Author Topic: Has my 3-family appreciated too much to keep?  (Read 4057 times)

Peony

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Has my 3-family appreciated too much to keep?
« on: November 06, 2013, 06:33:05 PM »
Weird problem here. My rental property in the NYC area, bought cheap, owned for 18 years, long mortgage-free, has appreciated to the point where Zillow now values it at $1.3 million and I suspect the value is more like $1.6 million. According to my CPA, the $1.6 million level is the magic number at which I clear $1 million after paying taxes, paying back depreciation, broker fees, etc. Rents are $2000, $1650 and $1900 per month -- definitely below market but excellent longstanding tenants. The place only costs about $1200 a month to run (property taxes are low), though I also put a big chunk into a reserve fund every month. There is some deferred maintenance (masonry) which I've been saving up to address ($24,000 job). The $1900 unit is actually a storefront that is being used as a legal residence/artist studio but could be converted back to commercial use (it hasn't been commercial since I've owned the building), which would probably garner at least $4000 per month, maybe as much as $6000 if I'd be willing to rent to a restaurant (I probably wouldn't). Also, the place is only a couple blocks from the river, which worries me. The city's new flood maps show it as not in a flood zone (and it did not flood at all during Sandy, though a few parts of the neighborhood did), but there's no reason to think there won't be more, possibly worse, Sandys in the future. So, the question is, what do you do when an asset has appreciated to the point where it is taking over your portfolio? I am uncomfortable with having nearly all my eggs in this one basket. Is "rebalancing" -- selling -- called for, since my return on all the capital locked up in this house is not that large? Or should I double down and do the commercial rental (which I'd need professional help with, since I know nothing about negotiating commercial leases) and just be more businesslike about running the place? I've considered a 1031 exchange for a rental property or properties nearer to my home but they seem overpriced. Please, MMM wizards, help me figure this out.
« Last Edit: November 07, 2013, 05:22:46 AM by Peony »

Another Reader

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Re: Has my 3-family appreciated too much to keep?
« Reply #1 on: November 06, 2013, 07:48:21 PM »
Ooooh, New York City real estate, the exception to all the rules.  Actually, I would be updating this property and raising the rents.  No restaurants, the vacancy and collection loss and periodic remodel costs would be more than the rent difference.  Then I would borrow out just enough to cover solid down payments on several other rentals that made sense elsewhere.  No way do I want to pay capital gains, depreciation recapture, and that nasty 3.8 percent Obamacare tax.  I would let the next generation inherit this one and get the stepped up basis.

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #2 on: November 07, 2013, 05:08:59 AM »
Another Reader, diversifying by borrowing against this property is an idea I hadn't thought of. I will consider that. I'd like to let the next generation inherit, but I also have my doubts as to the viability of this waterfront neighborhood in 35-40 years time. Think Red Hook, Brooklyn, or Hoboken, NJ, regarding flooding. I could look into 1031-ing into a different, inland building, but the NYC market is so competitive right now, it's not easy to make a reasoned, unhurried decision. There is also the possibility of using one apartment as my primary residence for two years (nice excuse to have an NYC experience!) and at least reducing a portion of the capital gains/depreciation hit, but I'll have to do some figuring to see if that makes sense, what with loss of income for said two years. If my younger kid would pick a college in the CUNY system (highly unlikely), we could potentially kill two birds (his college housing and some of my cap gains) with one stone.
« Last Edit: November 07, 2013, 05:20:40 AM by Peony »

TrulyStashin

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Re: Has my 3-family appreciated too much to keep?
« Reply #3 on: November 07, 2013, 05:38:42 AM »
FEMA reconsiders flood maps every few years (can't remember how often).  With rising sea levels, it is not unusual for coastal properties to be excluded from the 2013 map but by 2018, they're included.  Perhaps you could do some research to determine when your area's flood map was last drawn and when it is due for reconsideration.  That could be helpful data.

Also, the NFIP (flood insurance) was reformed in 2012 so that the taxpayer subsidy of below-market rates is ending/ being phased out.  The market rates for flood insurance can be astoundingly high.   I would want to know if that your area is up for remapping in, say, 2015 and if your property is very close to being in the flood zone now thus it is likely to be within the flood zone when the maps are redrawn in 2015.  In this scenario, I'd sell.

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #4 on: November 07, 2013, 05:52:59 AM »
TrulyStashin, NYC redrew flood maps post-Sandy, to reflect Sandy, and technically I am not in a flood zone (though, obviously, I am leery of that determination going forward). Not sure how those maps relate to the FEMA ones, I will look into that. Jeez, I don't even have flood insurance and never have had -- it was never a consideration before Sandy or Irene.
« Last Edit: November 07, 2013, 06:06:06 AM by Peony »

chasesfish

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Re: Has my 3-family appreciated too much to keep?
« Reply #5 on: November 07, 2013, 06:29:00 AM »
Are you relying on the income right now?

