What would you do? PTSD on a property

33 Replies

I'm curious what the hive mind thinks.

My husband and I bought a 36 unit property in November 2014.  It was a total slum - drug dealers, cockroaches, etc.  Through our personal blood, sweat, tears and money, we renovated it to a solid C - replaced furnaces, hot water heaters, kitchen cabinets, flooring, etc.  The purchase price was just over $2MM, the sale price is probably around $5.1MM. We only have about $1.5MM in loans, so we aren't leveraged.  We bought for $2MM, so we aren't depreciating.  From an accounting stand point, it makes sense to sell and turn it into something that produces more tax advantages.  We are cash flowing and turned a profit (even after depreciation) in 2017.

But, we are in the Denver Metro area - no good deals to be found for 100s of miles. If we 1031 exchange, I cannot image the stress we will be under to find a property. If we don't 1031 exchange, then we are looking at about $800K in taxes on about $2.7MM in cap gains.

I cannot stand driving near this property any more and it's not far from where we live.  The PM company we have has been and continues to make noise about how much time it takes to manage the property.  I'm not scared that they will drop us (this year), but they really are encouraging us to sell.  I'm not sure we want to go through the process of exchanging.  We have done a TON of research on ways out - Inland Private Capital, AEI, all sorts of other trusts that may work.  But nothing is really appealing.

What would you do? I really need some sound advice..

@Cary P. I don't know of another investment that has better tax advantages of what you described. I assume that all of the capitol expenditures that you described happened in previous tax years. If you made a profit and you have to pay taxes, that is actually a good thing, It means you are making money. I hope to pay a million dollars in taxes one day. That would mean that I made over $2M in that year.

Matt Theriault once said, "there is no such thing as a bad property, just bad managers." When you ask a successful investor what they would do differently if they could go back and do it again, they all say the same thing. "I would buy more property and I would have sold less."  I would find another manager.

@Cary P. I know a little bit about this conundrum but far from everything.  And I think it boils down to a couple of things that are quantifiable and a couple that aren't so easy to quantify or make generalities about:

1.) Age: If you're 5 years away from retirement it seems like a lot of hassle to start over.  New asset, maybe rehab work, there's always some initial hiccups, it just plain happens.  If you've reached a point of cash-flow stability with this property, do you really want to sell?  If I was close to retirement, I wouldn't.  Your property right now is the "devil you know" and that devil that is also cash-flowing.

2.) W2 Income:  Or, more specifically, your marginal tax rate.  If you and the hubby have W2 jobs that earn you $70K per year and the Fed's are taxing that non-offsettable income (i.e. "we don't have enough mortgage interest and depreciation") 12% it's different than if you're W2'ing $200K and it's being taxed at 24%.  It's hard to guess if this annual tax-disadvantaged situation is costing you $20K or $50K.

3.) Real Estate Commission:  Let's say you do sell for $5MM, the commission at 6% would be $300K.  You can probably run the numbers on the tax burden associated with your current property.   If you had more tax advantageous solutions a 1031 exchange, how long would it take you to "gain back" that $300K? 

4.) Property Management:  It's also a little unclear how much of the desire to sell is tax planning vs. a pain-in-the-rear property manager.  And, more specifically, would finding a better property manager solve 10% of the issue or 50% of the issue.  I think I'd also be asking myself if they are encouraging you to sell to a specific buyer (i.e. one of their other clients).  Not that it's a bad thing if they are, just good to know any potential motivations.

Not sure if this helps at all.

*I* was the manager for over a year when others wanted to rip me off, *I* was the GC for renovations that no one else wanted to manage, I know this property inside and out and I'm GLAD they are spending as much time on it as they are because I just can't do it any more. We have other properties and they don't vex me at all. I'm too involved and it isn't what I want.

It isn't the managers, it's the property.


I'm not saying this lightly regarding the management company... These are the best group of managers that I have found in Denver. I wouldn't move away from them for anything! I've burned through a number of crappy management companies, which is why all of my literal blood, sweat, tears and money are in this place. I'm total OCD control freak and these guys not only get that, but keep my properties in the same way I would.



Originally posted by @Anthony Dooley :

@Cary Plotkin I don't know of another investment that has better tax advantages of what you described. I assume that all of the capitol expenditures that you described happened in previous tax years. If you made a profit and you have to pay taxes, that is actually a good thing, It means you are making money. I hope to pay a million dollars in taxes one day. That would mean that I made over $2M in that year.

Matt Theriault once said, "there is no such thing as a bad property, just bad managers." When you ask a successful investor what they would do differently if they could go back and do it again, they all say the same thing. "I would buy more property and I would have sold less."  I would find another manager.

