REINVESTMENT OPTIONS
We lend a commercial and holistic view to many of our DC 2-4 Unit clients who are unfamiliar with their total package of options when it comes time to think about selling or refinancing their 2-4 Unit multifamily or commercial property. Here are some of the options that we’ve seen work well:
Cash-Out Sale
They say cash is king, and we get it! While we like some other options better, there’s nothing like the security of cash in the bank!
Owner Financed Sale
Some of out clients are looking to retire, slow down, travel, or otherwise. If they have a high amount of equity in their property, owner financing can be a great win-win option for the buyer & seller. As opposed to a traditional sale where all cash is received (and taxed) at one time, some of our clients prefer to find a local & reputable owner-operator who they can sell to on installment. The terms can be drawn up in any number of ways to best suit the needs of all parties, and we can assist the owners in finding legitimate ready/able buyers to satisfy the terms of the agreement. Under this scenario, our clients keeps the security of their real estate (they can foreclose if the note isn’t paid), they get an upfront down-payment, steady monthly coupon payments for as long as agreed, and leave the stress of operating the property behind. In some cases we find that our clients net just as much as when they were operating the property, with none of the operational related time commitments and stresses.
Cash-Out Refinance
In some cases, it’s much better for our clients to refinance, to take out cash that’s needed for improvements, repairs, the purchase of additional real estate, for other investments, or for personal endeavors. In this way our clients are able to to get some cash out, and ‘Keep the Cow that Giveth the Milk.’ We have deep relationships with local banks and national lenders who can assist with refinances.
Trade-Up
Whether by a Cash-Out sale, a Cash-Out Refinance, or a 1031 Tax-Deferred Exchange (discussed more below), this option is one of our favorites for clients who have built up some equity for several reasons. One is that commercial real estate can seem inaccessible to many of our 2-4 Unit clients, however, with our guidance our clients have been able to successfully navigate the waters of commercial real estate by “Trading-Up” from their prior property into a property more commercial in nature, typically a commercial property with a long-term ‘NNN’ lease. A NNN lease is a lease typically between 5-15 years (some leases with option periods included can be as long as 40-50 years) wherein the tenant pays for their own maintenance, and the owner’s property taxes and insurance. In some cases, the owner has little to no liability at all for the property, even for the structure and roof. A quick example, our client Cash-Out Refinances a 2-4 Unit Property, or they sell and hold a portion of the proceeds for a tax deferred 1031 exchange, let’s say $350,000. We assist the client in locating an ‘Absolute NNN’ property, in this case, a Dollar General in rural Virginia netting $2,250 per month. The client invests $350,000 as a down payment into the property, a 15 year lease is signed (with an additional (5) 5-year extensions totaling 40 potential year to the lease term), and the tenant begins the process of opening their bank account every month to collect their rent payment for the next 15+ years.
Professional Property Management
For some of our clients, selling their asset is not their first choice, but they think they can’t afford a property manager, or have never considered one. When most owner operators actually tally the time invested in operating a 2-4 Unit, the actual hours invested can be staggering. Gaining this time back from dealing with leasing, tenant requests / complaints, rent collection and fees, property repairs and improvements, lease terms, bill paying, interfacing with government agencies, etc., etc. – can be a big sigh of relief for clients whose intention is to hold, but to do so while enjoying their overall small multifamily or small commercial experience more fully.
Development
In some cases our clients property could be more in demand, valuable, easier to operate, etc., if they were developed to their highest and best use. This usually involves adding area and features to better suit the current demands for housing and commercial space, yielding a higher quality tenant and a better overall ownership experience. We have developed the necessary relationships with local commercial banks, attorneys, design/build firms, and others necessary, to assist our clients in a feasibility analysis of their property, to determine if there is a straight forward development solution to add substantial value and other long-term benefits to the property.
Condo Conversions
In D.C., condo conversions have become a highly profitable and sought after project, as the housing demands for the city are on an ever increasing upswing, condo conversions seek to increase the density of housing units in areas where they are permitted by-right or by appeal. We have experience with condo conversion attorneys and design/build firms, and can assist you in determining if your property and situation would make a good candidate for a condo conversion.
1031 Tax Deferred Exchange
Some of our clients are facing a big tax bill upon the sale of their DC small multifamily or small commercial property, so they are looking for ways to (a) shield their gains from taxes, and (b) keep their proceeds in real estate. Our clients may want to re-invest into real estate, but maybe into a little less of laborious asset class, a little larger asset, or maybe they’ve even looking to take on a highly labor intensive yet rewarding development or value-added project. The 1031 exchange allows for an owner to sell his property, and shield all or part of the gains from capital gains tax, by transferring all or part of the proceeds into another income property investment. The timing and details of a 1031 exchange is very important, so it is very important that if this is a potential option for our clients, that we get them in touch with several 1031 exchange intermediaries (the firms that facilitate the transaction and compliance between the buyer, the seller, and the IRS) as soon as possible to get out ahead of the timelines.
*Brandt Tingen is not a Financial, Legal, or Tax Adviser. There are many, many more options than those listed here, and each of these options as well as those listed require the dedicated inspection and feedback of a team of professionals. Obtain your own counsel including but not limited to these for-mentioned professional expertise areas prior to making any real estate decisions. Also do your own Due Diligence before engaging in any real estate related activity.