Need advice on deal.

16 Replies

I have 4 properties in Bismarck,ND. With the recent oil boom up here, rents have increased dramatically. Oil prices have dropped, but production and trucking havent slowed down and probably wont for awhile.

I bought a side by side duplex in 2010 for $149k. It generated $1375 a month at the time. In 2014 I signed new leases and now it will earn $1750 a month. I was recently placed the property online for sale more so as a feeler rather then a serious effort. I listed it for $211900. I have good interest in the property and have been dragging my feet on showings and what not, so lets just say I could sell it for $211900. The property has about $7k in needed updates waiting for me in the spring.

So the reason I am dragging my feet, is I am not sure what I would invest the $$ in. It makes no sense to simply sell and rebuy in my own market, because I wouldnt be taking advantage of in the hot market here and I might as well keep the property. I found a cabin in South Dakota in a tourist/ski area. The cabin is 1/4 mile from the base of the ski hill. Cabin costs $240k but has been listed for nearly a year now. So for comparison sake, lets just say I could get it for $212k and just wash on the deal.

The cabin:

Grossed 32k

After all expenses it netted $17k last year.

The duplex:

Will gross $21k this year.

After expenses will net around $17k (I do all repairs and management, so I just deducted $1000 water bill and $3000 for misc repairs that may arrise)

Soooooo theres the dilemma. Nets will be very similar. Advantage to the cabin because I need to update the duplex to the tune of about $7000 in the spring, or could sell as is now. Duplex is more the sure thing, if economy tanks then vacation home may sink.

Any input?

Its a tuff call. It seems to me you like the idea of owning a cabin instead of a duplex. That being said have you done inspections on the cabin? You know what you have with the duplex but you don't know what you're getting with the cabin. This year you plan on making more than 17k that you did last year 4,500 more. But you have 7k of work to do. 

So i guess the question is which property will return the most over the next 5 years? Also would you use the cabin when its not rented out?

That being said if you do sell the duplex i would 1031 exchange it into the cabin or what ever else you buy. 

Why are the cabin expenses so high?  Is there any way to lower that or rise rents?

If I were in your situation and I decided to sell, I would 1031 exchange it like @Peter MacKercher  suggests.  Then I would consider all potential investments, not just a single cabin in another state.  Resort property has a lot of additional risk you can't control (what if it doesn't snow?) and is highly mgt intensive.  Even if you don't find a property to exchange into within the required time, l/t cap gain rates are only at 15% if you make less than about $450k/yr.  My guess is there will be something out there that would beat a resort cabin in another state.

Originally posted by @Peter MacKercher :

Its a tuff call. It seems to me you like the idea of owning a cabin instead of a duplex. That being said have you done inspections on the cabin? You know what you have with the duplex but you don't know what you're getting with the cabin. This year you plan on making more than 17k that you did last year 4,500 more. But you have 7k of work to do. 

So i guess the question is which property will return the most over the next 5 years? Also would you use the cabin when its not rented out?

That being said if you do sell the duplex i would 1031 exchange it into the cabin or what ever else you buy. 

 I do like the idea of the cabin because its an area that we visit frequently as we enjoy snowboarding. We go there 2x a year right now and spend about $1k a year on lodging that would be eliminated.

Also, the 17k on the duplex is the newer higher rate, and thats about as high as it can go. 

Originally posted by @Peter MacKercher :

Why are the cabin expenses so high?  Is there any way to lower that or rise rents?

 32k gross rent

6800 utilities

3500 prop taxes

3000 "cabin exp" (not sure what these are, ive inquired)

500 repairs and maint

1200 "adv" (Also not sure on this, inquired as well.)

So not really much I could do myself being 300 miles away, but thats a double edge sword. Because the cabin would be hands off, management company handles it completely. I manage and repair my duplex.

I forgot to subtract insurance and taxes from duplex, so lower that $17k down to about $14500

I thought I would chime in here regarding personal use of rental/investment property when it is involved in a 1031 Exchange.  The 1031 Exchange must involve property that is held for rental or investment purposes.  A small amount of personal use does not create a problem, but too much could be a risk.  Most advisors recommend keeping the personal use to not more than two (2) weeks per year.  You could probably use it more if it was rented out for most of the year, but it would be a risk if the rental period is short.  Just a thing to keep in mind.

@Dave Antonelli  - Let's hear it for the Bakken right?  Here's another off the wall 1031 idea for you.  There are several types of property that would qualify as 'real estate' for the purposes of a sec 1031 exchange that you would not necessarily think about.  Certainly the sale of your duplex and a purchase of a vacation rental would.  But here's another -

Mineral rights and Oil and gas interests also typically qualify as real estate for 1031 treatment.  Here's why that may be of interest to you.   The housing market is obviously trailing the energy market.  Production skyrocketed and housing followed.  Now production/prices are falling but housing is trailing.  This might be your golden opportunity to stay close to home and invest in what you are familiar with by selling your duplex and 1031ing into some oil interests.  It might just be the classic sell high/buy low opportunity you're looking for.  Worth exploring!

