Want to sell 1-3 of my single family rentals, but where to put the money?

Question

Reason for selling:

Property 1: The area has declined, it's more and more difficult to find quality renters although it is currently rented, it sat for about 8 months recently, only day care scammers wanted to rent there, and it has an under ground oil tank for heating that makes me nervous. PLIA insurance is good for 60K. But I wonder if I'm better off not registering, as they may then come out and inspect it all the time. Equity in this is about 400K. I did a cash out refinance 2 years ago to buy more properties.

Property 2: HOA has been driving me nuts for nearly a decade and is getting worse and worse. They replaced the property management company and things improved, then suddenly a year later they came back...now they are even WORSE. Equity in this is about 400K. I did a cash out refinance a couple years ago to buy more properties.

Property 3: Nice area, but the kitchen and bathrooms need an overhaul. It's not difficult to rent the place, but I can't rent it at market due to the outdated kitchen, etc. Equity in this is about 300K.

If it wasn't for the rates, I'd sell and 1031 into other properties, but that's a non starter for the next few years to come due to rates. If I could, I'd use the proceeds to buy properties in cash, but the 1031 rules debt replacement rules stop that unless, again, I just replace the cash I have to replace the debt. I don't want all my eggs in real estate.

What can I do?

Zachary Ware · Answer

Have you thought about trying to sell them with seller financing with a balloon payment in 5 years? You could meet your required return off the interest and have the cash available in a few years if you're banking on rates being more suitable to buy at that time.

Alex Olson · Answer

@Jack B. Seller financing always sounds like a good idea. But, it never works out (999 out of 1000). With this type of sentiment you have for them, I recommend 1031 exchange. Pick your market and your goals and then go for it. When you 1031 exchange, the key is making your life better, not making you rich. If you upgrade, you have one. Don't swing for the fences!

Bill B. · Answer

Check your market for new builds and their incentives. I never even looked at new builds in my market until a couple months ago. They were always 20%+ more expensive. 2 months ago I bought my first new build that was priced maybe 5% - 10% above 20+ year old inventory with $5k in closing help and a 6% non-owner occupant 30 year fixed rate loan. The returns aren’t as great but I bought all my properties when they were 2-6 years old and now they’re closer to 20. The properties are aging, the neighborhoods are aging, etc etc. I did an exchange to save about $60k in taxes (no state income tax here.) And you never know. If it doesn’t make a good rental in a year maybe I’ll sell my primary home tax free and move in to it…

Julien Jeannot · Answer

@Jack B.

I suggest to start with the goal in mind. What are you looking to accomplish?

1. Cash flow?

2. Equity build?

3. Tax plays?

4. Retire on an island?

5. Other?

From there its easier to recommend where the proceeds will move to.

Jake Andronico · Answer

@Jack B.

Definitely talk to your CPA about what to expect on your potential tax bill if you were to sell and not 1031 exchange.

Also discussing with a good QI (Qualified Intermediary) may make sense.

There are DST's (Delaware Statutory Trusts) that are fully passive, you can 1031 exchange into them, and the may work nicely with your debt to equity ratio (typically they run at around 50% LTV but it does vary). They are generally large projects run by fairly reputable companies (plenty of reviews online).

The catch is these returns are generally low (especially now), but fully passive is almost always going to yield less than active.

You have great equity and in my opinion there is no shame if you wanted to cash out and have a smaller position in RE, or 1031 into something much more passive.

Best of luck to you!!

Jack B. · Answer

How does that work? Wrap mortgages issue is the due on sale clause. So do I not transfer title until they pay the balloon payment?

Keep the ideas coming fellas, good suggestions.

Jack B. · Answer

Does this work in a 1031 exchange? Or will I have to pay capital gains tax?

Eric Gerakos · Answer

Take advantage of high interest rates by buying first trust deeds. Currently paying 9%. Be the bank.

Want to sell 1-3 of my single family rentals, but where to put the money?

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