Newbie investor, 1031 exchange and too many choices - ideas?

Multi-Family and Apartment Investing
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Newbie investor, 1031 exchange and too many choices - ideas?

Jennifer B.
Investor · Portland, OR · Member since 2013 · 9 posts · 1 vote

Hi everyone! I'm brand new to Bigger Pockets and a complete newbie. My husband and I live in Portland, OR and currently own some farmland in another state which is cash rented and brings in 20K per year in income. The only expenses we have on it are the property taxes. It's easy income with no headaches, but we wonder if we could do better with multifamily real estate, plus we'd like to diversify. This land was purchased by family members in the 1950s and, if sold, would bring us about $600K in cash that would need to be rolled over to other RE to avoid significant capital gains. This would still leave us with 10K in yearly income from the remainder of the farmland that we plan on keeping.

We're thinking about taking action next year. I'm learning as much as I can now, but am intimidated by all the choices and complexity. If you were a beginner in this situation, would you purchase a couple of 2-4 plexes free and clear in our own backyard, look out of state in a less expensive area to purchase more properties free and clear or try to leverage some of the money? My husband does not want to leverage too much, since we have zero loans on the RE that we have now and he's getting close to retirement.

As I said, I'm trying to learn as much as I can now on BP, the web, books and have just joined the local REIA, but I'd love any thoughts you guys might have on this particular situation. Thanks so much for any advice you might be able to offer!

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Arjun K.
Real Estate Investor · New York, NY · Member since 2012 · 210 posts · 15 votes
13y

Why not raise leverage on the existing land? Keep the land, raise debt against it, and use the proceeds of that debt to invest elsewhere.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    13y

    Jennifer - to me that seems like a pretty easy decision to sell it.

    You are making 20k - taxes on 600,000 value.

    Let's say you sell it and 1031 exchange to something else. Sales costs would be roughly 8% (5% commission, 3% transaction fees). You would net 600,000 - 48,000 = 552,000.

    You would than buy a multi-family or another investment. If you decided to do all cash you can buy something for 552,000 that has a CAP rate of 7%. (Search Bigger Pockets for the definition of CAP Rate if you don't know).

    552,000 * 7% = 38,640/year

    That means you should NET 38,640/year with very little work.

    Many investors on this forum can achieve CAP rates over 10%. We typically put more hands on effort in but that means:

    552,000 * 10% = 55,200/year.

    Be careful when researching. Many Seller's don't show all the real expenses in their Cap rate... so do a lot of research before you buy!

    The other options: use leverage.

    Let's say you buy a property for 1.1million at 7% cap rate financed at 5% amortized over 25 years and put 552,000 down.

    1,100,000 * 7% = 77,000 / year

    You would have 550,000 mortgage with payments of $3,215.25/month or $38,583/year. You would net $37,417/year but also have $11,000 in principle reduction on your loan. So effectively would make $48,417/year versus under 20k.

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  • Jennifer B.
    OP
    Investor · Portland, OR · Member since 2013 · 9 posts · 1 vote
    13y

    Hi Steve - Thanks so much for your extensive reply - extremely helpful!

    It definitely seems like an obvious choice to sell it. We've never spent that much money on RE before though so it makes us nervous. We certainly want to avoid making any disastrous mistakes. I look forward to hearing what other have to say as well.

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  • Lukasz K.
    Banker · Las Vegas, NV · Member since 2013 · 13 posts · 1 vote
    13y

    1. Find a realtor that specializes in rentals/shortsales/insider deals.
    2 Target aggressive rental market.. buy 3 properties @ 150k apiece aim for 8-10% cap.
    3. Enjoy appreciation on 3 properties rather than 1.

    Be patient in acquiring - do not acquire properties that need extensive rehab work. These are the metrics we operate in 135-185k 8-13% cap. Your main advantage right now is that you have CASH -you can walk into *VERY* nice deals and enjoy good rent profits without trying to beat out a mortgage or risk crazy rehabs. Or you can hunt deals and try to get the most bang out of your buck - those can present pitfalls.

    Play it safe take rental comps into careful consideration to estimate your rents/timeframe. You can do land contracts season them then sell to investors increase your capital and buy more. If you move slow pay close attention to your metrics and don't go outside them *EVEN* if a deal looks solid. You'll do just fine.

    *OR* you can do what I did over the years is partner up with a hard money group - and make investments WITH them, WITH your cash. You actually have enough capital to be a transactional type funder - be the bank and don't worry about the mess/risk of property management. Hard money usually only acts on deals that make sense and have many options since they are investment homes they can foreclose, get their capital back and move on in a heartbeat. You have to have a pretty strong network and be rather savvy with the investment community - but this is definitely another option to consider - real estate is a complex thing there's many ways to make profit with it.

    My background is banking and hard money so I view things a bit differently than most. In my opinion the safer the deal the better! I used to take huge risks years back but have ratcheted down my risk taking over the years to nice clean make sense investments. Some would argue that my metrics aren't as high as they should be - however I'm ok with it. I'll pay more for something I have a good feeling will work rather than take a risk on low dollar deals that require a quick spin and a bit of luck.

    I'm new to these forums although I have been reading them for awhile - I'm here to learn and network with the community. If anyone has ideas/advice on my strategy I welcome it!

    Good luck in your ventures!

