Brutal feedback by smart real estate people needed
Hello Everyone,
I am a huge bigger pockets fan, yet have been in the quiet observation mode for many years. A recent real estate issue popped up, which I thought would be properly vetted through such a great real estate community like this one.
Here's the situation.
After my first single family flip (a full drop to foundation & build up), my family moved into a two family which has one apartment larger than most single family homes. As an owner this was to be the passive income we always wanted. The problem though is, my family is getting tired of the apartment life: noise from upstairs, trouble w/ tenants, etc.
Here are the options.
#1. Dump it. Pull the equity out, which is enough for a sizeable down payment on a single family. It will probably push us into a smaller home as we are living in NJs crazy expensive Bergen County.
#2. Refi, pull Cash out, and buy a smaller single family while retaining our current home for income. Income would be enough to cover the bills, yet a roadblock along the way could make this very difficult.
#3. Any other ideas?
Just wondering if any of you smart folks could have some advice for this confused home owner/investor.
Only limitations to the discussion.
Kids love my town/school, and don't want to move.
Thanks in advance for your responses.
Best,
Frank
P.S. Brutally honest feedback is always welcome.
@Frank K. I assume you are married. What does your wife think/want? I personally think that my relationship with my wife and her being comfortable with our living situation and financial situation is the most important thing. So I always start there e kick ideas back and forth until I get the "I think I could support that answer". You say a Refi would pay the bills. Would it completely pay for it's self? That means mortgage insurance taxes, budgeted repair expenses? If it is going to be a negative on your finances then it is best to sell it and move on. No one can tell you what you should do only you can figure that out. I just try to bring up questions that maybe you haven't asked yet so you can work through it all and make a good decision.
Best of Luck to ya.
Thanks Tyler, I really appreciate the response.
The Mrs. is the one who is also conflicted. From one side she wants to keep it for the long term investment part, yet in the short term the apartment life is wearing her thin.
As for the finances, if rented, we will cover the bills with a slight ($100/month) extra. A long term Vacancy (> 6 months) though would give my life a good kick in the you know where...
You should figure out the tax implications from #1. If you have been depreciating it to offset rental income, you will need to pay that depreciation back at sale unless you 1031 into another property. And if you rolled profit from your flip into this one via 1031, you will also have that to worry about. You will also have capital gains tax on the appreciation related to the rental unit. In an owner-occupied multi, this is usually done by allocating based on square footage.
Tax implications aside, it's hard to know what to tell you to do without more info. If you can refi with cash out and get enough renting both units to make a tidy monthly profit, I would say do that. If you are just going to break even or go negative monthly, you should consider dumping it and dealing with the tax hit.
BTW, I have a similar house in Boston. I hate hearing my tenants stomp around upstairs and they don't take good care of the place. But they provide us with most of the mortgage on a much nicer place than I could otherwise afford. So whenever the noise gets annoying, I just remind myself that the noise is what's enabling me to have my art studio, off street parking, and still put money in the kid's college fund every month.
As for option #3, one thing we are thinking about is eventually reconfiguring the upstairs apartment. In our situation, it's relatively easy to close off some walls and take back some of the space we rent out for our own purposes. We can make it go from a 4 bed, 2 bath rental to a 1 bed, 1 bath rental. We get 3 bedrooms and a bathroom for ourselves if we do that. Obviously, we'll make less money every month but it's nice to have the option. Having 1-2 people up there will be much quieter and we're more likely to get a great tenant in a nice 1-bed than in a 4-bed, and we will get more space out of the deal while still having some rental income. Is it possible for you to similarly reconfigure?
Thanks @Jason Turgeon for pointing out the 1031. Good advice. I didn't even think of the tax hit in my calcs for #1. Will need to sit down & recalc as we've been depreciating it every year. We also never did a 1031 for the initial flip as we lived in it for more than two years. :)
BTW, your #3 option was great and got me thinking. Another option I've been looking at it ripping apart the upstairs and replacing the nailed common board sub floor with a glued/screwed plywood subfloor. Thinking that will help out with the noise.
We are also thinking of listing the apartment at the end of the next lease as a two bedroom (w/ an office) just to target the 1-2 people tenants. Even playing around w/ Airbnb'ng it as well
As for the noise, I usually respond with, " Oh so that's how money sounds." when I hear them stomping around...it helps, but only sometimes.
Glad it was helpful.
