Todd is facing a challenging situation in real estate. Just six days before closing on a new home, he learned that it isn’t legally sellable. Meanwhile, renters are scheduled to move into his current home in two weeks. What actions should he take?
Anonymous is thrilled about the opportunity to grow her real estate investment portfolio. Should she sell her Bay Area rental property valued at $2.5 million to fund this expansion, or can she retain it and utilize the equity instead?
In today's episode, former financial planner Joe Saul-Sehy and I address these two inquiries.
Enjoy!
P.S. Have a question? Feel free to ask it here.
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Todd asks (timestamp 01:22): I’m just six days away from closing on a multifamily property, but I’ve encountered a significant issue. During the last inspection, I found out that the seller can't legally sell the property because the lot hasn’t been split into two distinct units.
This division process requires approval from the City Council, the Planning Commission, and a number of other committees, which could take months. According to our contract, the seller is now in default.
Here's where it gets complicated: to secure a more favorable mortgage, I’ve already rented out my current home, and the new tenants are moving in two weeks. I don’t want to breach their lease since they’re looking forward to moving in, but now I find myself without a place to go.
What steps should I take in this situation? Should I pressure the seller for a quicker resolution, negotiate some compensation, or even consider walking away from the deal?
Anonymous asks (timestamp 22:00): A few years back, I inherited a residential property in the Bay Area that I own outright. It has an estimated value between $2.25 million and $2.5 million, and I’ve been renting it out for the past few years, earning $5,800 per month.
My tenant is moving out this summer, and I’m contemplating using this property to broaden my investment portfolio. What do you think about the following options?
1. Sell and 1031 Exchange: Sell this property and utilize a 1031 exchange to acquire two or more residential rental properties.
2. Hold and Leverage: Keep this property as a rental while using the equity to finance additional property purchases.
I’m leaning toward the second option because I prefer to hold and expand, but I’d appreciate your insights. If I choose this route, I assume I'd need to invest outside the Bay Area due to the elevated costs here.
Additional Context:
I don’t depend on the rental income for my living expenses. I also have set aside $100,000 in a high-yield savings account for emergencies or potential renovations (like updating the kitchen and bathrooms).
The rest of the rental income has been invested but isn't designated for anything specific. My husband and I both have strong incomes, our children's college expenses are funded, and we have a manageable mortgage on our family home. We're also on track to retire in a few years.
I possess $500,000 in separate property securities and $5 million in real estate (which includes commercial properties jointly owned with my siblings). However, I wouldn’t leverage the commercial real estate or our joint assets, as my husband is cautious with risk.
If necessary, I could utilize the $500,000 in securities, but I’d prefer not to. Considering all these factors, what are the advantages and disadvantages of executing a 1031 exchange versus holding onto and leveraging this property?
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Todd is in a difficult situation with his real estate. Just six days before the closing on his new home, he discovered that it couldn't be legally sold. Meanwhile, renters are scheduled to move into his current property in two weeks. What options does he have?