Tough decision. Sold some properties, others no mortgage

Buying & Selling Real Estate
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Tough decision. Sold some properties, others no mortgage

Kenny M.
Yonkers, NY · Member since 2017 · 57 posts · 10 votes

I've been selling off some unprofitable properties, but I made up for it with the sale. Netted around 200k all-in-all. I didn't do a 1031 exchange as I have so many carry over losses from my new construction, it really didn't matter. I may be selling another four buildings which I would have to do a 1031 since the gain would be around a 60% profit. However, I have three other properties, new construction, which I built with grants and tax abatement credits I own free and clear (it's nice to be 100% debt free. Also own my home as I just paid of the mortgage on that as well). The three properties are worth around 2.1m. On one hand, I am happy to be debt free. I have income of around 30k a month coming in from my current portfolio. However, on the other hand, I feel I can get some great deals with the equity sitting in the new construction properties. I can also lock in a 3.75% rate for 10 years, with 3 years interest only. I just am concerned with two issues. One, paying high prices for top of the market 5+ unit multi-families. Two, the impending recession coming within the next year or so.

 
Looking for strategic advice on how to proceed from some vets who know more than me.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y

@Kenny M. - enviable position.  Some would say to sell and forgo the 1031 to keep your powder dry for bargain hunting in a correction.  The problem with that of course is that you have to wait for an event that may not happen soon or at all.  The worst thing in the world would be to sell and pay 20% off the top and then buy back in a market that simply stagnated for a number of years.  You just lost 20%.  

Of course those folks who sold and went into cash in 2007 because they knew exactly what was coming and were all pre-investors in "The Big Short" did substantially better and the 20% they paid in tax is nothing compared to having cash in an 80% depressed market.

But can you know???

One recommendation on the 1031 side would be to continue to look for your bargains and when one pops up that is too good to pass you purchase it using a reverse exchange.  

In a reverse exchange the QI takes title not you.  So you can take up to 6 months to sell your old properties now and 1031 exchange them into the property the QI is holding.  

That way you don't pay tax on the gain of the sale of your old properties.  

You get to purchase the right property when it comes along.  

You lock in appreciation on the new property.  You get to keep appreciation going on the old properties for a time.  

And for that time you also get to double dip income and tax benefits on both the old and new properties.  

The 1031 Investor5137 Reviews
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  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    7y

    Relax and keep your powder dry.  You are doing fine; patience but keep looking.

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Kenny M. - enviable position.  Some would say to sell and forgo the 1031 to keep your powder dry for bargain hunting in a correction.  The problem with that of course is that you have to wait for an event that may not happen soon or at all.  The worst thing in the world would be to sell and pay 20% off the top and then buy back in a market that simply stagnated for a number of years.  You just lost 20%.  

    Of course those folks who sold and went into cash in 2007 because they knew exactly what was coming and were all pre-investors in "The Big Short" did substantially better and the 20% they paid in tax is nothing compared to having cash in an 80% depressed market.

    But can you know???

    One recommendation on the 1031 side would be to continue to look for your bargains and when one pops up that is too good to pass you purchase it using a reverse exchange.  

    In a reverse exchange the QI takes title not you.  So you can take up to 6 months to sell your old properties now and 1031 exchange them into the property the QI is holding.  

    That way you don't pay tax on the gain of the sale of your old properties.  

    You get to purchase the right property when it comes along.  

    You lock in appreciation on the new property.  You get to keep appreciation going on the old properties for a time.  

    And for that time you also get to double dip income and tax benefits on both the old and new properties.  

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Matthew Ryan
    Developer · San Francisco, CA · Member since 2015 · 103 posts · 47 votes
    7y

    @Kenny M. - I don't pretend to know more than anyone :) You should look at Opportunity Zones. More flexible terms for re-investment (full 180 days) and if you keep the investment for ten years, you alleviate capitla gains on all appreciation. If you've got that much dry powder I think it makes since to at least consider an allocation into an OZ based investment even if it is late in the cycle. If you're looking that far out and the deal makes sense, the additional buying power (cash) is huge. Especially in a 28% fed tax bracket.

