Just bought, should I sell for equity right away?

Question

I just purchased my first investment property, a 12 unit (1 bed efficiency), for $412,000 with monthly gross rents of $5785.  There was fierce competition on the property, which is justified because the most conservative NOI is around $2850 giving it a CAP rate of 8.5% and a nice COC return around 10% - 16% depending on how expensive lawn/snow/water/common area utilities are for the year.  The property appraised for $505,000, and I was planning on making some minor improvements which should support or grow that appraised value and the rents.  So I am wondering if I should even hold on to this property or try and grab that free equity and get my cash back to move on to a bigger deal?

Edward B. · Answer

@Michael Andrews, I think once you factor in all of the transaction costs associated with selling this one and buying another one and add the tax consequences on top of it, that $100k won't look so $100k-ish. Also, if the market is that hot, what makes you think you will be able to find another property or two that pays this well?

Bird in the hand, my friend, bird in the hand.

Dave Foster · Answer

@Michael Andrews there is no statutory holding period to qualify for a 1031 exchange.  There is the issue only of intent and how you demonstrate that intent as Account Closed said.

If you purchased the property with the intent to hold for productive use (and your post seems to indicate that) then the 1031 would be appropriate.

Most folks feel that anything more than a year feels good.  But there are always situations that could justify a shorter (or longer) holding period.

All kinds of things can be used to demonstrate your intent.  Where the property is on your tax return, ads for rent, actual income, written correspondence with your professionals,  your past practice and current business model etc.

Brian Garrett · Answer

I think it just depends on your personal goals and what you want to accomplish.

If you're looking to grow your capital quickly than flipping it is the better option.

If you're looking to build cash flow and grow your wealth long term then keeping it is.

Your end goal should ultimately answer this question for you.

Sounds like a great deal by the way congrats and keep it up!

Thomas S. · Answer

Rental income is a slow process to wealth growth. If you are just starting out then flipping to realise immediate profits is a much quicker method to grow wealth.

Assuming you can sell to realise a profit and, big and, there is a potential market to invest up then why not. It's easy money and in the end you will be mush better positioned.

Do the numbers and start looking for oportunities to move up faster.

Account Closed · Answer

I’m not sure where you got that you had to hold it a year.  That is not correct.  You just needed to buy it with the intent for investment (cash flow or appreciation).  If you feel it is time to sell for various reasons, you can do a 1031 into something else.

Michael Andrews · Answer

@Joe Splitrock  You're correct the capital expenses are equal to a two bed, however many two beds in this area are renting for the same price or less.  And to add the tenants in this building are all 55+ and take IMMACULATE care of their apartments, so much so you could eat off the floor.  The existing stoves are probably 15 years old and don't look like they've even been used for more than a year.  Also, the expectation in these units is very basic appliances and features, so the overall costs of capital expenditures is very much on par with the rest of the market.

I do agree though, If I could find the property you're talking about with anywhere near a decent cashflow in my area I would be all over it.  This just happened to be the first deal that landed in my lap that made financial sense.  We'll see in a year what has transpired and pivot from there.

Levi T. · Answer

You have to make a choice, are you in the flipping business or are you in the rental business.  It is better to wait and make a lot more money, then is to take the cash and run. The rental business is a long game, people understand this come out on top  in the long run , everyone else who plays the flipping game is only playing the short game.

Joe Splitrock · Answer

Twelve tenants each paying $482 per month. More doors isn't always better. I would rather have 6 units with two bedrooms each collecting $900 per month. The problem with efficiency units is 12 toilets, 12 stoves, 12 fridges, etc. and around half the rent of a two bedroom. If you think you can sell it for $100K profit to exchange into a bigger deal, I say go for it. Hold it a year and then trade up. You can always put for sale by owner to reduce selling costs.

Michael Andrews · Answer

Thanks everyone.  I was not aware a 1031 exchange required a year, so those tax complications alone make it a bad idea to immediately sell.  Couple that with the fact this is a great deal that should produce awesome cashflow for the foreseeable future I am definitely going to hang on to it and look at doing a HELOC off my personal residence which has a ton of equity waiting to be tapped.  And when this property has "seasoned" I will approach my local lenders to see if I can either do a cash out refi or a HELOC to grow the farm.

Just bought, should I sell for equity right away?

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