If not, I would suggest borrowing $500,000 against the property, update it and improve the rents, then invest the difference.  The improvements in rents to something like a restaurant would more than pay for commercial property management,

This diversifies your net worth without incurring massive capital gains. 

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #6 on: November 07, 2013, 07:57:25 AM »
Chasesfish, that's another interesting idea, thanks. Yes, I am relying on the income right now, but that doesn't preclude taking the steps you suggest (though $500,000 sounds like an awfully big number! :) ). I'd have to live on savings/reserve fund and the borrowed money for the length of time it would take to update & find the right commercial tenant, but that wouldn't necessarily be such a long time (also, it's really only one unit that would have to be taken out of commission during that process). There isn't *that* much work to be done. And if things didn't work out commercially, it should be possible to find a well-paying replacement residential tenant quite easily. Based on the few comments I'm receiving here, I'm thinking it would be a good idea for me to get a line of credit in place against this building. I don't have to use it, or use all of it, but having it available would broaden my options. Also, I'm thinking I need to pay my CPA for an hour of his undivided attention to discuss these possibilities, and any others that people may suggest.
« Last Edit: November 07, 2013, 08:01:07 AM by Peony »

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #7 on: November 08, 2013, 03:43:44 PM »
I just had a quick phone conversation with a recommended mortgage broker in NYC about unlocking some of the $$ in this property to do improvements and possibly diversify. It is rather difficult to think of owing $$ again on this place, but I realize I need to look at this practically, not emotionally. Having access to more funds (other than what I have saved, which is a lot but NYC contractors are not cheap!) to do needed work that will significantly increase the rental potential (and marketability, should I choose to sell) will surely be a relief. So we'll see what the guy comes up with. He did not seem even slightly fazed by my request and simply asked for income and expense figures, which I promptly emailed.

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #8 on: November 18, 2013, 06:47:39 PM »
And guess what, a week later the guy has not responded to my email, nor to my follow-up email. And the architect I had begun working with on plans for the storefront has disappeared (that actually happened a couple months ago, but I assumed it was just a random flake-out). Grrrr! Do I even want to deal with NYC property and service providers?! 'Cause my little $1.6M building (a fortune, to me) is *teeny, tiny, minuscule potatoes* in that town.

willn

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Re: Has my 3-family appreciated too much to keep?
« Reply #9 on: November 19, 2013, 09:32:17 AM »
I'm not a fan of leveraged real estate, and I'm getting the feeling your worry about natural disaster, dealing with construction hassle, etc is strong. For these reasons I would sell if I were you.  I certainly wouldn't borrow against it to buy more leveraged property.

This goes against the advice of many real estate investors.  My experience is that not too many real estate investors survive the long run when they have to service debt on all their properties.  By long run I mean 15 years.   I've seen many that ride high for 10 years then go belly up when the market dies.   Interestingly it doesn't seem to stop them from rebuilding-I think for those types real estate and risk is a game and they realize it is simply a form of long term gambling.

Peony

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Re: Has my 3-family appreciated too much to keep?
« Reply #10 on: November 19, 2013, 10:44:54 AM »
Willn, thanks for your comment. I'm kind of thinking now that my mission for 2014 is to get this building into shape, whether to maximize my own income from it or to put it on the market. And I'm thinking that I will not mortgage it to any great extent. I probably can do the work needed for $100,000, maybe a good bit less, and I have nearly half of that saved. So if I borrow $50,000 (probably against my other rental, which is near my home and would allow me to deal with my local credit union), I'll have the funds without putting anything substantial at risk. Even though I know that leverage is the key to vast riches in real estate, one of the reasons why real estate has allowed me to live a pretty much FI existence for the last dozen years with minimal stress (and in spite of all sorts of stupid landlording mistakes on my part) is that I have not had to worry about a mortgage payment on the rentals. Maybe it will turn out to be a blessing that the big-money mortgage guy blew me off.

I'm also thinking that if I can get the commercial space rented to a good tenant for a decent price, I could take the least-desirable unit for my own family to use part-time, which would allow me to be more of a hands-on landlord and get a sense of when and how best to proceed. The neighborhood is in transition and it is hard for me know what exactly is going on without being there more. I discussed this with the BF this morning and he likes the idea; I think he likes the idea of the young adults in our family having access, at least for awhile, to NYC opportunities & culture.

aj_yooper

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Re: Has my 3-family appreciated too much to keep?
« Reply #11 on: November 22, 2013, 05:52:29 AM »
Not a real estate investor. 

You have a realistic worry about the long term viability of this property; solve that issue and move on.  Moving there and enjoying the city is denial.