hold or sell and reinvest

53 Replies

Originally posted by @Allan Glass :

Hi @jeremiah 

@Jeremiah Hilliard

Instead of writing a long explanation, i'll refer you to Ben's post on the subject, he did a great job of conveying the point I'm trying to make

http://www.biggerpockets.com/renewsblog/2015/07/21...

Great article! I read it a few times to try and comprehend how that article solidifies the original poster keeping the NY property. I'm missing the boat and you are much more experienced than myself so I don't doubt you're correct but when you get a chance would you mind explaining it? 

I can't get my head around why his IRR would be better with the NY property involved, especially factoring in long distance land lording aspect.

Also, your original statement of "I don't understand why someone would sell an appreciating asset, that has positive cash flow unless they had to" is something I can't seem to grasp. When most of us sell a property it isn't because we had to, it's because we were seeking a better return elsewhere. I'm sure you've sold many properties that you didn't have to, right? 

Please don't take my questions as doubting you, I'm trying to learn

@Dave Foster

Thanks Dave, though isnt 1031 very limiting?  Has to be purchased within a specific timeframe, equal or higher value, etc?  Any tips or detail?

Hey Gene,

Welcome to South Florida!  In regards to the 1031 exchange tax deferral strategy, there are a couple rules to qualify:

1. The property that you own (the relinquished property) and the property that you acquire (the replacement property) through the exchange have to qualify as "like-kind" and be held for investment purposes.  In my opinion, when it comes to real estate it's easiest to think of it as - if you're exchanging dirt for any other kind of dirt, you're good to go.  You can exchange a residential property for a commercial property such as a multifamily, office, industrial, or retail property.  You could even exchange it for unimproved land.

2. You have to exchange for equal or greater value and use all of the funds that came out of that sale to go into the acquisition of the replacement property in order to get a full deferral.  Any money you withdraw, becomes taxable.

3. You are required to use an qualified intermediary (QI) to facilitate the exchange.  You are never allowed to "touch" the funds.

4. You have a specific time period - 45 days from the sale of the relinquished property to identify a limited number of properties that would be acceptable as replacement properties.  You can either identify 3 of any value; no limitation on value but there’s a limitation on the number of properties you can acquire.  The second option is you can acquire as many as you would like as long as the total value of those which you acquire doesn’t exceed 200% of that which you sold.

5. Lastly, you’ve got another 135 days behind that to close the transaction; identify in the first 45, close in the remaining 135 days.  Technically 180 from the date you close of the relinquished property.

Something to keep in mind is that these rules are absolute.  There are no extensions of any kind.  If you decide to utilize the 1031 tax code, I highly recommend using a CPA, QI, and broker that are familiar with this type of transaction as it is a very complex tax code.  

Happy investing!

Originally posted by @Gene D. :

Hello everyone, thanks for taking the time to read this.

I have a condo that currently can sell for ~ $700k, originally purchased for ~$500k, 30 yr fixed at 4.625, currently rented for $2,800.  All other monthly expenses ~$500 (tenant pays,water, heat, etc, property is tax abated for the next 10 years, with annual taxes  currently projected at ~8k).

While nobody has a crystal ball, I suspect it may keep going up by about 5% per year, a pretty popular area in Brooklyn, NY.

I lived there myself for the first 3 years and have rented it for the past 18 months, the current tenant moving out, rental demand is very strong, getting someone else should be no problem or can provide vacant if decided to sell.  Costs me zero to have a realtor screen and bring in a tenant, as the renter takes care of the fees in my part of NY.  The building also has a mgt co available for small repairs, very reasonable fees.

I moved to Florida and am currently looking at investment opportunities in Palm Beach, Dade and Broward counties, there seem to be options out there for a higher return on both flip and buy and hold.

I'd love to hear any thoughts on the correct move or to connect with someone that has local FL area knowledge.

My 2 cents: 

Hold quality assets indefinitely and cash out refi to pull out cash tax free and acquire additional investments.  Or 1031, but 1031 has several challenges/drawbacks.  Only sell if (1) premise for acquisition changes, or (2) you must to acquire a bigger more attractive deal.

Generate long-term wealth by investing IN real estate, not through transactions (casino vs gambler).

