Author Topic: Sell One Building and Pay Off the Other?  (Read 806 times)

thepuglife

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Sell One Building and Pay Off the Other?
« on: October 02, 2018, 02:54:28 PM »
MOD NOTE: Merged duplicate topics.


I am wondering if any real estate investors could weigh in on my situation. I bought two triplexes in SF about 14 years ago. They both needed a lot of work, which has been done over the years and they are now in good condition. I am wondering if it may be time to sell one or both. Here are the numbers.

Property 1 - San Francisco Triplex
Market Value: bank appraisal 3 million
Original Purchase Price: $950,000
Mortgage Amount: $860,000
Interest Rate: 4.375 %
Mortgage Term: 30 year fixed with 27 years remaining
Rents: $16,500 per month
Principal and Interest: $4448.63
Taxes: $14,390/yr
Insurance: $4400 /yr for homeowners/landlord/umbrella policies
Deferred Maintenance Notes: building was built in 1909 but has concrete foundation from 1995. It has new electrical service and mostly new plumbing. 2 of 3 units were remodeled in the past 5 years. When the remaining long term tenant moves out, that unit will need updates to kitchen and bath. The roof is old but not leaking and should be replaced in the next year or two.

Financing Notes: Both properties were purchased with ten year interest only loans. Refinanced to 30 year fixed.

Property 2 - San Francisco Triplex
Market Value: bank appraisal 3.3 million
Original Purchase Price: 1,200,000
Mortgage amount: 1,175,000
Interest Rate: 4.25%
Mortgage Term: 30 year fixed with 27 years remaining
Rents: $19,400 per month
Principal and Interest: $5,986
Taxes: $17,316.31/yr
Insurance: $5500/yr for homeowners/landlord/umbrella
Deferred Maintenance Notes: building was built in 1895. Per pest and general contractor inspections, the building is in good shape. 2 of 3 units were remodeled in the last three years. The remaining unit is partially remodeled but needs new kitchen cabinets. The building sits on bedrock. Structural engineer recommends partial foundation upgrade which would cost about 75k. Building had electrical service upgraded in 2004 and has mostly new plumbing. Roof has another 2-3 years per inspector.

My question is whether I should consider selling one property to pay off the mortgage for the other, sell both, or keep both. My concerns are (1) whether the rents justify the equity that is now sitting in the buildings; (2) my financial exposure to the real estate market as I have little invested elsewhere and (3) the possibility of a natural disaster like an earthquake.

I have considered earthquake insurance but am tempted to put resources into getting the partial foundation upgrade to building two and getting EQ policies on my home and building one. I am relatively cash poor as I have put a lot of money into remodeling the units.

Also, I am a single parent with a teen child who has a disability that affects his ability to work. I would like to create a trust for him that will support him when I pass away. I am not sure that leaving these two buildings in the trust is the best way to do that.

Any feedback would be appreciated!







« Last Edit: October 09, 2018, 08:51:33 AM by arebelspy »

Dicey

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Re: Sell One Building and Pay Off the Other?
« Reply #1 on: October 02, 2018, 07:14:07 PM »
My rentals are single family homes in SoCal, but I live in the Bay Area and am interested in seeing what kind of responses you get.


ysette9

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Re: Sell One Building and Pay Off the Other?
« Reply #2 on: October 02, 2018, 08:23:47 PM »
I’d recommend looking into earthquake insurance. I always put off pricing it out because I was sure it would be prohibitively expensive. I finally looked into it last year and was surprised at how affordable it was for my SFH. It probably is way less than doing the foundation and you can have coverage tomorrow.

AccidentialMustache

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Re: Sell One Building and Pay Off the Other?
« Reply #3 on: October 02, 2018, 08:49:02 PM »
The question looks to me like, "is 2-3 million your number?" If the answer is yes, then yes time to sell? Taking the bank assessed value minus mortgages, minus taxes and real estate fees it still looks like multi-millionaire territory. Pick a nice not-SF-not-NYC location you'd like to live, sell the properties and retire. Assuming you can stay under your SWR on the number, you'll continue building assets that you can then figure out how to use to care for your progeny after you're gone.

