We own a 4-unit townhome that is appraised for around $1.2 million.
I just ran the numbers through a calculator and realized that this property returns very little for the amount of equity we have.
Monthly rent: $6800 ($81600 annual)
Property tax: $12000/yr
Maintenance & Repairs + Cap Ex: $5000
Utilities (water, gardening, trash, electricity): $4570
Total cash in pocket at end of year: $54000
Cash ROI = 4.53%!! This seems pretty terrible to me!
Should I 1031 exchange this to a larger commercial property? I'm thinking of a medium-sized multifamily (20 units??)
First, congratulations on owning an $1 million+ asset free and clear! That is no small feat. Next, in my opinion this is simply a case of leverage, or rather, lack there of. Your stated rate of return on the investment as a percentage is just the math. The percentage is small because the cash in the deal base is big ($1.2m)...Actually it's enormous!! If your cash in pocket is $54k at the end of the year and if you only had $240k in the property (20% of stated current value of $1.2M) vice the full $1.2M, your cash on cash would be 22.5%!!! Nothing to sneeze at!! So, as for what you should do? It really depends on what your end state goals are. There are true values to swapping up via a 1031 but the biggest down fall is that you sell a performing assets. If you like the property, it performs well and all you need to do get it 'geared' (love that term!) better by utilizing leverage, why not pull out 70-75% and go buy that next larger property? $900K or 75% pulled out is a lot of capital that can be deployed 'more effectively' to meet whatever your goals are AND you keep your original performing 4-plex that is now leveraged more effectively for a cash on cash return. Additionally you continue reap all the other secondary and tertiary benefits of retaining that property over time. Unfortunately this is just the long version of IT DEPENDS! But don't fall in love with 1031s because it sounds sexy. If you want to sell it and want to buy something bigger... Do it! 1031s are a tax-advantaged way to do just that. If not, then pick a growth/conversion strategy that aligns to your goals, lifestyle and aspirations! Again, congrats!
Was this property purchased in cash? If that is the case than yes the ROI is low. However if this is free and clear after debt pay down your ROI is whatever you initially put into the deal.
I agree with @William Randolph and would leverage this property to a level that it still cash flows some and use that money to buy a larger property.
Sean Ploskina, Oceanside Properties | [email protected] | 757‑581‑1488
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