just dont seem effective (please correct me if i'm wrong), but the thought of taking cash out of the three that are paid off is intriguing. however if i took at 750k, and that produces 24k a year in cash flow, that seems terrible. thats accounting for the new loan payment.

Chad McMahan

Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 754 posts · 504 votes

4y

Originally posted by @Chris Hill:

I'd love some advice. I purchased 14 townhomes eight years ago for $120K each, and they are now all worth $350K. Total value is $4.9M, and I owe $1.6M. My goal is monthly cash flow. I'm about roughly $11k right now, but my goal is 30K. Here are a few thoughts I've considered, but I am sure someone with more experience might have better suggestions.

1. Sell 6 of them - Ideally I want to hang onto the 8 newest ones, so I'm considering selling 6. Rough numbers, I could sell for $2M, and I owe 400k on those six, so I would net 1.6 (I know I'm excluding some costs). I've invested in Ashcroft syndications and I like that a lot. The cash flow of those 6 today is about 6k. If I were to put 1.6 into ashcroft at 9%, its $12K a month, double. That diversifies me a bit more, local rentals, syndications. I'd probably split the syndications amongst a few operators. (Suggestions?) I cant 1031 into ashcroft so would it be worth it to eat the capital gains?

2. Cash out refi - I looked at these numbers if I did refi on all 14. I could get 1.9 in cash, but the payment on the current loan plus the cash is $18K so not ideal.

I manage the 14 properties, which is easy as they are newer, but eventually I want to be more passive.

In summary, my main question is what would you do with the equity? My market could drop and I would miss out on those gains. All you experienced folks, what would you do in this situation? Happy to provide any details i missed.

Hi Chris.

Before you make major changes- are you renting these as STR's or LTR's? Assuming you are renting them as LTR's *can* they be rented as STR's? If so, get a STR income assessment by a local STR management company. This could be the easiest and fastest way to double your cash flow- if not reach your goal of $30k, monthly. Even if you pay a local STR management company to manage, you should see a sizeable increase in your monthly net.

Adam Christopher Zaleski

Investor · Pueblo West, CO · Member since 2014 · 310 posts · 213 votes

4y

Originally posted by @Chris Hill:

@Mike Hourihan honestly 30k was a random number. three years ago I thought 20 was the number. As I thought about taxes, I was thinking with 30 I'd actually keep 20, but not sure. We dont have any debt, our expenses are about 7, so that would be more than enough

@George Azita my goal is really long term steady cash flow. i'd love to have 30 rolling in for 40 years, withdrawing funds until theyre gone doesnt appeal as much to me. not right or wrong, just personal preference

@Jake Wiley this is pretty interesting. i have no experience in larger multi fam, but I didnt have experience with sfr either when i bought the first house. I'm sure there are many articles on here about starting with a big project like that, so i just need to educate myself. Can you expand on your comment "you could flip into a 100% passive strategy"? Can you provide a bit more detail on that? 10m property, sell it for 11m, then what happens?

@Paul Moore i love this. this is what I was hoping for, is folks with your experience providing advice! I agree with diversifying. i like the idea of 5-10 syndications, keeping the rentals, and expanding all over the country, storage, residential turnkeys, etc.

i think i will hang on to what i have, and just use my day job funds and rental funds to expand into syndications. for some reason the cash out refi numbers just dont seem effective (please correct me if i'm wrong), but the thought of taking cash out of the three that are paid off is intriguing. however if i took at 750k, and that produces 24k a year in cash flow, that seems terrible. thats accounting for the new loan payment.

Based on your personal situation, the most common advice from all the posters is that you should avoid the syndications. It's a little weird that you still want to do that. If you really want to still do it, please start off with a very small amount of money.

The stock market (S&P 500) did 25% last year. I don't understand why anyone would want to do a syndication for 9%.

The first 80K of capital gains is at 0%. If you quit your job and sold one townhouse a year, the first 80K of capital gains would be 0%.