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Matthew Ryan:

    @Kenny M. - I don't pretend to know more than anyone :) You should look at Opportunity Zones. More flexible terms for re-investment (full 180 days) and if you keep the investment for ten years, you alleviate capitla gains on all appreciation. If you've got that much dry powder I think it makes since to at least consider an allocation into an OZ based investment even if it is late in the cycle. If you're looking that far out and the deal makes sense, the additional buying power (cash) is huge. Especially in a 28% fed tax bracket.

    No doubt, but they are few and far between nowadays. Plus, the type of tenants in those zones are garbage. When I was in them in New Haven, CT, lots of evictions.

    0Reply
  • Matthew Ryan
    Developer · San Francisco, CA · Member since 2015 · 103 posts · 47 votes
    7y

    @Kenny M. - I know better than to fight ones perception. Only thing I'll say is I would challenge you to not discount all OZ's. We set our fund up in #1 OZ according to Fundrise. There's OZ's in downtown San Jose, Downtown Berkeley, etc. Some of these are areas that are seeing institutional players move-in and while I don't like to elevate them as the wholly grail of all decision making, they also don't chase poor tenant profiles ;) 

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Matthew Ryan:

    @Kenny M. - I know better than to fight ones perception. Only thing I'll say is I would challenge you to not discount all OZ's. We set our fund up in #1 OZ according to Fundrise. There's OZ's in downtown San Jose, Downtown Berkeley, etc. Some of these are areas that are seeing institutional players move-in and while I don't like to elevate them as the wholly grail of all decision making, they also don't chase poor tenant profiles ;) 

     Perhaps, but the dev. zones in CT are war zones. You need to carry a gun to protect yourself. Especially when the crips and bloods are in the area. The ones in New York (outside the city) have all been scouped up by the big devs. Same as in most major urban areas in NJ like Newark, Hoboken, Jersey City, Kearny, Elizabeth and The Oranges. You have Irvington left, and the numbered streets of Newark, but it's pretty dangerous. We were looking at a building across from a police station in Newark, NJ. There were gun shots fired, the cops didn't even leave the station to investigate. 

    0Reply
  • Syed H.
    Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y
    Originally posted by @Kenny M.:
    Originally posted by @Matthew Ryan:

    @Kenny M. - I know better than to fight ones perception. Only thing I'll say is I would challenge you to not discount all OZ's. We set our fund up in #1 OZ according to Fundrise. There's OZ's in downtown San Jose, Downtown Berkeley, etc. Some of these are areas that are seeing institutional players move-in and while I don't like to elevate them as the wholly grail of all decision making, they also don't chase poor tenant profiles ;) 

     Perhaps, but the dev. zones in CT are war zones. You need to carry a gun to protect yourself. Especially when the crips and bloods are in the area. The ones in New York (outside the city) have all been scouped up by the big devs. Same as in most major urban areas in NJ like Newark, Hoboken, Jersey City, Kearny, Elizabeth and The Oranges. You have Irvington left, and the numbered streets of Newark, but it's pretty dangerous. We were looking at a building across from a police station in Newark, NJ. There were gun shots fired, the cops didn't even leave the station to investigate. 

     Depending on what size you are looking for there are still OZ deals in Harlem, Bronx, and Westchester. I’ve seen deals recently in the $3-15m space. But than again the OZ requirements might be too expensive in the lower end. Haven’t run the numbers myself to dig deeper yet.

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Syed H.:
    Originally posted by @Kenny M.:
    Originally posted by @Matthew Ryan:

    @Kenny M. - I know better than to fight ones perception. Only thing I'll say is I would challenge you to not discount all OZ's. We set our fund up in #1 OZ according to Fundrise. There's OZ's in downtown San Jose, Downtown Berkeley, etc. Some of these are areas that are seeing institutional players move-in and while I don't like to elevate them as the wholly grail of all decision making, they also don't chase poor tenant profiles ;) 

     Perhaps, but the dev. zones in CT are war zones. You need to carry a gun to protect yourself. Especially when the crips and bloods are in the area. The ones in New York (outside the city) have all been scouped up by the big devs. Same as in most major urban areas in NJ like Newark, Hoboken, Jersey City, Kearny, Elizabeth and The Oranges. You have Irvington left, and the numbered streets of Newark, but it's pretty dangerous. We were looking at a building across from a police station in Newark, NJ. There were gun shots fired, the cops didn't even leave the station to investigate. 

