Moving from residential to commercial (investor)
We're not getting approvals for loans on more houses due to government regulations, residential lending guidelines, etc.

Does it make sense to sell everything off and leverage the $1M equity into one commercial investment which we could either force appreciation or refinance in a few years.  

The pro is that we can continue growing, the con is that we lose 100k to taxes, commissions, fees in the interim.
[{"id": "f8472q6", "text": "You will save on taxes by closing on all properties in the same time. Then doing a 1031 exchange to the commercial property.", "replies": [{"id": "f8488c6", "text": "You have to compare the cash flow (cap rate) of your current investment with whatever you can potentially purchase. That way, it\u2019s more of an apples-to-apples comparison. \n\nMany resi investors make the mistake of confusing gross rent vs. net rent. Don\u2019t make that error. \n\nThen, make a financial decision. See if your current investments are \u201ccapped out\u201d with less room to grow and appreciate than a comparable commercial investment.\n\nEdit:: oops, not intended to be a reply. Supposed to be a new comment. Sorry OP.", "replies": [{"id": "f849dxz", "text": "I would compare your levered return on equity. \n\nIf you only look at cap rate you\u2019ll be overstating your returns on the commercial real estate because generally (for non-institutional investors) commercial loans have higher interest rates than conventional resi.\n\nLevered return on equity would be more apples to apples.", "replies": [{"id": "f849g9m", "text": "Oh! That\u2019s a very very good point. I hadn\u2019t even considered the difference in financing.", "replies": [{"id": "f849i24", "text": "A quick and dirty NOI/ Value would be fine to see if he\u2019s in the ballpark though.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "f854f1k", "text": "Thanks, I saw your post.", "replies": [], "depth": 3}, {"id": "f8ez2l5", "text": "&gt;cash flow (cap rate)\n\nCap rate and cash flow are not the same thing.", "replies": [], "depth": 3}], "depth": 2}, {"id": "f84ahed", "text": "A 1031 on multiple properties isn't reasonable. You'd end up losing more money trying to sell everything at once than you'd pay in taxes. On top of that, you'd have to overpay to find and close on a commercial property in time.", "replies": [{"id": "f84ij9o", "text": "you sell it as a portfolio", "replies": [{"id": "f84n2k8", "text": "Yes and you don't know what OP tax situation looks like. Check with your CPA. If you've had a lot of appreciation and/or have owned the property for a long time then consider a 1031. Consider using a broker to help navigate the whole thing. Not a good reason not to. Keep in mind that interest rates for commercial will likely be in line with residential but amortization will be lower. Plan on levering around 65% to keep some cash on hand. Another option would be to sell one house, 1031 in to a duplex, quad, etc. then keep doing that so you have 30 or 4p units with those 10 loans. Maybe sell two as a package then buy a 10 unit or something. This should help smooth the transition. Commercial is a whole different world than residential. Don't let yourself think it's just bigger. It's a whole different business with its own metrics, rules, risks.", "replies": [{"id": "f854jav", "text": "My bad for not disclosing location, we don't even have 1031 here.", "replies": [], "depth": 5}], "depth": 4}, {"id": "f855c4z", "text": "The market for portfolios is smaller. He'd make more money selling each property retail than trying to find someone willing to buy the portfolio as a whole. He's going to take another hit overpaying for a new deal because he'll be in a rush to identify a property within 45 days.", "replies": [{"id": "f855pz3", "text": "Yes the market is smaller but I completely disagree that you can\u2019t find a firm to buy it. Large PE shops, hedge funds. and even some REITs are are clamoring for SFH portfolios as a bet on millennials renting longer\n\nWay too many articles on the subject that you can google", "replies": [{"id": "f8597m5", "text": "It's certainly possible to find a buyer, I'm not disputing that. I'm merely saying he's not going to get as much for the homes if he packages them than if he were selling off each home individually.", "replies": [{"id": "f85aaji", "text": "Eh. Sometimes companies pay a premium because you added value by aggregating all these properties together that cash flow", "replies": [{"id": "f85astl", "text": "You're right. I'm probably out of line speculating about his market. I've always paid 50-70% of retail when I buy portfolios of SFH. I'm sure this varies wildly by market though.", "replies": [{"id": "f85b94n", "text": "Wow 50%??? Idk where you are but that sounds ridiculously low. The only thing I can think of is when you are selling big portfolios, it\u2019s valued like a commercial property using NOI/CapRates or via IRRs\n\nThat could either make the value or the property higher or lower versus selling each property individually since traditionally, residential real estate is not valued based on cash flow but rather other non financial aspects", "replies": [{"id": "f85c8sc", "text": "To be fair, the 50% was on a three property portfolio that the seller had to get rid of within a month. He asked me to make an offer, I offered low to give myself room to negotiate up, and then he took it. I told him to put it on the market and try to get other offers, but he didn't want to bother. 60-70% is more of the norm. The reason is that homes valued above $120k don't cashflow in my market. Even at 70%, its hard to get them to cashflow. Most people who buy these small portfolios will just slowly liquidate them in the retail market.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "f8a3zh8", "text": "Hedge funds are buying SFR portfolios like crazy.", "replies": [{"id": "f8aaewa", "text": "They're only buying in a few dozen cities where they can use scale to make their systems more efficient. They're also focusing on distressed markets. Perhaps OP lives in one of those cities, but its unlikely he does.