Todd is in a real estate bind. He found out six days before closing on a new home that it wasn’t legally sellable. And renters are moving into his current home in two weeks. What should he do?
Anonymous is excited about expanding her real estate portfolio. Should she sell her $2.5 million rental property in the Bay Area to do this, or can she keep it and leverage the equity instead?
Former financial planner Joe Saul-Sehy and I tackle these two questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Todd asks (at 01:22 minutes): I’m six days away from closing on a multifamily property and just hit a major roadblock. During the final inspection, I discovered that the seller couldn’t legally sell the property because the lot wasn’t divided into two separate units.
This process requires approval from the City Council, the Planning Commission, and several other committees—something that could take months. Under our contract, the seller is now in default.
Here’s where it gets tricky: to secure a better mortgage deal, I already rented out my current home, and the new tenants are moving in two weeks. I don’t want to break their lease since they’re excited to move in, but now I have no place to go.
How should I handle this situation? Should I try to push the seller to resolve this faster, negotiate compensation, or even walk away from the deal?
Anonymous asks (at 22:00 minutes): Several years ago, I inherited a residential property in the Bay Area that I own outright. It’s worth $2.25–$2.5 million and for the past few years, I’ve rented it out, collecting $5,800/month.
My tenant will be moving out this summer and I’m interested in leveraging this property to expand my investing portfolio. What do you think about the following options?
- Sell and 1031 Exchange: Sell this property and use a 1031 exchange to purchase two or more residential rental properties.
- Hold and Leverage: Keep this property as a rental, but use the equity to finance the purchase of additional properties.
I’m leaning toward option two because I’d prefer to hold and add, but I’d like your perspective. If I pursue this path, I assume I’d need to invest outside of the Bay Area due to the high costs here.
Additional Context:
- I don’t rely on the rental income for living expenses. I’ve set aside $100,000 in a high-yield savings account for emergencies or potential updates (e.g., the kitchen and bathrooms).
- The remaining rental income has been invested but isn’t earmarked for anything specific.
- My husband and I each have strong incomes, our kids’ college expenses are covered, and our family home’s mortgage is under control. We’re also on track to retire in several years.
- I have $500,000 in separate property securities and $5 million in real estate (including commercial properties owned jointly with my siblings). However, I wouldn’t leverage the commercial real estate or any of our community property assets, as my husband is risk-averse.
If needed, I could tap into the $500,000 in securities, though I’d prefer not to.
Given these considerations, what are the pros and cons of selling via a 1031 exchange versus holding and leveraging this property?
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