1. I'm 44, no where near retirement age.  Cash flow stability is great, but honestly, the gut wrenching terror I feel going near this property is not worth it.  That's why we would consider cashing out if an exchange isn't forthcoming.

2. I don't work for a salary any more.  I'm formerly a software engineer who has become a SAHM sandwiched between elementary school aged kids and mid 80s year old in-laws, as well as managing our property and non-property related business. Hubby works for the non-real estate business and we get loads of tax savings there.  We haven't had to pay taxes since 2012 due to real estate losses and the real estate being active, not passive.

3. 6% commissions?  No, try 3% - At $5MM, you don't pay 6% and if you do, the buyer is making up the difference on their end, not mine (meaning if I want $5MM for it and they want a higher commission, the price is going up to cover, I'm not taking less).  I'm looking at about $150K in commissions. I've already got that locked in on my side.

4. The PM company would not be my sellers agent.  They have nothing to gain on this sale, but they have told me they won't manage for the new owners if we do sell due to the time it takes to manage. Their only dog in this hunt is if we exchange in their area, I would invite them to comment on future properties as to if they would manage them. Their encouragement is the lack of leverage and depreciation, not the burden on their company - at least not yet :D


Originally posted by @Andrew Johnson :

@Cary Plotkin I know a little bit about this conundrum but far from everything.  And I think it boils down to a couple of things that are quantifiable and a couple that aren't so easy to quantify or make generalities about:

1.) Age: If you're 5 years away from retirement it seems like a lot of hassle to start over.  New asset, maybe rehab work, there's always some initial hiccups, it just plain happens.  If you've reached a point of cash-flow stability with this property, do you really want to sell?  If I was close to retirement, I wouldn't.  Your property right now is the "devil you know" and that devil that is also cash-flowing.

2.) W2 Income:  Or, more specifically, your marginal tax rate.  If you and the hubby have W2 jobs that earn you $70K per year and the Fed's are taxing that non-offsettable income (i.e. "we don't have enough mortgage interest and depreciation") 12% it's different than if you're W2'ing $200K and it's being taxed at 24%.  It's hard to guess if this annual tax-disadvantaged situation is costing you $20K or $50K.

3.) Real Estate Commission:  Let's say you do sell for $5MM, the commission at 6% would be $300K.  You can probably run the numbers on the tax burden associated with your current property.   If you had more tax advantageous solutions a 1031 exchange, how long would it take you to "gain back" that $300K? 

4.) Property Management:  It's also a little unclear how much of the desire to sell is tax planning vs. a pain-in-the-rear property manager.  And, more specifically, would finding a better property manager solve 10% of the issue or 50% of the issue.  I think I'd also be asking myself if they are encouraging you to sell to a specific buyer (i.e. one of their other clients).  Not that it's a bad thing if they are, just good to know any potential motivations.

Not sure if this helps at all.

A little more risk, but an offset for taxes, if you owner finance the property.  You still will have income, defer the taxes in smaller increments over more years.  Should be able to get a better rate than a CD.  Then take the down payment they give you and hold until you find the deal close to you.  

No matter the market, if you look you will find what you want.  It may take a little longer and be aggravating but you kill two birds with one stone. You eliminate a property you are not fond of and you still get a great income and finally the tax bill is over an extended period of time.  

@Cary P. point taken but @Andrew Johnson makes some good points too.  I think you should definitely do a 1031, but it will be very difficult to find a "good deal" in your market. Even if you go into Loveland or Greely, you may have to overpay today to get into another property that doesn't stress you out so much. The stress seems to be the pain point. The good news is, I think that area will continue to appreciate over the next few years, but maybe not as much as it has.

The easy way is to just sell and pay the taxes, but if you can tolerate it, I would hold on to it.

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I feel your pain @Cary P. .  I have one property in Aurora that I'd like to sell and 1031 into something, but there's nothing to exchange into.  I've been considering hotels, but that's a really different sort of beast from rental properties.  So, for now, I'm just holding on.  I'm not as optimistic as @Anthony Dooley about future values, so I think there will be opportunities in the future.  Just not right now and not quick enough to do a 1031.

With the new, lower tax rates its tempting to just bite the bullet and pay the taxes.  Similar for my IRAs.  

@Cary P. Sounds like you should sell it!  Money aside, I would hate to own an asset (that I could turn into cash) if there was gut wrenching terror associated with it.  After reading your follow-up it doesn't sound like you have an asset that you love or even like.  Just one that has appreciated like crazy over the past three years due to the market and some heavy sweat equity.  

If you are really OCD about the property it's going to be tough for you to get a good deal 100's of miles away.  Either that or you'll spend a lot of time driving/flying.  Part of the reason I invest out of state is that it pseudo-forces me to leave a lot in the hands of the property manager.  

