Should I sell and find a 1031 or ????

[Jane S.]

In making a decision about whether to keep looking for a an “acceptable” tenant or sell the property, I researched whether I really made enough money to justify having to deal with liars, cheats, thieves, scumbags, druggies, filth, and squatters, otherwise known as tenants. Yes, bloom is off the rose. 

Wait for it!

Fixed costs (debt, insurance, county tax for 2021) = $11730.00 looks pretty good, doesn't it? I have owned it since 2012 and it has nice equity.

Rent collected in 2021 = 4 months @ $1800=$7200, 7 months @ $1875= $13,125. late rent 4 times and didnt pay penalties, tenant bought drugs instead, $425 owed, new total=$19,900. 

Less plumbing costs for causing drain clogs, lease violations, smoking, drug use, approx. $1500, new total $18,400. Unpaid rent court ordered $1875 * 2=$3750.00, new total $14,650.

Haven't even started on the out of pocket costs in 2022 after I finally evicted, which included $1,900 for the eviction lawyer. It took 3 months during which they did as much damage as they could while still occupying. 

I have $11,000 in remodeling costs, labor, Home Depot, etc. I did get some help from homeowners insurance but no coverage for “cleaning” even though I had to replace the stove, parts of the fridge, carpet, etc etc

So I cleared $243.33 per month over the period. If I subtract the insurance claim payments I am in negative territory. 

Why would I keep this property? I must be WET if I do. Right?

But I need to know what my cap gains are if I sell.

If I find a qualified applicant the rent will be $2000 plus animal fee $600 (only one allowed) and tenant pays utilities.

Long story short, who do I contact on this site that can help me calculate my cap gains? Advise me about Delaware statutory trusts?

There is nothing to buy here in my town that will cash flow. MLS has overpriced houses that look like bankruptcies if BRRR'd. Same for flips. And I cant invest OOS.

Thanks for any referrals or solid suggestions. 

[Kevin Sobilo]

Add back in $3750 because court ordered unpaid rent isn't an expense or loss to you. Its just money you didn't collect. It doesn't subtract from the rent you did collect.

So, that means you made $555.83 per month which is excellent especially considering what you dealt with.

Your capital gains if you sell can be done by having an agent do a market analysis and by using your tax returns to figure out your basis. You have been depreciating the property for ~10 years on your taxes, so your basis will be well lower than your purchase price by now. Subtract your a ARV (market analysis price) minus your basis and that would be the amount you estimate paying capital gains on.

Me, I would keep that rental all day long! Just learn to manage it better. Stop believing that is the crazy world that made your experience harsh and realize that you could have managed the property better and greatly lessened the chances of such a bad experience. 

[Jane S.]

ITS NOT MY FAULT !!!!!!! I HAVE SEVERAL OTHER SFR'S WITH REALLY GOOD TENANTS!!!!! THIS WAS MY FIRST AND LAST EVICTION AFTER 20 YEARS OF INVESTING.

I HATE IT WHEN PEEPS PLAY THE BLAME GAME, THESE TENANTS WERE RAT SCUM AND THERE WAS NO WAY I COULD HAVE FIGURED THAT OUT UNTIL THEY STOPPED PAYING. They were extremely clever in the way they hid all their ugliness. Experienced professional renters. Sucked up to me and meanwhile were plotting to screw me. They knew exactly how to do it, too. And the municipal court let them stay in the property without paying. They owe everybody.

THE UNPAID RENT IS STILL A COST TO ME, THE COURT ORDERED THEM TO PAY IT. 

Also I have not included all the money I paid carpenters, drywallers, handymen, painters, yard cleaners, junk haulers, assorted helpers, property manager, so I doubt if the $555 is realistic.

All day today the phone was ringing off the hook and I have 3 parties “very interested” who said they gross 3x the rent or more and no animals, they agreed to complete the rental app TODAY or TONITE and submit it. More lies and foolery. Doubt i will get their apps. Why should I do the hard work of showing the property to people who cant even DO what they agreed to do? I need them to have skin in the game before I will allow them to see the property. That’s just smart managing. No tire kickers they have to pre-qualify. Just like when you buy a house, you need a prequal letter. That should be a requirement for renters, too. Multifamily sellers are not showing until they get a buyer’s offer in writing.

Thanks for the response, It is helpful but ends on a sour note.

[Kevin Sobilo]

@Jane S., your post made it sound like you were naive and never expect something like this to happen.

So, now you know it is worth it! You have other rentals and this is your first eviction experience in 20 years. So, you made LOTS of money compared to this bad experience. You have to look at the whole picture of your investing not just this experience to see whether its worthwhile.

Also, the $3750 is not a cost to you. If it was you could write it off on your taxes, but you cannot because it is not a cost. Ask your accountant or tax preparer on that one if you don't see my point.

I recommend getting past the emotions and getting back to the grind. If you have done this successfully for that long I'm sure you will do well going forward even if once in a while you have a bad experience. I always expect to have an experience like this but work hard to mitigate the risk. I'm also never upset when something negative like this happens because I know its a risk going in. 

[Jane S.]

You're right I never expected the Spanish inquisition! (The nasty tenant crooks are Latinx BTW)

Python had a joke for every bad day.

Anyhoo I am gonna find out about a Delaware trust in a few minutes, just to see if I can rely on it to deliver around 5% I would be happy to shelter cap gains at that rate.

I’m long past the emotions but looking forward to suing them in Small Claims. I know I wont get a cent unless I get their paychecks garnished. Hoping for that.

[Dave Foster]

@Jane S.

When you sell that property you'll want to do a 1031 to defer all tax. You're accountant is the best person to advise you on your gain, but there are other ways to closely estimate your gain.

[Todd Van Etten]

I'm having similar troubles in a SFR and I'm trying to decide if I should hang on, 1031 exchange, or cut and run.

You'll want to talk to your accountant about the cost of capital gains. There's both federal and state capital gains tax. Federal is 15%, and is different for each state. A quick search says capital gains in CO is 4.63%. You can run the numbers using both rates. Make sure you've got everything lined up ahead of time if you're going to exchange because the deadline will come up fast. My mentor once did an exchange and the company holding her money actually ran off with her money--no kidding. So it's also good to vet them as well.