Originally posted by @Gene D. :

@Neal Collins

Very good point, I thought about it as well. From the brief chat I had with my tax preparer, my understanding is that the profit wouldn’t be completely tax free, as I’ve already started depreciating the property on my 2014 tax returns, same will apply to 2015. My understanding is that a prorated portion of the net profit will still be taxed.

Assuming property was purchased Sept 2010 and is sold Sept 2015. I resided there from purchase date until tenant moved in on March 1, 2014 and will move out on Aug 31, 2015. Total 60 months of ownership, and 18 months as investment. Approximately 30% of the profit therefore is taxable.

Am I understating this correctly or are you saying that it’s just as simple as “if you live there for 2 of 5 years it’s totally tax free”?

Thanks

Hi Gene,

The capital gain would be completely tax-free up to the $250,000 limitation since you are single.  The depreciation that you have taken on the property since you converted it into a rental property will be taxable regardless.  The only time that the capital gain is prorated and not completely tax-free is if the property was held as investment property first and then converted into your primary residence second.  This change was included in the Tax Act of 2008.

This is not an easy decision.  The $250,000 in tax-free gain is very tempting, and can get you a brand new start in Florida (with brand new cost basis to depreciate all over again). 

Dave is correct.  You have a three (3) year window when you move out of the property in order to sell and close on the sale and take advantage of your 121 Exclusion.  You lose the ability to take the 121 Exclusion after the three (3) year window.

Good luck.

Originally posted by @Gene D. :

Thanks Dave, though isnt 1031 very limiting?  Has to be purchased within a specific timeframe, equal or higher value, etc?  Any tips or detail?

No, it actually allows you to sell a current asset and reposition in any other type of real estate as long as it is held for investment or business use purposes.  It is a great tool as long as you use it to your advantage and end up in a better position that what you were in.

The 45 calendar day identification period, which I assume is what you mean by limiting, can be challenging, but not if you plan ahead and do your homework. 

Originally posted by @Larry T. :

@Gene D. You said that you are strictly looking for ROI. So we need to know what your ROI would be by holding.

You said you could pull about $300K from the NY property, so I'll take that as your equity position and assume you have a $400K mortgage.

With a 30yr loan at 4.65% our mortgage payments should be about $2063, of which $1,550 is interest and $513 is principal.  Renting out at $2,800/mo, minus your $500/mo expenses, you are cash flowing $2,800 - $500 - $2,063 = $237/mo.  Together with your principal payments of $513, you are grossing $750/mo.  Yearly, that is $9,000.

You also assume 5% annual appreciation.  0.05 * $700K = $35K/yr.

So your initial total gross yearly ROI on your $300K of equity is $9,000 + $35,000 = $44,000. That's a 13.2% ROI.

It sounds like you can much better flipping in FL.  Keep in mind holding is more passive, flipping is much more active.  Also, you are somewhat speculating on the appreciation in NY and flipping margins in FL.

@Larry T. Your calc's are roughly in line with mine, thanks for sharing.

@Jon S. "cash out refi to pull out cash tax free and acquire additional investments" - any further detail on how to best proceed with this approach?  anything I should be specifically aware of as part of this process?  Thank you.

@Allan Glass @Jeremiah Hilliard

Jeremiah, I think Allan is saying to focus less on rent roll and more on the actual return of the investment after exiting.  I wholeheartedly agree, though I still dont necessarily see the math working in favor or holding the asset as oppossed to selling and reinvesting in potentially a more attractive asset.  Allen, can you help me understand what I am missing here?  Thank you.

Hey @Gene D.

 and @Jeremiah Hilliard

Sorry for the quick/short answer but yes, I'm saying if/when possible focus on the ROI not the short term cash flow, unless you "have to." Wealth building, which is the goal of real estate investing, is a long term play (the point of Ben's article). Buying for cash flow is a means to the end. It's a job, a paycheck, to move you towards financial independence.

Not being able to pull equity out of his asset with a refi, or not having additional cash to invest in other assets, when you "need" cash flow is a "have to" scenario, so if you need to generate additional short term cash, do so to survive and continue.  I didn't get the sense he needed the additional cash flow, just that he was thinking he could generate more cash flow by selling and investing in Florida.