But Denver's been a big ol' rising tide.  So odds are you won't find a great deal in Denver, Nashville, Austin, Seattle, or all of the other monster appreciation markets.  Same hiccup that happens with Cali-folk like me that have massive amounts of equity in our primary residence.  You can capture it if you want to move but not if you want to sell and buy the home down the street.

My biggest buy was at $2MM, still had the 6% for the seller to split on both agents in the sales agreement, I haven't done a $5MM deal yet ;-)  

Originally posted by @Ron Flatt :

A little more risk, but an offset for taxes, if you owner finance the property.  You still will have income, defer the taxes in smaller increments over more years.  Should be able to get a better rate than a CD.  Then take the down payment they give you and hold until you find the deal close to you.  

No matter the market, if you look you will find what you want.  It may take a little longer and be aggravating but you kill two birds with one stone. You eliminate a property you are not fond of and you still get a great income and finally the tax bill is over an extended period of time.  

But I don't relieve myself of the property if the new owner defaults.  We have considered all kinds of ways out, but one thing for sure, I do not want anything to do with this property once we have sold it.  Any sort of boomerang effect due to bad buyers is not something I will consider.

To your second point, we could always say we are going to exchange and if we just cannot identify in 45 days (plus looking while under contract on the first property), we can just bite the bullet and pay taxes or go into something like Inland or AEI.

Originally posted by @Andrew Johnson :

@Cary Plotkin Sounds like you should sell it!  Money aside, I would hate to own an asset (that I could turn into cash) if there was gut wrenching terror associated with it.  After reading your follow-up it doesn't sound like you have an asset that you love or even like.  Just one that has appreciated like crazy over the past three years due to the market and some heavy sweat equity.  

If you are really OCD about the property it's going to be tough for you to get a good deal 100's of miles away.  Either that or you'll spend a lot of time driving/flying.  Part of the reason I invest out of state is that it pseudo-forces me to leave a lot in the hands of the property manager.  

But Denver's been a big ol' rising tide.  So odds are you won't find a great deal in Denver, Nashville, Austin, Seattle, or all of the other monster appreciation markets.  Same hiccup that happens with Cali-folk like me that have massive amounts of equity in our primary residence.  You can capture it if you want to move but not if you want to sell and buy the home down the street.

My biggest buy was at $2MM, still had the 6% for the seller to split on both agents in the sales agreement, I haven't done a $5MM deal yet ;-)  

Oh, I'm not OCD over everything, just this one that has a million of my dollars, year of my life, 40 pounds of my body, and enough blood to donate several pints to the Red Cross (Bonfils for you locals). 

Any little thing, because I'm so close to it, is a personal affront when it doesn't go right. I've told the PM company to just deal with certain things below a certain monetary value because hearing about them sends me into heart palpitations. The other properties (another apartment complex, multiple SFH) could burn down and I don't care, as long as no one gets hurt. It's just this one because of how much of myself I've left at this one.

I'm seriously thinking about just taking the tax hit, but not sure if the deal would close in time for us to time the market correctly and honestly how do you invest $2MM in the market in a timely fashion? :D  But, as a last ditch, we could always identify an Inland offering and go that route, if needed.

I would start looking for a market and larger property farther away/out of state.

I suggest you step back and have a drink.

You seem to be too personally involved. Its just money not your life

@Cary P. So, in fairness, I bought a $2MM apartment building.  I didn't write a $2MM check so I have some fun debt along with it.  And it wasn't my first buy in the market where I invest, it was my 3rd.  So by the time I did that deal I had a good sense of vacancy, the area, the quality of tenants my PM was getting, etc.  And I also (by that time) knew that I was comfortable with an out-of-state investment that I couldn't drive by every day/week/month.  So I travel twice a year out there so that I can at least put my eyes on it.  And in the meantime I only focus on "big" things with the property which basically boils down to me nagging on any vacant units.  I definitely don't have the same kind of emotional attachment to the property that you do with this particular one.  Who knows, it might work out better for me financially if I did.  

I also can't say that it was in a timely fashion but maybe more opportunistic as far as timing went.  I knew the area, had driven by the building, etc. so it was already kind of a "known entity" to me...if that makes sense.  It was also newer construction which meant that I can get a better quality tenant, don't have to worry about (expected) cap-ex costs, for a while, etc.  So if you combine *everything* it wasn't that hard for me to make that purchase.  I still have a list of those "known" addresses where I invest that I know that I like.  Properties that I'm 90% sure I'd want to make an offer on when/if they come available.  That doesn't mean I'd get it accepted, that it would be good deal, etc. but I know enough that I would be emotionally comfortable going into debt for it.

