First condo: Trade up to multiplex or rent out

6 Replies

Was reading 7 Years to 7 Figure Wealth on this site and I'm at Year 5 - basically he takes roughly the same equity I have and trades up his 3 properties for a multiplex, that got me thinking about my current situation:

I got very lucky buying an undervalued property in a red hot market (South Boston) that has market appreciated over 42% in the last 4 years. I also timed my refinance perfectly, so my expenses are about $2100/mo while rents in my area go for in excess of $3200/mo. My property isn't the nicest, but I imagine with even $10k invested in my property I would further increase appreciation as well as increase rents to the median. $1100/mo cash flow for a 2+ bed sounds incredible, but I'm worried about a few things:

  • South Boston is post peak. Housing prices are set to fall in 2018-2019, rents might level off/drop?
  • My house has had structural issues in the past. We've had 2 structural engineers come out in 2013 and 2017 and have said things are fine, but it's got a serious grade heading toward the back of the house. Whether it gets worse or not, it's noticeable for sure, and could scare away renters.
  • CapEx is looking pretty steep over the next 10 years. 10-15 to replace roof, likely re-side the exterior walls this summer to increase curb appeal and better protect the exterior walls. That alone would probably be $30k out of pocket for me over the next 10 years.

So taking a page from 7 Years to 7 Figures, I'm considering a 1031 Exchange: rent my current place to have it be considered an investment property, then 1031 to trade up for a multiplex. The problem is that when I look at most advice here, they advocate cash flows of $100-200/door, and for 4-6 beds in Boston $1200/mo cash flow would be great for a 6 bed, but that's basically the same as my current condo, with 3 times as many people (and x2 the units) to worry about...I guess that could be looked at as a hedge against vacancy, but what I'm getting at is:

My current property seems like a cash cow, but might cost me a bit in the future. Would trading up be smarter than making my current property great through forced appreciation and hold for the long term?

@Adam Conrad I'm not sure South Boston is post peak.  I think it's still at peak and might still be climbing, though prices have certainly gone nuts - making me think that this would be a good time to cash out / 1031.

I'm guessing that you have a typical Southie 3-decker, most likely built in the early 1900s.  In those houses, tilting floors are VERY common.  Lots of them had cedar posts for lally columns, and they tend to shrink a bit over the decades - especially if it wasn't properly kiln dried.

That said, I've seen a lot of those homes where there were steel lally columns installed later, stabilizing the structure, but leaving the slopes in the floors.  I've had contractors tell me that jacking the house up to level it risks cracking walls and plumbing.  

So in short, I think your structural engineers are right.  I wouldn't worry too much about leveling the floors.  Those who will buy that property are used to these things - and the market there is so hot, buyers will probably overlook a multitude of sins.

Let me know if you want comps for it.  

@Adam Conrad one to think about is being able to find a replacement property. I sold a large portfolio in late 2016, and it was extremely tough finding replacement properties. I ended up only take a fraction of the sale into a 1031. I used my proceeds to invest in two different MSA. I have two more properties I am getting ready to sell, and have been looking nonstop for replacement properties and just decided to skip the 1031 and take cash. I am just not finding anything I like. its either overpriced for me, or would require more work than my current properties. Keep all this in mind. You could always sell, put the funds into a 1031, then if you don't find a quality replacement, pay capital gains.

It might be worth keeping your current property, and really focus on building up your reserves.

Another option is to just cash out completely while you are way ahead, and wait for a pull back to reinvest.

@Charlie MacPherson good to know - that actually gives me a ton of peace of mind, I've always had a lingering worry about the sloping in the house. I already have comps as I did a refinance so I know I can make quite a bit off of a sale, but I do want to retain cash flows, which seems very plausible in the current place. But I did find a place in East Boston where it looks like I could live in one of the 3 units and then rent the other 2 out and likely have it cover the mortgage and expenses and still cash flow $1000/mo, and that cash flow will only increase once we move out. Thoughts?

@Andrew Kerr yeah I'm not seeing too much right now but I do have my eye on one multiplex and running the math I found I could get this place at a discount, live in one of the 3 units, and maybe get $1000/mo cash flow and live rent free until we moved out and then turn that cash flow into closer to $3000/mo. That's why I'm considering trading up.

@Adam Conrad a three unit where you could live in could be a cool property to trade up too.

@Adam Conrad Personally, I say you trade to a multi based off your situation and the concerns you have about the property. Southie is a crazy market right now, while I agree that the market doesn't quite seem to be as ridiculous as it was a year or two ago its still pretty close. You're easily going to be able to sell your property without anyone taking a second look at the issues you noted, however those expenses could eat away 3-5 years of cash flow when they become an issues.

We put a triplex we owned in Somerville on the market last year, it was a similar situation to yourself, were we had significant Cap Ex that we saw coming forth in the future and the market value of the property wasn't bringing in the net return we were searching for. So we took the appreciation gains and reinvested elsewhere. 

Outside of these issues you're having you should look at what your internal ROI is including the equity you have in the property, not just the cash. Then compare that to the return you're aiming to get... i'd be willing to bet its significantly lower.

@Adam Conrad Let's talk about the 2nd property.  East Boston has gone price crazy along with Southie, but I've seen a few 3-plexes that were sub-$1M.  I even saw one - which was DISGUSTING - at $600K.

Shoot me the address and I can run comps.  

I think the important thing is to keep a sharp eye on the market.  If it starts to tick downward, I'd pull the trigger on the sale and get out post haste.  

But that's just me.

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