Sell for equity, or keep for cashflow?

1 Reply

So my partners and I have a "classic" dilemma. We bought 16 units (6 duplexes, 1 quad) on the same street 2-3 years ago (in 3 separate transactions). We paid about $66k for the duplexes, and $120k for the quad. We put 10% down and had private mortgage financing between 12-15 years, fixed. Income is as follows:

Duplexes- Averages $1,150 per duplex per month

Quad- $2,300 per month

For easy math's sake, lets say we owe $60k on each duplex (it's actually less than that) and $105k on the quad, for a total of $465k. I am contemplating selling at $90k per duplex, $180k for the quad. This would leave us with roughly $25k NET per duplex, $66k for the quad, TOTAL of $216k. 

What would you do here? The units are about 50 minutes each way from my house (I manage them) and the travel is wearing on me. BUT I would be looking at about $7k per month cash flow once they are paid off. The buildings were built in 2003 and could easily be held for the long term. I am debating selling them and using the money via a 1031 to buy property closer to home (which is more expensive) or just keeping them forever. Help?

Hi Jake,

You're on the right track that if you want to do this in a way that maximizes your portfolio you keep the dollars  tax deferred in the 1031.  But the fundamental question I'm hearing inside your post is 'Do I want to be a landlord of these houses from a distance and are they the best way to make money"?  Maybe that's oversimplifying it but the two issues you seem to be pondering are those. And while the 1031 exchange can accommodate either of those goals very handily it may no be the gut decision you reach.  So if you start your analysis from the point of focusing on those two questions I think you'll arrive at the best conclusion for you.

1.  Do I want to be a distant landlord?  What are the costs associated with reducing your travel time?  Can you find good management?  What are the alternatives and what is the actual cost to you now?  Some people want to look over their back fence at their rentals.  Some don't want rentors to know that they even live in the same state.  This is an emotional and psychological question probably more than a dollars and cents question.

2. What's my return on investment closer to home?  This one's more straightforward to put into cold numbers but then you've got to deal with the possible conclusion of "I can make more from a distance but I want my rentals closer - or vice versa.  If the answers to your two fundamental questions conflict then maybe there's a third path that acccommodates.

3.  That path might be to restructure your financing and take that equity and buy a rental closer to your home.  What the heck.  Have your cake and eat it too.  

I'd love to hear some of the experiences of long term hold folks dealing with properties built in the early 2000s.  From an actuarial point of view what kinds of big tickets are going to crop up in the near term on 12 year old units?

Dave

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