My take, YMMV.

Papa bear

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Re: Sell One Building and Pay Off the Other?
« Reply #4 on: October 02, 2018, 08:55:46 PM »
In my opinion, the rents do not justify your equity position. I would sell and get into higher yield real estate.  You earned your return on appreciation.  Now put that to work.  Appreciation doesn’t throw off rent.

But I would not sell to pay off a mortgage. Keep those low mortgages if you end up keeping the rentals.


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thepuglife

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Re: Sell One Building and Pay Off the Other?
« Reply #5 on: October 03, 2018, 09:56:25 AM »
Thank you for the feedback! I am thinking of posting this in the real estate forum as well.

ysette9

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Re: Sell One Building and Pay Off the Other?
« Reply #6 on: October 03, 2018, 11:33:01 AM »
Like any case study-type question posted here, I think you should start by identifying what your goals are. Stay here? Move? FI now? Later? Legacy? Etc etc. Get that straight and I personally have found that the finances start falling into place because they are serving a higher goal.

tralfamadorian

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Re: Sell One Building and Pay Off the Other?
« Reply #7 on: October 03, 2018, 07:18:45 PM »
My vote is to sell at least one. Personally, I would sell both.

Firstly, because your equity is not working nearly as hard for you as it would in VTSAX. Secondly, as you alluded to, index funds would be much easier to find a trustee to manage properly when you're gone then real estate. Thirdly, as you also mentioned, that is a lot of net worth tied up in one market class (small multi-family) in one location.

thepuglife

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Re: Sell One Building and Pay Off the Other?
« Reply #8 on: October 04, 2018, 11:10:13 AM »
Tralfamadorian, thank you for the feedback. I should have mentioned that I am somewhat emotionally attached to these buildings, which is one of the reasons I asked this question. When they were purchased, they were run down and in marginal locations. The neighborhoods have evolved from kind of rough to "hip." It was a lot of work and very stressful to do all of the improvements, but now I am proud of the buildings and it is hard to let them go. They are historical and I have tried to preserve their original features.

There is also a back story here. I bought and renovated an old home in Seattle in the 1990s. When I sold it, the buyer tore out a 100 year old set of original built ins and replaced it with Ikea cabinets. I found out about this from a contractor friend who saw what they did. Now I have an irrational desire to protect these old buildings.

Part of the mix here is also that I am a somewhat natural Mustachian. I have always lived below my means and I don't need to sell the buildings in order to change or improve my lifestyle. I am just worried that I have taken on too much risk for someone my age (54).

thepuglife

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Sell or Hold in Bay Area
« Reply #9 on: October 04, 2018, 01:21:02 PM »
I am wondering if any real estate investors could weigh in on my situation. I bought two triplexes in SF about 14 years ago. They both needed a lot of work, which has been done over the years and they are now in good condition. I am wondering if it may be time to sell one or both. Here are the numbers.

Property 1 - San Francisco Triplex
Market Value: bank appraisal 3 million
Original Purchase Price: $950,000
Mortgage Amount: $860,000
Interest Rate: 4.375 %
Mortgage Term: 30 year fixed with 27 years remaining
Rents: $16,500 per month
Principal and Interest: $4448.63
Taxes: $14,390/yr
Insurance: $4400 /yr for homeowners/landlord/umbrella policies
Deferred Maintenance Notes: building was built in 1909 but has concrete foundation from 1995. It has new electrical service and mostly new plumbing. 2 of 3 units were remodeled in the past 5 years. When the remaining long term tenant moves out, that unit will need updates to kitchen and bath. The roof is old but not leaking and should be replaced in the next year or two.

Financing Notes: Both properties were purchased with ten year interest only loans. Refinanced to 30 year fixed.