The goal, the end game, is wealth building. You do that by focusing on ROI and by not selling performing assets in A markets that will likely appreciate (both by market appreciation and rental appreciation), that provide positive cash flow and effectively paying for themselves.

I'd advocate building a portfolio of more assets via leveraging or accumulating more cash, not trading one for another to squeeze out a one time (taxable) profit via flipping or chasing annual income yields (cap rates).

my two cents....

Hope this helps,

A

Originally posted by @Gene D. :

@Allan Glass @Jeremiah Hilliard

Jeremiah, I think Allan is saying to focus less on rent roll and more on the actual return of the investment after exiting.  I wholeheartedly agree, though I still dont necessarily see the math working in favor or holding the asset as oppossed to selling and reinvesting in potentially a more attractive asset.  Allen, can you help me understand what I am missing here?  Thank you.

I agree and I think that's where I'm confused. I didn't get the feeling you were chasing cash flow at all. I believe the Florida market will yield a better IRR over the long term, therefore making it a better investment overall, not just for cash flow.

Even is the appreciation market in NY was better then FL, which I don't know that it is, the cash flow is much worse. Would the added appreciation make up for the shortage in cash flow? I was assuming your money would perform better long term, not just short term, in Florida. 

I would sell it.  You have an under performing asset.  Would you buy it today if you did not own it?  

The taxers are not the issue, with a decent tax person you can do a swap and postpone the taxes indefinitely.  The transaction costs are the issue for buying and selling, closing, stamp tax, I believe NY requires 2 lawyers, etc.

Future appreciation is guaranteed to no one. In a long enough time frame you will have appreciation, but how much of that is just inflation? If your house goes up 10% and the cost of everything goes up 10% have you gained anything? Specific to Brooklyn, I am not sure that it can keep gentrifying at the rate it has. In the 70's and 80's it was where you lived if you could not afford Manhattan and wanted a short commute. Then at some point it became cool. Additionally, the NOI as a percentage is lower due to higher property taxes, maintenance, less landlord friendly laws.

  As a long term trend, the population is shifting away from the major hubs to the suburbs and rural areas.

Cash Flow is King! if you are like most people.  Appreciation is nice, but you can't live off unless you liquidating the asset.  Sure, you can take the equity out and live off it, but that becomes a payment.  If you leverage your investment you can cover the fixed costs and generate cash flow.  If all goes well you have the added benefit of appreciation on top of the cash flow. 

@Lesley Resnick

 Where are you finding statistics showing a longterm population shift away from cities to the suburbs and rural areas? 

Lesley nailed it. 

If you didn't already own it would you buy it today. I got this from Ramsey and use it all the time. 

Local guy here, sell it. Its a condo, they don't appreciate as much here unless its from a top neighborhood(downtown areas). In which case i doubt, since op stated its worth 700k, 2 bed condos usually go for 1+ mil. Most likely bed stuy, crown heights, bushwick. lots of development of rentals there due to expiration of 421 tax. Rental turn over is high due to yuppie interest. Good luck finding a good tenant broker, they collect commission even if they let a criminal inside your home. And good luck going through brooklyn housing court from Florida. 

The us census outlines the population shift from the NE to south and west.  The data is from 2012, but the reasons for migration have not changed.  Technology and virtual employment have increased and it is expensive to live in the NE.  

https://www.census.gov/dataviz/visualizations/024/

I think I first heard the saying was from Buffet, it is good common sense.

Doesn't matter, NYC is international hub. Doesn't matter who leaves it gets replaced with money. Lots of money parked here.

@Gene D.   To answer your question, I have property 30-45 minutes outside of Orlando.

I come at this from the perspective of having seen what properties do in quality locations in areas with high paying jobs and no room for additional building.  Look at what properties were going for in your same complex 20 years ago.

@Allan Glass I think has a similar perspective.  I think that I would just examine what you could get in Florida before you make a decision.  It's not as easy to find deals as it was just 6-8 months ago.  Florida has relatively high taxes and insurance rates and relatively low rents, although in my area they have been going up.  I rode the appreciation wave up in 2005 and I rode it down, too.  I think there will be more appreciation, but I'm not buying now.  I plan to sell some when things get ridiculous and pay off my Los Angeles stuff, which I plan to hold forever.

