Selling an 8 unit to pick up a 43 unit in a worse location
BP,
I need a little advice. I have an 8 unit property that I would say is in a B class location. I also own an 8 unit on the street behind it (It shares the same backyard). Therefore, in the future, If I ever did want to sell, I could sell all 16 units together. The one particular 8 unit that I am considering selling has also caused me issues, problems, money.
With that being said, I have an opportunity to buy a 43 unit property that is in a C class area that needs quite a bit of exterior work, but it is a cash flow BEAST. What are your thoughts? I hate breaking up the 16 units, but it is hard to pass up on the cash flow this particular asset brings. Any feedback would be great! Thanks.
@Stephen Jones instead of selling (using the 1031 exchange) could you keep both 8-units and just get a loan based on the value?
It is a really tough decision, but creating a deal analysis can help you make the best choice. Looking at the cash flow of the 43-unit will give you an idea of which one could be more profitable in the long run. If it's not too much work and the 43-unit cash flows significantly better, it could be a good choice. It is worth considering doing a deal analysis to help you make the right decision for your business. Good luck!
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Real Estate Agent Texas (#005416)
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Run a return on equity calculation. This will help you understand your current position vs where you could get to with an 1031 exchange. I can show you how this works.
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Real Estate Agent Kansas (#00245860) and Missouri (#2019043249)
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As someone who does C/D properties, let me tell you upfront-- exterior work is the beginning of the work needed. You need to evaluate if you can handle the scope of 43 properties, as I guarantee they weren't managed or taken care of like a B property. You should expect deferred maintenance, and a lot of shady work.
A lot of people get googly eyed when they see C/D property cash flow numbers, but don't really stop and think about the actual amount of work and maintenance needed. I have "B" properties I forget I own. If it's in the worst part of town, you need to expect a lot of problems, and most importantly-- be able to handle them financially and be mentally ready to invest a lot of $$$ to make them better. I think of it like houses are dying, and they need a lot of $$$/energy/effort to get them back to normal, kind of like house CPR. As long as you go into it ready and expecting the work/$$/energy and realize it's not apples/apples with a B property, you will do great! It's different managing a house when someone is paycheck/paycheck vs. doing well, and how they live/lifestyle, it's just different!
why not package the 2 8 unit buildings together now and sell them together? that way you can pick up the 43 units and have a healthy reserve in case you need it. if you don't need it after a year or two use some to pick up more units.
Hey @Stephen Jones - congrats on your real estate investments! I'm an investor & realtor and from my perspective, you'd have to decide yourself if the tradeoff is worth the headache.
My opinion is to go for it, you've already successfully managed a portfolio well enough that you should be ready to tackle bigger things.
Good luck!
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Broker New York (#10401359681)
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You stated that the 8 unit has caused you issues, problems, and money. Do you see similar issues arising with the 43 units? If not, how do you intend to manage future issues with the new property so it does not become a larger repeat of the present?
Also, see if you can involve the seller in the deal more actively to take on some of the due diligence. Most properties are FS because the seller messed up. Smart investors really need to find out what happened. Sellers are good at spinning tales that seem reasonable Dont fall for it.
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@Drew Sygit
So you are saying to pull the trigger? Even if this could potentially be a depreciating asset?
Stephen, just a thought- business is business. Sounds like you are emotionally attached to the 16 units together. If your primary focus is business forward motion cash is king. It is not always easy to separate emotion from these deals, understandable. Looks like you have family to set up generational wealth for. Good luck on all of your endeavors!
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@Stephen Jones don't you already have a depreciating asset?
@Drew Sygit
Not necessarily. It is in a much better location.
@Stephen Jones. Cash flow beast? Is that based on present day operations or is it a projection? We passed on a 17 unit this year, the Seller gave us a spreadsheet with projections that he wanted to pass off as current income. The red herring was his inability to produce leases; we have other property in the market so we knew the numbers were possible but the property needed alot to get there.
Long & short, if the numbers make it worth it - do it. Every property comes with a set of headaches, you are experienced so you know that. The one technical piece of advice I can pass along, is to increase your vacancy & misc costs provisions when running numbers; C markets should be calculated at 10% minimum.
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@Stephen Jones what are the chances of you repositioning the bigger property and raising the Class?
You say "cash flow beast". If your underwriting is solid while being conservative, I would go for it the 43 unit. Im not sure I'll sell the 8 unit though. I feel like you're unnecessarily restricting yourself by not considering partnership, especially syndication.