If you are between tenants and going to sink money into it, there are other methods of soundproofing. I really wish I had done them when we had the ceilings open. We had insulation blown in so we don't get much of the vocal noise, but we hear all the footsteps. This video is a good primer, and you should be able to do some of the footstep isolation from above if you are ripping up the subfloors. https://www.youtube.com/watch?v=YitQQJrksYI
Best thing would be to rip down your ceiling, insulate, and replace the ceiling with two layers of drywall suspended from sound isolating clips attached to the joists. But since that is a huge PIA, you probably won't want to do all that.
There are also products designed to go in between subfloor and hardwood floor, like this: https://acousticalsolutions.com/product/iso-step-floor-underlayment/
And of course if you are considering ripping out the subfloors, you could go with a thick wall-to-wall carpet on top of a thick pad instead of hardwood. That will help a lot, although carpet in rentals can get pretty nasty and there is often a preference for hardwood in the Northeast.
Is there an option of fixing up the upstairs so it's nice enough for you to live in and then renting out the downstairs? Then the tenants have to live with your noise instead of the other way around.
If it works as an investment, why not do a HELOC while you are still owner occupying it and can get great terms. Use the HELOC as a down payment on a new SFH in your same school district and move in. At that point, if the numbers justify it and you choose to, you can refi either property and pay off your HELOC.
@Jason Turgeon Good stuff, and thanks for sharing. Thinking subfloor, rubber padding, and wall to wall carpeting will be the best way to correct it from above.
As for moving upstairs, it would be a smaller space, and remove our access to the yard, deck, etc. Great points though, and thanks for sharing.
@Corby Goade. Great option with the HELOC. Only issue I'm thinking though is I might not be able to get a mortgage if the HELOC is on my credit score? Worth exploring so thanks for that.
Hi Frank,
Maybe move upstairs, but get the bigger downstairs unit completely ready for a new resident before you move.
Then put a sign on the upstairs unit's door reading "Penthouse Suite" (maybe that will make it easier to sell the concept to your wife-???).
Good Luck!
@Scott Mac Love it man! Great stuff. Will give it a shot.
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@Frank K., Great advice from @Jason Turgeon who knows what he's talking about. If you can't get it sound proofed to your satisfaction then stay the course until you've lived in that larger unit for two years. Make it an adventure with your family by sharing the pot of gold at the end of the rainbow. If you wait you can sell the entire thing and do a 1031 on the smaller investment portion. And the first $500K of profit allocated to the primary residence side is tax free.
So promise your kids a puppy and a surfboard with part of the tax free proceeds. And give your wife a new kitchen in the new primary residence. You'll be doing it with tax free dollars. Meanwhile you'll also be getting another stand alone investment property that might suit you better. So you'll still get the passive income. It just won't be coming from right on top of you.
@ Dave Foster Nice option. I like the fact that maybe I can turn this property into two properties.
Over the next week I will be putting together the scenarios to see how the numbers work out.
Thank you again everyone for your thoughtful insight. Stay tuned.
if you don't mind, what town is your house in?
How much would each unit rent for? How many bdrm in each unit? full basement? garage or carport or driveway?
Commuter friendly? Family friendly?
I just purchased my first multifamily property back in October. duplex in Saddle Brook, right behind the park. the property checked all of my wifes boxes. this way, she is happy, the kids are happy, I am happy. Schools were not a big thing for us as we are home schooling the kids. the only con is I am doing all of the remolding myself, I am happy to experience this as a first time home owner (hire it out!!! time is $$) The second unit is still vacant...38 days in.....
@Corby Goade has a great idea about the HELOC. Esp is you have a lot of equity.
Is the stomping due to them wearing shoes on hardwood floors? If so a simple “hey, its pretty loud down here, pls take shoes off “ may help. Around here noone would think about wearing shoes inside!
How much appreciation does your area generate?
@Jonathan Valdes Glad you did the wife check before moving in. I did that as well, only issue is I didn't know it had an expiration date. For now, the plan is rip up the sub-floor & do a screw/glue install instead of the current common board/nail assembly. Thinking this might be the best long term option. Plus I could use a workout. 30 sheets of 3/4 ply up to the second floor is a nice way to get in shape. BTW. We are near Hawhtorne, so the location ticks all of our needs.
@Mary Mitchell. definitely have that in our rules/regs. But you know how people can be. Short memories, especially when it comes to taking off your shoes. My kids have the same problem.. Appreciation is pretty good, especially since we purchased it a while ago. Thinking 4-5% on a yearly basis.
@Danielle S. That's also another alternative. However, with the market being super high right now, I think having a HELOC in place like @Corby Goade mentioned may make a bit more in place if a downward trend begins. Then jump on a good price if available...only problem is I am not certain we'll have a negative price adjustment in our area. Good schools, quaint town, etc.