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Multi-Family and Apartment Investing

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Jordan Akins
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My dad needs help with his decision to sell his apartments.

Jordan Akins
Posted Dec 30 2022, 09:35

My dad has about 35 doors in one location which is his main source of income. The units are probably worth $2mil and are bringing in probably $20k a month.

The units are about 25 years old and have not been serviced good the last 5 years. It’s too the point where there’s probably $200k worth of stuff to be done to get them back to 100%.

My dad is older and doesn’t want to go into anymore debt so he is having thoughts of just selling and getting out of it.

The negativeI see to that is:

1. What is he gonna take the money he gets from selling it and do with it to bring in the same amount of money to live on?

Seems to me he needs to keep them spend the money it takes to fix them up to get full rent and just take that hit.

Just wanted to get some opinions. Thanks

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Andrew S.
  • Investor
  • Raleigh, NC
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Andrew S.
  • Investor
  • Raleigh, NC
Replied Dec 31 2022, 07:57
Quote from @Jordan Akins:
I think he should keep them because there’s nothing he can take that money out directly into something and get the monthly cash flow he is…that I know of. 
Well, true, he  makes a decent return currently, but remember, the reason why the return is so good is that he is (apparently) neglecting maintenance.  You can't keep doing that indefinitely - at some point, the whole thing collapses.  Either literally, or figuratively when tenants stop putting up with renting stuff that is in disrepair and he can't find new tenants anymore.  So, sure, as a short term strategy, he can try to squeeze out whatever is left, but longterm, the value of the asset will suffer.

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Eliott Elias#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
  • Investor
  • Austin, TX
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Eliott Elias#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
  • Investor
  • Austin, TX
Replied Dec 31 2022, 08:02

Find something more turnkey for him, or find someone to handle a project like this for him. What does the timeline look like to fix it up? I'm an advocate for holding. 

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Anthony C Valera
  • Investor
  • Worcester County, MA
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Anthony C Valera
  • Investor
  • Worcester County, MA
Replied Dec 31 2022, 08:02
Quote from @Jon A.:
Quote from @Anthony C Valera:

Probably unpopular opinion but he could put the portfolio in a trust and seller finance the whole thing to an investor willing to put the work in to bring it up to market value. Depending on what all those numbers look like, a decent down payment to get him started (and pay off some of that debt!) , and then provide him with monthly income without the hassle of doing the work. This would prevent capital gains or the need to 1031 since he would only be taxes on the money he is actually receiving each year.  

Granted this monthly number will likely be lower than his current rental income BUT the possibility is there to control the down payment and the interest rate, ideally netting him more through the life of the loan.


 What happens with depreciation recapture in this scenario?


Thats a good question and I'm not sure of the answer. My initial thought (not being a tax professional (barely a tax amateur at this point)) is that it would depend on how long they've owned the asset and how much they depreciated. In the unlikely the event they are just learning about depreciation or heard about it recently, the recapture would be minimal. That being said if he's owned the assets for over 27.5 years and is thus completely depreciated, is beyond recapture? No idea, though If anyone does know I'd love the info. 

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Anthony C Valera
  • Investor
  • Worcester County, MA
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Anthony C Valera
  • Investor
  • Worcester County, MA
Replied Dec 31 2022, 08:06
Quote from @Bud Gaffney:

@Jordan Akins why not keep them and hire a property manager?


 This is another great idea. In this same vein, take on a partner that will help bring the asset up to market condition & value as well as manage the property. Even if you give them a healthy equity position you would still be able to grow and take advantage of the equity moving forward.

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Bruce Woodruff
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#4 All Forums Contributor
  • Contractor/Investor/Consultant
  • West Valley Phoenix
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Bruce Woodruff
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#4 All Forums Contributor
  • Contractor/Investor/Consultant
  • West Valley Phoenix
Replied Dec 31 2022, 08:24
Quote from @Chris Seveney:


It’s not $25k but is $25k what he is betting or grossing.


 Im guessing that's the gross based on his reply to me. This just feels like a time so sell and live off the $2mil as you suggest....

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Chris Seveney
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  • Virginia
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Chris Seveney
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Replied Dec 31 2022, 08:43

@Bruce Woodruff

Yeah my concern would be $2M for what was described seems heavy. Either way I would sell now as well

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Replied Dec 31 2022, 08:58

Does he have access to a good property manager who can help with the deferred maintenance and continue to cash flow the property? What city is he in? 

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Replied Dec 31 2022, 09:11

@Anthony C Valera Anthony hit the nail on the head with the SF.

 Seller Financing + SubTo in existing debt would do the trick. Your father is receiving monthly Cash flow without lifting his finger, does not go through the pain with Agents ( commissions, fees ), No capital gain tax and potential to actually make way more money by selling the property for a higher price on Seller Financing. 

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Mike Nelson
  • Investor
  • Oak Park, IL
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Mike Nelson
  • Investor
  • Oak Park, IL
Replied Dec 31 2022, 09:18

One consideration is a DST (Delaware Statuary Trust) 1031 exchange. He would sell the property and invest the proceeds in a DST, thereby deferring taxes. There are people who facilitate this type of exchange, with a reputable syndication. Advantages are tax savings, and there is no management involved.