Property 2 - San Francisco Triplex
Market Value: bank appraisal 3.3 million
Original Purchase Price: 1,200,000
Mortgage amount: 1,175,000
Interest Rate: 4.25%
Mortgage Term: 30 year fixed with 27 years remaining
Rents: $19,400 per month
Principal and Interest: $5,986
Taxes: $17,316.31/yr
Insurance: $5500/yr for homeowners/landlord/umbrella
Deferred Maintenance Notes: building was built in 1895. Per pest and general contractor inspections, the building is in good shape. 2 of 3 units were remodeled in the last three years. The remaining unit is partially remodeled but needs new kitchen cabinets. The building sits on bedrock. Structural engineer recommends partial foundation upgrade which would cost about 75k. Building had electrical service upgraded in 2004 and has mostly new plumbing. Roof has another 2-3 years per inspector.

My question is whether I should consider selling one property to pay off the mortgage for the other, sell both, or keep both. My concerns are (1) whether the rents justify the equity that is now sitting in the buildings; (2) my financial exposure to the real estate market as I have little invested elsewhere and (3) the possibility of a natural disaster like an earthquake.

I have considered earthquake insurance but am tempted to put resources into getting the partial foundation upgrade to building two and getting EQ policies on my home and building one. I am relatively cash poor as I have put a lot of money into remodeling the units.

Also, I am a single parent with a teen child who has a disability that affects his ability to work. I would like to create a trust for him that will support him when I pass away. I am not sure that leaving these two buildings in the trust is the best way to do that.

Any feedback would be appreciated! I posted this in Case Studies but moved the topic here because the RE section seems like a better fit.

waltworks

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Re: Sell or Hold in Bay Area
« Reply #10 on: October 04, 2018, 02:07:53 PM »
I would sell them both and dunk the money in something boring like a Vanguard index fund. It's not that they are horrible properties - it's that you have $4 million tied up in 2 old buildings and there are all sorts of scenarios where something goes wrong and you're ruined.

At least sell one for the sake of diversifying. $2 million parked in something boring that you never have to think about will allow you, per 4% SWR, to give you/your son $80k/year forever at essentially zero risk.

-W

Dicey

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Re: Sell One Building and Pay Off the Other?
« Reply #11 on: October 05, 2018, 01:08:41 PM »
Tralfamadorian, thank you for the feedback. I should have mentioned that I am somewhat emotionally attached to these buildings, which is one of the reasons I asked this question. When they were purchased, they were run down and in marginal locations. The neighborhoods have evolved from kind of rough to "hip." It was a lot of work and very stressful to do all of the improvements, but now I am proud of the buildings and it is hard to let them go. They are historical and I have tried to preserve their original features.

There is also a back story here. I bought and renovated an old home in Seattle in the 1990s. When I sold it, the buyer tore out a 100 year old set of original built ins and replaced it with Ikea cabinets. I found out about this from a contractor friend who saw what they did. Now I have an irrational desire to protect these old buildings.

Part of the mix here is also that I am a somewhat natural Mustachian. I have always lived below my means and I don't need to sell the buildings in order to change or improve my lifestyle. I am just worried that I have taken on too much risk for someone my age (54).
The preservation of these buildings is a worthwhile accomplishment and something to be very proud of achieving in your life, especially as a single woman. You just don't want them to become a millstone as you age. It would be awful to be a paper multi-millionaire who can't afford groceries, taxes or a new roof. There is no one-size-fits-all path. Answer the questions, listen to our input, process it, and then follow your heart. You will know what to do. Please bring us along for the ride, as it's sure to be interesting.

Random thought from someone who has lived in the City and loves smart renovation: There lots of old buildings in lots of old cities. Buildings that special (and not-so-special) people loved and protected fiercely. But now the people are gone and the buildings remain. Don't let the building(s) keep you from living your very best life. Even when people do what seems like terrible things to buildings, life goes on. People are more important than buildings.

thepuglife

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Re: Sell One Building and Pay Off the Other?
« Reply #12 on: October 06, 2018, 10:19:48 AM »
Dicey, thank you for the very thoughtful reply! You are right that I need to balance the desire to preserve the buildings with preserving my sanity and living a balanced and meaningful life.

I keep telling myself that a building is just a thing. But some older buildings (my 1895 building for example) have such unique character that they seem like more than just a collection of parts.