I'm not saying you can't find good deals in Florida and make money on them, but I would think hard (which it looks like you are doing) and have good justification for selling something in Brooklyn that is making money.

Also read David Schumacher's "Buy and Hold Forever" book (or any of the 4 versions of his Buy and Hold book, I have them all, including a signed copy ;) It was also recommended in Jonna Webers BP Podcast

Good luck.

Jeff

@Jeff T.

Yes.  agreed.  I'm not intimately familiar with the micro levels of the Florida market, but I do understand it's a volatile market (large price swings / vacancy swings / rent rate swings between up and down markets). For me, these markets provide opportunity for short term cash flow investing or quick turns (flipping), but are not safe wealth building markets (unless you're buying at the bottom of a recession like 2009-2010).

I'm not an advocate of cashing out of mature markets, to speculate.  I like to speculate with extra cash and/or liquidity, but would not trade in a purchase I could not replicate in a mature and A market, to play that game.

I hope we all find continued success!

A

Originally posted by @Allan Glass :

Hey @Gene D.

 and @Jeremiah Hilliard

Sorry for the quick/short answer but yes, I'm saying if/when possible focus on the ROI not the short term cash flow, unless you "have to." Wealth building, which is the goal of real estate investing, is a long term play (the point of Ben's article). Buying for cash flow is a means to the end. It's a job, a paycheck, to move you towards financial independence.

Not being able to pull equity out of his asset with a refi, or not having additional cash to invest in other assets, when you "need" cash flow is a "have to" scenario, so if you need to generate additional short term cash, do so to survive and continue.  I didn't get the sense he needed the additional cash flow, just that he was thinking he could generate more cash flow by selling and investing in Florida.

The goal, the end game, is wealth building. You do that by focusing on ROI and by not selling performing assets in A markets that will likely appreciate (both by market appreciation and rental appreciation), that provide positive cash flow and effectively paying for themselves.

I'd advocate building a portfolio of more assets via leveraging or accumulating more cash, not trading one for another to squeeze out a one time (taxable) profit via flipping or chasing annual income yields (cap rates).

my two cents....

Hope this helps,

A

Hi @Allan Glass and thanks again for your input, I definitely appreciate it.

Im still grappling with your advice though, as I see the potential transaction as simply rebalancing of a portfolio from an asset that has outperformed and I feel is fairly to overvalued into one that is actually undervalued and has a higher chance of appreciation.

My sale of the NY property will also allow me to escape a taxable event (as I actually resided there for more than 2 years, the expected tax benefit of which is $45k)

With that in mind, do you still recommend sticking with the property in NY long-term?  

I am very intrigued by the suggestion of potentially pulling equity out and theoretically using that as my capital base of the next acquisition.  

@Lesley Resnick

@Jeremiah Hilliard

@Allan Glass

@Jeff T.

I think the varied advice comes from varied level of risk each of you is willing to accept. I skew more to Lesley and Jeremiah, while Alan and Jeff T would rather hold on to a safer bet with a lower yield. Very similar to what you’d find with investors in blue chips that kick off 2.5% annual yield, the stock grows EPS at a rate of 5% but isn’t going anywhere. Other investors may feel they have a longer investment horizon and are OK with the potential downside. I hope I understood correctly the main reasons for the diversion in advice and am not missing a key component in valuing each opportunity. Please do let me know if my line of thinking is off.

I simply look at this as an arbitrage opportunity due to regional market differences in the current cycle, no attachment to either personally.

BTW, interesting viewpoint Lesley, as I wouldn’t make the purchase now in the current market I am in and am interested in FL, taking this step back is helping me see clearer in which direction I may want to head.

@Will Wong

The property is in Midwood, very little opportunity for new construction, very high demand and population growth, high paying jobs (30 min B train to mid-town), safe, family oriented, etc. Also, the Condo market has outperformed the single home market significantly over the last 5 years.

I do most definitely agree with you that any population loss due to migration gets replenished and then some via immigration, tons of people moving from the flyover states, etc

@Lesley Resnick

@Jeremiah Hilliard

Curious, what type of ROI do you project in your region over lets say the next 5 years, including both just cash flow and also including an exit with any projected appreciated for the types of properties you work with?

I am not too familiar and its always interesting to hear local perspectives. Thanks in advance for your insight.

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