So maybe that's something actionable for you, do you have a list of addresses of "like to have property"?  Heck, I'd be bugging your PM and ask when what else they manage and if there's a few diamonds in there, make an unsolicited offer.  Your worse case scenario is you get told "no" a few times.  I know I've gotten a few "no's" when I'd asked my PM about what else they manage, if an owner would sell, etc.  But I figure it can't hurt to let the owner know that their PM knows a potential buyer that's interested if/when they do want to sell.

On the extreme plus side, you're faced with all of the "good" problems to have in real estate ;-)

@Cary P. , I'd 1031 into a passive two year hold of a debt free product.  And take the debt as boot so you walk away with a smaller tax bill and 1031 the rest into a holding pattern property that will provide nice cash while you wait for the market to soften and turn.  No debt left, less tax, and a place to wait.

No one sees it coming in Denver. But no one did either in the mid 80s when Denver was an oil town and oil went bust. Or the early 90s when RTC went bust. and the HUD section offering 20K 3/2 houses for $1000 down to investors was bigger than the rest of the Rocky Mountain News. Or the 2000s when Joe Nacchio screwed QWEST and telecom followed.

Denver has come of age and boom/bust may be over.  But I doubt it.  And no matter what at least the west coast retreat/stagnate - advance appreciate model will come in play.

There's no such thing as a new paradigm.  Just variations on a centuries old theme. 

@Cary P. You may consider doing a reverse 1031, which allows you to first identify a new property to buy, which takes off a lot of the '45 day pressure', and then you have 6 months to find a buyer for your property. I realize that you want out long before 6 months, but the pressure issue of a regular 1031 is diminished. Make sure you speak to a QI first.

732-333-1477

Hi Cary....there are lots of options to exchange into. It might be a good idea to explore some options and get a strategy in place before you list your apartments.

My recommendation would be to trade up in asset class.  Trade your C into a B+/A-. You might take a little hit on the return, but nothing like the taxes.  I have access to some multifamily pre-market listings, brand new, great neighborhoods, should perform around a 5.5CAP.  I've also got a couple of off-market lower income plays that are not in Aurora, so there is a lot less brain damage.  I've also built out a single family strategy that I've begun working with some of my clients and it looks very promising.  I have 20 doors here in Denver, so I'm an investor first, but I'm also licensed as a broker to facilitate transactions.  PM me if you'd like to have coffee and chat, I'm confident your challenges can be solved.

That's a very good point.  You aren't getting much depreciation from it if your purchase price is low.

(206) 407-5452

I'm a big quality of life kind of guy, and I can totally sympathize with you on dealing with a problem property and questionable management.  I would submit for your consideration that whatever the financial impact to you of ridding yourself of the property in any way possible is going to be far less than the emotional and physical toll of continuing to deal with it.  You'll be selling at a profit, there are worse things in life than taxes.  At this point I would tell you to focus on the logistics of parting with the property.  

@Cary P. if I am understanding correctly, you expect to cash out with $2.7M, so after $800K in taxes you would have around $1.9M. Why are you getting hung up on the taxes? You could invest that $1.9M in the stock market, specifically in a low cost, all market index fund. It would be completely passive. Given the corporate tax cuts and repatriation of overseas cash, I expect 2018 to see market gains of 20-30%. I think 2019 will be strong too, so you will see some really good gains your first two years. Two years of 20% gains will return you back to $2.7M. Using a conservative, 4% withdrawal rate, you could take out $76K or more a year for doing nothing. Is your rental property paying you $6000 a month to do nothing?

I will get creamed on this one, because this is a real estate forum, but sometimes real estate isn't the best answer. 

A busy mom may have different objectives than the stress of rental properties. I will also challenge your beliefs around retirement. There are many people who have retired on less than $76K per year. Listen to the BiggerPockets Money podcast with MMM (mister money mustache) and read his blog.

Originally posted by @Yonah Weiss :

@Cary Plotkin You may consider doing a reverse 1031, which allows you to first identify a new property to buy, which takes off a lot of the '45 day pressure', and then you have 6 months to find a buyer for your property. I realize that you want out long before 6 months, but the pressure issue of a regular 1031 is diminished. Make sure you speak to a QI first.

Basically, this is what we do.. Even before the first property goes under contract, we start finding our targets and then once we get passed the inspections, etc, we send the 30 day LoI to time going under contract with the closing of the first...

@Cary P. You need to sell. If you are that worried about taxes then attempt a 1031. If it doesn't work out, then it doesn't work out. Regardless, you need to list this asap since it's causing this much problems. Also, you could probably find a decent NNN in a less costly, but still solid area for around $2m and have no debt on it.

@Cary P. , If you can wait to execute your sale and start the 1031 exchange until after July 5thish you can name properties on your 45 day list but not close on any and let your exchange expire after 180 days.  It will end officially in 2019 and your accountant should be able to report the cash in that year thus delaying tax until 2020.

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