Originally posted by @Bill Exeter :

I thought I would chime in here regarding personal use of rental/investment property when it is involved in a 1031 Exchange.  The 1031 Exchange must involve property that is held for rental or investment purposes.  A small amount of personal use does not create a problem, but too much could be a risk.  Most advisors recommend keeping the personal use to not more than two (2) weeks per year.  You could probably use it more if it was rented out for most of the year, but it would be a risk if the rental period is short.  Just a thing to keep in mind.

 This is a good and valid point. I dont think we would be using it more then 14 days a year. I talked to a gentleman that owns one down the road from the cabin that also is a BP member and he said you can be down there more if you are doing "maintenance"....that seems like a broad category....also this particular property has a garage with a finished living space in it. So theres an opportunity as well if it is rented if I wanted to stay there a night (would have to make deal with property manager that the living space doesnt get rented as well....which I have no idea why it would)

Originally posted by @Dave Foster :

@Dave Antonelli - Let's hear it for the Bakken right?  Here's another off the wall 1031 idea for you.  There are several types of property that would qualify as 'real estate' for the purposes of a sec 1031 exchange that you would not necessarily think about.  Certainly the sale of your duplex and a purchase of a vacation rental would.  But here's another -

Mineral rights and Oil and gas interests also typically qualify as real estate for 1031 treatment.  Here's why that may be of interest to you.   The housing market is obviously trailing the energy market.  Production skyrocketed and housing followed.  Now production/prices are falling but housing is trailing.  This might be your golden opportunity to stay close to home and invest in what you are familiar with by selling your duplex and 1031ing into some oil interests.  It might just be the classic sell high/buy low opportunity you're looking for.  Worth exploring!

 Thank you for the info but I wouldnt be comfortable doing that based solely on the fact that I dont know enough about it.

So basically I would buy mineral rights to land and if they ever find oil/gas on that land I would get the $$ from it? Wouldnt anyone who has land in the bakken area already have checked if there was oil/gas on the land?

@Dave Antonelli  

No, only certain types of producing oil and gas interests would qualify for 1031 Exchange treatment.  Drilling programs do not qualify for 1031 Exchange treatment, but they can provide a nice tax credit.  Oil and gas investments should only be made by those who really understand them.  I would not get involved with them unless you take the time to do your homework and really look under the hood.  It just a very different type of investment.

Originally posted by @Bill Exeter :

@Dave Antonelli 

No, only certain types of producing oil and gas interests would qualify for 1031 Exchange treatment.  Drilling programs do not qualify for 1031 Exchange treatment, but they can provide a nice tax credit.  Oil and gas investments should only be made by those who really understand them.  I would not get involved with them unless you take the time to do your homework and really look under the hood.  It just a very different type of investment.

 I do not know a lot about these investments and dont really want to get involved with them. 

Im starting to look at the pros and cons of my initial deal:

Pros of keeping duplex: 

More stable predictable income

Ease of not having to sell and buy

Easier exit, larger buying pool, and more room for appreciation

Pros of buying cabin:

Higher ceiling for income, but also some potential for less

Less headache compared to managing own property

Able to use property for recreation

Get out of updating duplex property

seems like almost a coin flip, wish there was a way I could keep duplex and buy cabin as well but with 2 mortgages I think I am tapped.

@Dave Antonelli  Is that cabin by Terry Peak in Lead/Deadwood area?  Just was curious.  I ski there some times and only 35 mins away. 

Originally posted by @Mark Gruetzmacher:

@Dave Antonelli Is that cabin by Terry Peak in Lead/Deadwood area?  Just was curious.  I ski there some times and only 35 mins away. 

 @Mark Gruetzmacher 

yes it is, Id like to message you to discuss futher

As an owner of 3 vacation rental cabins - that I love and use myself and take great pride and joy in - I have to chime in to say that owning a vacation rental can be a lot more work and risk than yearly rental. 

Weekly rentals are risky - your place has to be in a great location, be better, and have better reviews than your competition to stay booked. 

You mentioned a mgt company - assuming they do the bookings, housekeeping, repairs - has their cut been factored in? It is usually very high. They generally do not fix the busted furniture or replace the broken pots, pans, dishes, stained sheets, etc. These things happen in vacation rentals, can be a real buzz kill if you aren't prepared, and cause negative reviews. In other words, be prepared to BE ON TOP of your vacation rental. 

Also - staying there can be great - but you will most likely spend most of your time doing those projects and bringing up supplies that only an owner can take charge of. We finally figured out that taking the rental $ and going somewhere else is the most relaxing vacation we can get. We stay in ours only when they are not booked, and that's usually to get work done. 

That said - we love the vacation rental business, have found a niche that is very profitable and plan to buy more, as well as single and multifamily traditional rentals. But we are going in to the next ones with eyes wide open. 

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