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Michael Gansberg
  • Investor
  • New York City, NY
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Michael Gansberg
  • Investor
  • New York City, NY
Replied Dec 31 2022, 09:26

@Jordan Akins - I second @Mike Nelson 's suggestion. DST's(Delaware Statutory Trusts) can solve your dad's problem. He'll take a hit on the cashflow(but ask yourself- is the cashflow really $20k/mo if he's deferred $200k of repairs? Deferred maintenance usually gets more expensive with time, and it's not always the gradual process you're hoping for.)

Your dad can avoid paying any capital gains if he does the 1031 and purchases the correct amount of replacement property, and he can diversify as well into different geographies and asset classes- residential rentals, commercial of all flavors, land, farms, whatever. Also- he will never get a phone call again regarding a problematic tenant, an overflowing toilet...or anything, really. 

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Jonathan R McLaughlin
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  • Rental Property Investor
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Jonathan R McLaughlin
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  • Rental Property Investor
  • Boston, Massachusetts (MA)
Replied Dec 31 2022, 13:21

ya, I don't think we can give you anything useful without knowing some of the basics...like how much debt, what the capital expenses and rehab really looks like and how much he needs.

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Craig Fillion
  • Real Estate Agent
  • Raleigh NC & Triangle Area
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Craig Fillion
  • Real Estate Agent
  • Raleigh NC & Triangle Area
Replied Dec 31 2022, 13:39

I did not judge the returns of these options but wanted to put them out there. He's currently getting a 12% Return. There is a limited number of options to achieve passive/safe 12%.

1 Option: Sounds like if he kept them you definitely would have to get the repairs done and he would have to get it under property management.

2: If he ended up dumping them maybe try to get them sold with seller finance?

3: Sell them all and try Note investing?

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Denis Churchill
  • Loxahatchee, FL
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Denis Churchill
  • Loxahatchee, FL
Replied Dec 31 2022, 13:39

@Jordan Akins Hey Jordan, I am not the most experienced investor on the block, but what comes to my mind is a golden opportunity for you and your Dad. Get educated, if not already, and partner with your Dad. Slowly but surely you can take over and still keep your Dad’s best interests in mind. With deferred maintenance taken care of you should be able to raise the rents, a bit at a time, and have an income generating asset to hold and benefit from for years to come. My two cents.

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Phommala Songkhors
  • Investor
  • Cape Cod, MA
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Phommala Songkhors
  • Investor
  • Cape Cod, MA
Replied Dec 31 2022, 18:47
Quote from @Jordan Akins:

My dad has about 35 doors in one location which is his main source of income. The units are probably worth $2mil and are bringing in probably $20k a month.

The units are about 25 years old and have not been serviced good the last 5 years. It’s too the point where there’s probably $200k worth of stuff to be done to get them back to 100%.

My dad is older and doesn’t want to go into anymore debt so he is having thoughts of just selling and getting out of it.

The negativeI see to that is:

1. What is he gonna take the money he gets from selling it and do with it to bring in the same amount of money to live on?

Seems to me he needs to keep them spend the money it takes to fix them up to get full rent and just take that hit.

Just wanted to get some opinions. Thanks


 Hey let's get on a call ! we'll buy it from your dad :] 

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Basit Siddiqi
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  • Accountant
  • New York, NY
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Basit Siddiqi
Pro Member
  • Accountant
  • New York, NY
Replied Jan 1 2023, 16:22

How old is your dad?

I would consider selling the portfolio and investing in something that involves less time.

1) Sell the property and do seller financing at 8% interest
The 8% interest would be more than what he is getting at the moment.

2) Sell the property and invest it into stocks/bonds.
I would also consider selling a portion of the portfolio every year which he can use towards his living costs

3) Sell and invest in a real estate syndication that pays a monthly / quarterly distribution

Best of luck

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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
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Bjorn Ahlblad
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#5 Multi-Family and Apartment Investing Contributor
  • Investor
  • Shelton, WA
Replied Jan 1 2023, 19:07

@Jordan Akins Talk to your accountant or @Basit Siddiqi above, about your dad 'gifting' the property to you and the associated tax savings with that transaction. It may make sense. All the best!

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Julio Gonzalez
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  • Specialist
  • West Palm Beach, FL
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Julio Gonzalez
Pro Member
  • Specialist
  • West Palm Beach, FL
Replied Jan 2 2023, 19:03

@Jordan Akins Are you familiar with a 721 Exchange? It would allow him to be a passive investor rather than an active investor and defer the taxes. Here's an article that explains it.

https://www.biggerpockets.com/...

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Drew Sygit
Property Manager
Agent
#2 Managing Your Property Contributor
  • Property Manager
  • Royal Oak, MI
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Drew Sygit
Property Manager
Agent
#2 Managing Your Property Contributor
  • Property Manager
  • Royal Oak, MI
Replied Jan 5 2023, 18:11

why can't you take over management?