     Depending on what size you are looking for there are still OZ deals in Harlem, Bronx, and Westchester. I’ve seen deals recently in the $3-15m space. But than again the OZ requirements might be too expensive in the lower end. Haven’t run the numbers myself to dig deeper yet.

    Haven't found any left in Westchester, if you can PM me that would be appreciated. As for NYC, not sure I'd be able to deal with the high costs for evictions in the city.

    0Reply
  • Bryan Mills
    Attorney · Birmingham, AL · Member since 2016 · 43 posts · 28 votes
    7y

    @Matthew Ryan

    Agree with Matthew here. I am located in Birmingham and our entire downtown was designated an OZ. It covers pretty much all of the areas that were already being developed.

    At minimum, you could set up your own OZ Fund within 179 days from your gain event and put your gain money in it, then buy yourself another 6 months (or more depending on timing) to find an investment. It’s flexible because you don’t certify an entity as a OZ Fund until you file the tax return for the entity. If you don't find anything you like in an OZ, you just pull your money back out, don't file a Form 8996 certification and pay your gains taxes. Keep in mind the OZ Fund does have to be an entity taxed as a partnership (or corporation) though, so it will need a member other than you.

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Bryan Mills:

    @Matthew Ryan

    Agree with Matthew here. I am located in Birmingham and our entire downtown was designated an OZ. It covers pretty much all of the areas that were already being developed.

    At minimum, you could set up your own OZ Fund within 179 days from your gain event and put your gain money in it, then buy yourself another 6 months (or more depending on timing) to find an investment. It’s flexible because you don’t certify an entity as a OZ Fund until you file the tax return for the entity. If you don't find anything you like in an OZ, you just pull your money back out, don't file a Form 8996 certification and pay your gains taxes. Keep in mind the OZ Fund does have to be an entity taxed as a partnership (or corporation) though, so it will need a member other than you.

    I checked with my CPA, he doesn't know anything about this. I need to find a new CPA. The corporate structure is a C corp, so that wouldn't be an issue.

    0Reply
  • Bryan Mills
    Attorney · Birmingham, AL · Member since 2016 · 43 posts · 28 votes
    7y

    @Kenny D.

    Is there a particular reason it's set up as a C Corporation? Typically for real estate it makes more sense to hold investments in an LLC (whether disregarded or a partnership for tax purposes). The basis rules associated with Opportunity Zone investments make it even more important.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Kenny D. Is the 30k a month gross Income or Net income? If it’s net income in calculating around 17 percent cash on cash which is really good..

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Bryan Mills:

    @Kenny D.

    Is there a particular reason it's set up as a C Corporation? Typically for real estate it makes more sense to hold investments in an LLC (whether disregarded or a partnership for tax purposes). The basis rules associated with Opportunity Zone investments make it even more important.

    Not for our setup. C corp works the best and yields the most tax and security benefits for our structure.

    0Reply
  • Kenny M.
    OP
    Yonkers, NY · Member since 2017 · 57 posts · 10 votes
    7y
    Originally posted by @Caleb Heimsoth:

    @Kenny D. Is the 30k a month gross Income or Net income? If it’s net income in calculating around 17 percent cash on cash which is really good..

    That's NET.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y
    Originally posted by @Kenny M.:
    Originally posted by @Caleb Heimsoth:

    @Kenny D. Is the 30k a month gross Income or Net income? If it’s net income in calculating around 17 percent cash on cash which is really good..

    That's NET.

    Sounds like a good return to me then 

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Kenny M. and @Matthew Ryan, I think the OZs in Manchester, CT are worth looking at. Not nearly as war zone as some of the others. Very strong rental market, close to Hartford.

    1Reply
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