What would you do?

Question

Current Situation:

1. Bought a 2bed / 2bath condo in NYC for $800k in 2011, with $500k down $300k mortgage.

2. Condo is netting approximately $2k a month. It has a 15 year tax abatement that will start escalating in a year or 2. This will start cutting into the net cash flow.

3. Condo can be sold for $1.4m for a net profit of $600k. Would leave the deal with $1 mill cash, if 1031.

Desired Situation with new:

1. Something that cash flows better than $2k / month.

2. Minimal management time unless cash flow is greater then $10k. If cash flow is greater than $10K, I could do it full-time without having the day job. That would be ideal. If it is less than $10K need to keep the day job, so would want minimal managerial duties.

3. Open to moving out of NYC, if #2 above can be obtained (in a warm climate) and my family likes the place. Otherwise, need something close by.

4. Don't want to pay capital gains, so 1031 is probably required. Concerned about making the timelines.

Dave Foster · Answer

@David Edelstein, For a seller of a property you want to do a reverse exchange on it is not one bit different from a regular sale.  They are simply selling their property.  the only difference is that it is not being sold to you.  It is being sold to an entity whose sole job is to hold that property for you until you sell your other property. The entity that takes title to the property is called the "exchange accommodating title holder (eat).  That way you can still follow the required order for a 1031 exchange and sell your old property and then buy your new property.  This way the eat is holding on to your new property for you while you sell your old one.  So the risk of selling your old property and not finding a good replacement is mitigated.

The trick to this process from a financing perspective is that the eat is buying the property with non-recourse funding provided and guaranteed by you which is then partially or fully paid off when you sell your old property.  This typically becomes a private bank or portfolio lender loan.

But if your position is such that you can find cash from other sources including tapping the equity on the existing condo in a 2nd or refi or savings for a short term or whatever, you can go that route as well.  Owner financing is fine if the seller wants to do that for you as long as they understand that some or all of their note will be paid off very shortly when you sell the old property and use those proceeds to purchase the property the eat is holding for you.

Mark Creason · Answer

I think a reverse 1031 exchange would be a great idea.  Are you looking to be in New York still?  New York is tough with their low cap rates.  I have been seeing 3s and 4s in New York, whereas I see 6s, 7s, and 8s here in Texas and in the south.

Mark

Dave Foster · Answer

@David Edelstein, You situation is ideal to consider a reverse 1031 exchange.  You've got the right equity position, gain and potential tax amount, and search parameter requirements to make a reverse very attractive.

Although they are more expensive your numbers make it a very worthwhile consideration.  In a reverse exchange you locate your replacement property first and buy it in a specific manner using an exchange accommodating title holder set up by your qualified intermediary.  Then you sell your old property.  Although you still have a 180 day window to then complete your sale after purchasing the new property a lot of the guesswork and angst of trying to locate the right cash flow property is gone.

David Edelstein · Answer

Dave, thanks for the explanation, I appreciate it.

Account Closed · Answer

Been there, done that, have the T-shirt.  My appreciation over 30 years has been 9-11%.  If you truly believe that your appreciation is dropping in half then MAYBE it would be wise to incur ALL the costs to exchange properties.  Doubt it.  What is the historic appreciation rate for the location and property type over the last 20,30,40 years?   Why will it not be the same?

Michael Wagner · Answer

Have you looked at self storage as an assett class.  With the $1M you could invest, you'd easily be able to get into a facility large enough to achieve all that you stipulated as your goals.  You could probably get into something that would be lucrative enough to leave your job and still only require 10-20 hours of your work per week....(once you learn the industry of course but that doesn't take long.)

You've got what we call GREAT PROBLEMS TO HAVE RIGHT NOW.  Enjoy it and keep us posted on your progress.

Mike

Account Closed · Answer

Ya got it wrong.  Doesn't anyone know how to use the internets?

https://en.wikipedia.org/wiki/D%27oh%21

David Edelstein · Answer

Dave F, Thanks for the heads up on the possibility of a reverse 1031 I didn't realize that could be an option and it looks interesting. I wonder as a seller, when some one approaches with a reverse 1031 offer, is that considered "not ideal". Of course, cash offer is king and allows you the most bargaining power. With a reverse 1031 can I still propose seller financing (as long as it is the same or greater than the loan on the original)? What are the down sides to a seller when he is considering a reverse 1031 offer to buy his/her property?

Mark, we're flexible. NYC is great because it is so solid and of course the appreciation, regardless of what is going on. But, the cash flow and isn't great and the winters can be brutal. Texas doesn't sound too bad to me, it's a possibility. I'm in the construction industry MEP project engineer. A value add opportunity here in NYC could be perfect for but it would require cash out and time to do the upgrades, which seems difficult to impossible with a 1031. Maybe, at some point that would work. But, for this particular deal, I believe it would behoove me the best to get into something that is cash flowing better, so it can afford me the time to get into more rehabs / flips.

Bob B, you make a good point. The appreciation in NYC has been unbelievable but it's not going to continue at the same pace. This year it is anticipated to be 5% while it has been 10% over the last years. If I can trade this in for something that is cash flowing at $10k or better every month I'm home free, no more day job! It seems like it should be possible and the 1031 reverse seems like it also is the way to go. The current lease is up March 2017, so that is my day to sell. Reading and preparing until then, look forward to building connections here on BP, so I'm ready and if possible, have a deal pipeline built up.

Bill Exeter · Answer

Hi David,

Certainly, if you have the time, finding suitable property that you can buy at the right price would generate the best return for you.  It also takes the most amount of time and ongoing maintenance.  I would certainly try that path because it would likely be the most lucrative for you.  Our clients have also looked at more passive investment opportunities when they could not identify the right property to acquire on their own.  These passive investments can include:

• Net lease properties (NNN)
• Tenant-In-Common Investment Properties (TICs)
• Delaware Statutory Trusts (DSTs)

These would likely pay around 5.5% to 6.5% to start, so more than what you are getting today but not $10K.  @Leslie Pappas can chime in here, too.

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