Exit and reinvest or keep and rent

Multi-Family and Apartment Investing
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Exit and reinvest or keep and rent

Account Closed
Investor · Member since 2020 · 23 posts · 10 votes

I’m trying to decide what is the better move with my two family short term rental property? Should I continue to rent it or should I turn it into two condos and sell one of them?

I bought a two family duplex (2bed1bath each) on the beach in Wells, Maine for 750K. I was profiting after all expenses about $1000/month previously and I just tore it down and rebuilt the entire thing to double the occupancy so now 4 beds 2 baths in each unit. The new post renovation value is $2.5 million. I spent 700k on the renovation and currently owe $1.2M at a 7% 30 yr fixed.

I rent it out now and profit about $1,200/month. My question is if I turn it into two condos I think i can sell 1 unit for $1.2-1.4M, pay off the entire home and keep the other. Then I’d be profiting 5-6k/month. Or I can pay some of it off and get another investment property. This is currently my only investment property.

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Kyle Vogeler
Rental Property Investor · Emmaus, PA · Member since 2021 · 153 posts · 85 votes
1y

The good news is that you are in a position that allows you to have options! I would sit down and ponder what your goals and who your network is... this will help you decide the path you chose.

The 3 options essentially are:

- Sell neither condo, let the property cash flow and pay off the debt associated with it. With minimal work, you can pay off the property and have a decent nest egg for retirement or your kids or a charity, etc. Down side is less money today.

- Sell one condo. Now you have one property that is clear-and-free of debt, giving you more money today. It also gives you the option to refinance and invest in other properties. You should be able to get up to $750K which could buy you another $2.5-3M in properties. The only downside to refinancing is you are now lowering the cash flow on the condo.

- Sell both condos. Sell them individually and get $2.8-$2.9M, pay off the $1.2M debt and $200K of closing costs and you have $1.4-$1.5M to reinvest which could get you a portfolio anywhere from $4.5-6M in size. You could utilize your network, find value-add properties again and repeat your initial process at a larger scale. Upsides: More potential for profit, larger portfolio diversification. Downsides: More work, more potential for problems to arise. 


You have lots of options and any of them can lead to success, but first you have to define what success means to you. 

Best of luck!

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    1y
    Quote from @Account Closed:

    I’m trying to decide what is the better move with my two family short term rental property? Should I continue to rent it or should I turn it into two condos and sell one of them?

    I bought a two family duplex (2bed1bath each) on the beach in Wells, Maine for 750K. I was profiting after all expenses about $1000/month previously and I just tore it down and rebuilt the entire thing to double the occupancy so now 4 beds 2 baths in each unit. The new post renovation value is $2.5 million. I spent 700k on the renovation and currently owe $1.2M at a 7% 30 yr fixed.

    I rent it out now and profit about $1,200/month. My question is if I turn it into two condos I think i can sell 1 unit for $1.2-1.4M, pay off the entire home and keep the other. Then I’d be profiting 5-6k/month. Or I can pay some of it off and get another investment property. This is currently my only investment property.


    Personally, I think your profit is too small based on your investment. You've got a 1.7% COC return and even worse based on appraised value. I think you've answered your own question - sell one of the units. That gets you 8.6% COC return.

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  • Dan WeberBusiness Member
    Realtor · Portland, ME · Member since 2015 · 656 posts · 552 votes
    1y

    @Account Closed agreed with JD - look at your Return on Equity. If you sold one, your return on equity would jump. If the other one that was owned free and clear was worth $1.2mil and had a cash flow of $60k/year, your ROE there would be 5%. You could tap into the equity in that one for a downpayment to scale your portfolio from there. At least you'd have some options.

    1Reply
  • Account Closed
    OP
    Investor · Member since 2020 · 23 posts · 10 votes
    1y

    @Dan Weber

    Thanks both of you that makes sense and was definitely the way I was leaning.

    1Reply
  • Kyle Vogeler
    Rental Property Investor · Emmaus, PA · Member since 2021 · 153 posts · 85 votes
    1y

    The good news is that you are in a position that allows you to have options! I would sit down and ponder what your goals and who your network is... this will help you decide the path you chose.

    The 3 options essentially are:

    - Sell neither condo, let the property cash flow and pay off the debt associated with it. With minimal work, you can pay off the property and have a decent nest egg for retirement or your kids or a charity, etc. Down side is less money today.

    - Sell one condo. Now you have one property that is clear-and-free of debt, giving you more money today. It also gives you the option to refinance and invest in other properties. You should be able to get up to $750K which could buy you another $2.5-3M in properties. The only downside to refinancing is you are now lowering the cash flow on the condo.

    - Sell both condos. Sell them individually and get $2.8-$2.9M, pay off the $1.2M debt and $200K of closing costs and you have $1.4-$1.5M to reinvest which could get you a portfolio anywhere from $4.5-6M in size. You could utilize your network, find value-add properties again and repeat your initial process at a larger scale. Upsides: More potential for profit, larger portfolio diversification. Downsides: More work, more potential for problems to arise. 


    You have lots of options and any of them can lead to success, but first you have to define what success means to you. 

    Best of luck!

    1Reply
  • Account Closed
    OP
    Investor · Member since 2020 · 23 posts · 10 votes
    1y

    @Kyle Vogeler thanks for laying it out that way it makes it nice and clear. I think option 2 is what we are leaning towards.

    0Reply
  • Kyle Vogeler
    Rental Property Investor · Emmaus, PA · Member since 2021 · 153 posts · 85 votes
    1y

    Option 2 is a good choice. It leaves you with a property in your portfolio that is cash flowing while also allowing yourself to grow at a manageable rate.

    0Reply
  • Robert Rixer
    Investor · Miami, FL · Member since 2015 · 355 posts · 268 votes
    1y

    Playing devil's advocate - give some additional thought to the condo conversion. Property taxes will go up versus keeping as apartments, you'll have to establish an HOA with reserves and you'll be at the mercy of the other condo owner. If they are not great people, they could make life a nightmare.

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