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    13y

    Jennifer,

    You seem to be facing a very personal decision, not a numbers decision. There is more to life than just money. Any decision involves your family - history, present day, and future.

    Before considering any different, new, and unknown risks and challenges, consider if investing the cash flow would be a better option for your family and its future.

    Best of luck with your considerations and decisions.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    13y

    This is a personal call. From a money perspective it is an easy sell, sell, sell. About $550k net at a 10 CAP (which should be a no-brainer in the right location) you'll triple your NOI on a cash deal, which I am assuming is what you want to do?

    But, having no headaches with income-producing residential re is a pipe dream. What you have now is truly passive. a 20 unit apartment building is a different game - are you sure the money is worth it to you?

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  • Tom Goans
    Real Estate Investor · Englewood, CO · Member since 2013 · 988 posts · 258 votes
    13y

    Ben is correct. Most real estate investments require much of your participation or consideration. Even if you hire a property manager, read all the posts concerning problems with property managers.

    0Reply
  • Jennifer B.
    OP
    Investor · Portland, OR · Member since 2013 · 9 posts · 1 vote
    13y

    Thanks for all of your input. All of these points are well taken. We are considering all of this. Not sure if the extra income is worth the headaches we might be in for. I intend learn as much as I can here on BP and by talking with other local investors before making any big decisions.

    0Reply
  • Jason Tinder
    Bentonville, AR · Member since 2013 · 24 posts · 6 votes
    13y

    You can definitely get a higher rate of return. If it were me, I would sell the land and use the proceeds as a down payment on something large - an apartment complex. I would start looking for your purchase (after a bit of learning), and make the purchase subject to your selling your land. Use a 1031 exchange, as you mentioned. You could put 25% down on up to $2.4 million in property. From there, you'll need to learn to manage the managers. Using leverage will help you to get better returns. Make money using other people's money.

    0Reply
  • Marissa LoCascio
    Collegeville, PA · Member since 2013 · 2 posts · 0 votes
    13y

    Jennifer, I can certainly help answer any questions you may have about 1031 and the process. 1031 can be a great wealth building tool and allows for diversification into properties that require management or even properties that are management free which may be something you and your husband would be interested in since he is nearing retirement.

    Marissa

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    13y

    Jennifer Blume and Marissa LoCascio we do have a 1031 Exchange Forum where issues around that topic can be discussed.

    0Reply
  • Anthony Palmiotto
    Hard Money Lender · Sea Girt, NJ · Member since 2012 · 125 posts · 37 votes
    13y
    Originally posted by Steve L.:
    Jennifer - to me that seems like a pretty easy decision to sell it.

    You are making 20k - taxes on 600,000 value.

    Let's say you sell it and 1031 exchange to something else. Sales costs would be roughly 8% (5% commission, 3% transaction fees). You would net 600,000 - 48,000 = 552,000.

    You would than buy a multi-family or another investment. If you decided to do all cash you can buy something for 552,000 that has a CAP rate of 7%. (Search Bigger Pockets for the definition of CAP Rate if you don't know).

    552,000 * 7% = 38,640/year

    That means you should NET 38,640/year with very little work.

    Many investors on this forum can achieve CAP rates over 10%. We typically put more hands on effort in but that means:

    552,000 * 10% = 55,200/year.

    Be careful when researching. Many Seller's don't show all the real expenses in their Cap rate... so do a lot of research before you buy!

    The other options: use leverage.

    Let's say you buy a property for 1.1million at 7% cap rate financed at 5% amortized over 25 years and put 552,000 down.

    1,100,000 * 7% = 77,000 / year

    You would have 550,000 mortgage with payments of $3,215.25/month or $38,583/year. You would net $37,417/year but also have $11,000 in principle reduction on your loan. So effectively would make $48,417/year versus under 20k.

    Loan amortization is beautiful isn't it?

    0Reply
  • Jeremy Cyrier
    Commercial Real Estate Broker · Wakefield, MA · Member since 2011 · 60 posts · 21 votes
    13y

    It seems to make sense to sell it. If you can convert $600,000 from earning you $10,000 per year to a 10% dividend of $60,000 per year, that's quite a pay raise. To own a piece of real estate worth owning, you'll need to put down about 50% of the equity and use some leverage to get the return without the headaches.

    0Reply
  • Arjun K.
    Real Estate Investor · New York, NY · Member since 2012 · 210 posts · 15 votes
    13y

    Why not raise leverage on the existing land? Keep the land, raise debt against it, and use the proceeds of that debt to invest elsewhere.

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Hi Jennifer,

    Apartments are an option.

    If you are worried about managers and (tenants, toilets, termites) then you can look at something like a triple net leasing property.

    Corporate rated tenant and the tenant pays taxes, insurance, lease payment, etc. . Many people use these for safer passive investments with no headache. Just like any investment there are bad deals and leases out there and you have to use someone who has knowledge to buy the right property.

    Typical is about a 6 to 7 cap going in and rent bumps of 1.5% to 2% annually. Some do not have rent bumps in primary lease term but cap starts out higher in the 8's etc.

    With apartments you get stronger annual rent increases and you can leverage your cash more to get a better cash on cash return which you usually cannot do in ( single tenant net lease). You can do MTNL (mutli tenant net lease) for a stronger cap and leverage. You have to ask yourself what it is you really want.

    Good luck

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