Go big(10+ units) or stay small(

Question

I started the process of selling my condo in September, and it is finally about to close next week.

My original plan was to take the $100k profit I got from the sale, and combine it with my $60k savings to put $50k down each on three quads, and use the rest for closing costs. Unfortunately inventory in the quad market seems to have depleted. Now I'm faced with a dilemma. Since I've put the money in a 1031 exchange I'm kind of under the gun to buy property.

It seems it might be wiser course of action to buy one large 10+ unit complex. Those seem to be far more plentiful than the smaller buildings. I should make around the same amount, maybe a little more, but I've never owned a building that size, and frankly it stresses me out a little bit.

A third option would be to look at similar markets outside of Phoenix, but I don't live in the area and thus don't know them as well. I would love to get people's opinions, and see what kind of expert feedback I can get.

Thank you

Bud Dwyer · Answer

@Jay Boyle

I never thought of reaching out to a PM first. A few of the building I was looking to buy had managers living on site in a free unit. Looking at the numbers it seems cheaper to have on site management, but more of a crapshoot.

@Sean Webb

I'm barely getting my feet wet in Phoenix. I don't know if I would want to buy property in a place I have no market knowledge of. If that is what you are talking about?

@Kathy Stewart

Learned everything I know from the 1031 exchange forum lol.

Jay Boyle · Answer

Bud,

Management is everything. It will make or break the deal. Seek out the managers of successful properties in your market. Ask them what props they can make work easily. They often have leads on properties for sale. Its hard to find a great PM. I find it works best to do that first. My properties are in Tucson. I live in New Jersey but the fantastic PM makes it happen.

I am sorry you are under the gun for the 1031. keep looking but don't buy a marginal deal just to save the capital gains tax. Its better to loose the 1031, pay some taxes and buy a really great investment if it takes longer, its worth it. my two cents sir. good luck!

Jay

Michael Boyer · Answer

Sounds like you are on the right track, Bud. You might work managing a smaller place into your work/life....but from the above hourly per week, a PM may be the route as you mention.. And some classics of landlord lit are posted in my blog (older books you could get free/low cost used) should you ever want to give it a try or have ideas for the place...

Best of luck..

Dave Foster · Answer

@Bud Dwyer Water under the bridge at this point. But I feel your pain re: the time crunch of the 1031. Next time around you may want to consider trying to contractually lock in your next property before you close escrow on your old property. The order you go into contract doesn't matter, only the order of sell then buy.

Even an option to purchase with an extended flexible closing for a few thousand would be better than paying the capital gains right?

If you decide to go bigger another possible strategy begins to become feasible - the reverse exchange. This would let you lock up your replacement property before your old property is sold. They're a bit more complicated and pricier than a simple straight exchange but with the economies of scale in a large property can be well worth your while in finding the perfect replacement property.

Casey Miles · Answer

Hi Bud,

All things being equal on the return side of things as you indicated, I'd rather have a small complex in one location than 3 quads spread out. That being said I'm surprised they are equal from an ROI/CAP rate perspective. I'm not doubting you it's just amongst my quads and duplexes throughout Phx, Chandler, and AJ with a couple SF here and there. I have never been able to find a complex that was better from a CAP rate perspective against MF/SF. There are exceptions but as a general rule that's my experience. With that said I've thought about liquidating everything at times and buying 1 complex for the ease of managing one location.

Keep in mind that lending will be different on a complex amongst other things. I would try and be patient and find something in Phoenix, where you live, before venturing out since this sounds like it would be your first significant RE investment. I too have considered Tucson but it'd have to be a hell of a deal to put up with the issues/expenses of dealing with a remote property. Even with a good property manager it is nice be closer to your investment.

Good luck and Happy Investing. I live in Mesa, if you ever want a second set of eyes on something let me know.

Casey

Bud Dwyer · Answer

The condo was a rental, it was not my main home.

I will hiring a PM.

i have never landlorded before.

I currently work 50-60 hours a week, but it's laid back. I can deal with issues on the phone if I need to.

I'm a single guy.

I have a few I've looked at, and they all seem to cashflow nicely (baring any expensive repairs). They are all in the $450-600k range, so at $150k down it would be a max LTV of %75.

Michael Boyer · Answer

bud, congrats on the savvy sale, big plans, and a few questions...to help in your analysis...

Was the condo your main home or, I suspect a rental, hence the exchange (see irs rules on taxes and sale of main home.. Maybe no rush)?

Will you be managing the place or hiring it out?

Have you landlorded before?

Do you have a day job?

Other work/life issues like a bunch of small kids or on ten boards...

Three quads is twelve units, so the scale was similar, but you'd need 20 percent down on the commercial financing for the ten plus unit? And do you have one picked out? Does it cash flow?

There is economy of scale of with all the units in one place but think about your fit with the role of landlord, or if you are set to hire it out....

Go big(10+ units) or stay small(<4 units), Phoenix Area?

Go big(10+ units) or stay small(<4 units), Phoenix Area?

9 Replies