Help me evaluate three options for offloading current rental ?

Question

Hi Everyone, I'm new here and seeking some opinions on offloading a rental property.

Background: 2K sq ft single family home in HOT market in Colorado. I've owned it 2 years and break even on the rent. I intended to fix/ flip but since having contractors look at it, I've changed my mind. It's a pandoras box of renovation needs and I thus far can't find a contractor willing to do it (hot market has drawn them all to new construction)

When I bought the property, there was a splittable 25X150 lot next door. I paid $310 and it's now worth about $420 without the lot-- so I could make a bit of $ and keep the lot (now worth $90K)

Here are my choices:

1) Sell house pay capital gains (25%) and pay down other RE debt or use that cash to build new rental on lot next door.

2) Sell house and do 1031 exchange into another investment property in better shape.

3) Scrape house and build triplex.  (somewhat of a moral dilemma here-- the former owner currently lives next door- an 80 yr old lady who lived in the house for 65 years and lots of folks in town who'd judge me for demolishing a historically remarkable home)

Would love some feedback on this! Leanne

Dave Foster · Answer

@Leanne Pressly, Don't take local judgment lightly!   It's not fair but it's there and if you're in a tight knit community you'll be amazed at the sway those folks can have.

Unless you've got experience in construction there is a hefty rookie tax applied.  And if that rookie tax is applied on top of 25% tax on profit from the sale of the house - that's a stiff penalty to pay just to build a house on an empty lot.  Especially in a market where trades are working for big developers or doing their own infill.

But why not sell the house and do a 1031 and sell the lot and do a 1031 and go buy something using the two together that will meet your cash flow needs.

Jim Adrian · Answer

Tearing it down would be my last option.  If you build a tri-plex are there others in the neighborhood that would allow this to blend in?  Assuming there is not.  To build new, you lost 8 months of rent that covers your mortgage that you would have to cover on top of new construction cost.

Leanne Pressly · Answer

Hmmm, good point that I hadn't really thought of. I guess part of why I want to build is because we ALSO own two other lots in a prime subdivision and we thought to build a smaller house would let us dip our toes into building so when we get to building on those lots we'd be more experienced?

We'd be working with a builder who has his own crew so we're not going to be the General in this instance.