Hold or Sell Original LTR?

Question

I bought a 3/1 1300sq ft house for LTR in May 2020. Due to personal issues we are completing the renovations now, 9 months later. I have 3 potential tenants lined up.

However in the meantime my market has exploded. Similar 3/1’s that are smaller, not identical, are selling for $269,000. I haven’t consulted my Realtor yet to get a market analysis but I’m confident my house would sell in the $209-249,000 range.

Not taking into consideration anything other than cash flow it would take me close to 35 years to earn this type of money out of this building. I understand there would be repairs, vacancies, maintenance, and of course I’d be earning depreciation.

I don’t see our market sustaining a much higher price for “starter” homes because the average salary in my area is still between $13-17. Typically any home in my area under $300,000 is under contract within hours of going on the market unless there is something wrong with it and then it might last a couple of days.

Would you keep this asset knowing the market price may crash and that you would earn a solid $3,600 cash flow up to $5-6,000 a year over time, or sell next month and realize an approximate $100,000 gain that could be 1031’d into something larger. I have something in mind that I believe I can get the owner to cooperate on.

Thanks!

Alecia

Alecia Loveless · Answer

@Dave Foster Hi Dave, thanks for the information. As I mentioned above I will consult with my accountant who has a great amount of knowledge about these things. He will point me in the right direction. If I have any further questions I will reach out! Your information was most helpful. Alecia

Dave Foster · Answer

@Alecia Loveless, There is no statutory holding period that would qualify your property for a 1031 exchange.  The standard is your intent.  Your intent must have been to hold that property for productive investment use.  Most folks feel comfortable with anything more than a year.  But there could always be situations where a shorter (or longer) period would be appropriate.  It's all about your intent and how you can demonstrate that intent.  In your favor you seem to have had the original intent to hold - you have tenants lined up.  You'll have had that property on two consecutive tax returns.  And of course the general craziness of the time impacts things as well.  On the opposite you haven't owned it for very long.  And you haven't generated any rent from it.  Written correspondence with your professionals indicating your intent would be good as well.

At the end of the day you'll have to decide if you feel like you have had legitimate intent.  1031s are not an audit trigger.  But All in all I would say never do something just because it won't be looked at.  But also never not do something you feel is right just because it may be questioned.

Alecia Loveless · Answer

@Scott Wolf Hi Scott, Thanks for the information. I will consult with my tax specialist right away as I have some more time till the house will be done. He is quite familiar with these things and can put me in touch with the right people for specialization. Thank you for your help and if I have any questions I will let you know.

Alecia Loveless · Answer

@Michael Hayworth Thank you for your opinion. As I mentioned above I’m considering both options still. I was preparing to email my Realtor about potentially selling when I received an email from him about just the same thing.

I emailed him back and provided him a comp which he hadn’t specifically thought of that house on his own but now he has looked at it. He said let’s sell this one and make you a bundle and go buy another Multi!

Realistically the house is probably 3 weeks away from being ready to have the realtor walk through it as my contractor also plows and we tend to get a fair amount of snow. But he’s making great progress.

I’ll keep you all posted.

Thanks!!

Alecia Loveless · Answer

@Will Fraser Hi Will, thanks for the input. I am definitely considering what you said and believe I got this property for a steal. Once it’s done as I mentioned the total repair cost is very low. I’m very happy with it and believe it’s a sound investment.

The only real reason to even consider selling it would be to purchase a multi family that would have greater cash flow than this one does.

I’m closing on a 4-plex in two weeks and the seller has expressed interest in selling several other multis that he owns. A nice profit from this SFH coupled with the money I have from a sale late last year would likely get me another 4-plex. And the cash flow from two 4-plexes would be better than cash flow from one SFH. As would all of the other benefits that come with long term real estate.

But I do have an open mind and like this house very much as an investment vehicle.

Scott Wolf · Answer

@Alecia Loveless, I'm putting my investment property up on the market in the Hudson Valley NY because of the market craziness.  We're lucky enough to have held it for two years so a 1031 is a possibility.

Due to your personal issues & the market insanity, you may be able to argue that your original intent was to rent it, but the market is too good now to pass up the appreciation chance. Happy to connect you with my QI that could talk you through it in detail a little bit more.

Michael Hayworth · Answer

Sell it. Use the profits to buy two more. Even at the higher prices, you'll be building more wealth.

The twist is that you're 9 months in, so potentially sit on it for another 3 months until you're past a year. Most CPAs will then file it as long-term gains which will save you on taxes. (You''ll get some arguments about that on here, but talk to your CPA.)

I'm personally very skeptical of 1031s or any other structure that keeps you from using your money how you want to. (I'm also skeptical of IRAs and 401(ks) unless there's a substantial company match.) I became wealthy by having my money available for me to use and invest, not having it in an account where I have only limited access to it. Now that I AM reasonably wealthy, I might consider something like that for tax deferment. Others obviously disagree. Discuss with your CPA.

Will Fraser · Answer

Hi @Alecia Loveless, I would hold fast to that asset.  You MAY be able to 1031 Exchange that into another asset, but the sticky wicket here is that your timeframe is so short between purchase and re-sale that it may not be possible, but a savvy QI would be the one to ask about this.

Assuming you can't exchange:  when you factor in your costs of sale and the "income bump" you'll experience tax-wise, you'll see your potential profits dwindle by $30k or more.  If you kept it and refinanced it onto long-term, fixed-rate debt you would be able to pull out much of the equity, pay a fraction of the costs of sale and taxes, and still hold the asset to benefit from the other strategic levers of real estate investing.

The most common regret I hear from "down the road" investors is the assets they have sold.  Good things happen over time in real estate investing, and market prices recessing down in terms of the value of the home don't hurt until rents shrink, similar to the way that stock values dipping isn't real loss for an owner unless they sell.

Hold or Sell Original LTR?

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