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "f8a3vwi", "text": "Yes, it is \\*SWAPPED\\* as a portfolio and if the dollar values don't match, additional cash (boot) compensates the individual whose value doesn't match.  This is basic stuff.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "f849mpe", "text": "What specific law out there is preventing you from taking on more loans for residential properties? First time I\u2019m hearing this so I\u2019m curious", "replies": [{"id": "f84aeag", "text": "FannieMae and FreddieMac restrict you to having 10 residential mortgages. Some banks will have an overlay on this, which restricts you to even less than 10.", "replies": [{"id": "f84axi2", "text": "Ah gotcha thanks", "replies": [], "depth": 3}, {"id": "f84wc7m", "text": "Why not just establish a relationship with a local/private (commercial) bank to get around Fan/Fred? They don't care how may loans you have - main difference is they won't do 30 year Amm and maybe rate little higher, but at lease you don't have to switch entire business model?", "replies": [], "depth": 3}], "depth": 2}, {"id": "f854694", "text": "This is in Canada where there is a lot of political fear mongering about *dem foreigners buying up our houses and leaving dem empty*", "replies": [], "depth": 2}, {"id": "f85xg8j", "text": "Most lenders have pulled back their use of rental income in SFH for qualifying.  When we started buying we could get 100% recognized.  Now it is like 70% max. We couldn't do now what we did  then, and that's only changed in 5 years.", "replies": [{"id": "f86m4gr", "text": "Is the 70% capped at some amount?", "replies": [{"id": "f86r5y2", "text": "No but if you make $200k they only count 70% of it so the debt coverage ratio looks too low.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "f8a3k19", "text": "Bank  regulators require limits to SFR home loans both in loan limits and numbers of loans. The bank's individual economic status regarding outstanding loans also contribute, so no hard and fast rules can apply, except that each bank has to be judged on its own merit.", "replies": [], "depth": 2}], "depth": 1}, {"id": "f84i21j", "text": "I work in a very high COL area so take this with a grain of salt but $1M isn't very much at all in the commercial world. You can leverage that up to buy a $4m property but vacancy is scary without a lot of cash on hand. We work in a hot market but it's still not unheard-of to have a space sit vacant for a year. When I do sign tenants they expect TI money. I put about $35/ft into fitouts for most tenants.", "replies": [{"id": "f84ihjd", "text": "office im assuming", "replies": [{"id": "f84ilvz", "text": "We do office and retail", "replies": [], "depth": 3}], "depth": 2}, {"id": "f84wknn", "text": "truth Ottorange.  For this reason only properties I am comfortable buying are multi tenant buildings with small suites.  This way obviously you don't get your lunch handed to you if one or two tenants vacate.", "replies": [{"id": "f8547sx", "text": "Agreed. I couldn't go single tenant.", "replies": [], "depth": 3}, {"id": "f85h134", "text": "So you won't consider retailers like CVS or Dollar chains or fast food restaurant chains?", "replies": [], "depth": 3}], "depth": 2}, {"id": "f854aga", "text": "Fair enough. I would have to invest in LCOLs for it to make sense then.", "replies": [{"id": "f858q04", "text": "Where I'm at you can buy stabilized commercial buildings at 7-8 caps. Then you don't even need to worry about vacancy", "replies": [{"id": "f85xa9q", "text": "Midwest?", "replies": [{"id": "f85xfcc", "text": "That's correct!", "replies": [], "depth": 5}], "depth": 4}, {"id": "f8dc90n", "text": "What does the cap rate have to do with vacancy?", "replies": [{"id": "f8dlmth", "text": "Well you won't be about to buy it at a very good cap rate if half the building is vacant", "replies": [{"id": "f8ez78b", "text": "&gt;good cap rate\n\nThere is no such thing as a good cap rate and occupancy has no affect on the cap rate.", "replies": [{"id": "f8f2nek", "text": "Not sure what you mean. I would consider a building that would be a 10% cap rate to be a \"good cap rate\"\n\nOccupancy is directly related to cap rate since that is where the income comes from", "replies": [{"id": "f8of4mp", "text": "&gt;I would consider a building that would be a 10% cap rate to be a \"good cap rate\"\n\nI can sell you 10 caps all day long.    In a 12 cap market.  I buy $100,000 NOI $833,333 and sell to you at a \"good\" 10 cap for $1,000,000.  I just made $166,667 because you don't know what a cap rate is.", "replies": [{"id": "f8plqob", "text": "Except in my market, 8 cap is the norm. A 10 cap property is a rare but nice find.", "replies": [{"id": "f8qzwdb", "text": "&gt;Except in my market, 8 cap is the norm. A 10 cap property is a rare but nice find.\n\n$100,000 NOI at an 8 cap is $1,250,000.  At a 10 cap it is $1,000,000.  Who is giving a buyer a $250,000 discount?  Grandma?", "replies": [{"id": "f8r1ds7", "text": "There's a number of reasons they would sell at a higher cap than market.  Not everything at a 10 cap would be a good deal in this market. \n\n-just want an easy done deal (also don't have to pay broker fees)\n\n-property is valued low using other valuations\n\n-issues with the property\n\n-leases are short term or end soon\n\n-shitty building \n\nCap rate isn't the only thing to look for. Sometimes it's a crappy product but makes good income, which leads to those higher than market cap rates.", "replies": [{"id": "fapd39o", "text": "&gt; Sometimes it's a crappy product but makes good income, which leads to those higher than market cap rates.\n\nThen you are using the wrong cap rate comps.  You need to use sales of crappy products.", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}, {"id": "f8of8tq", "text": "&gt;Occupancy is directly related to cap rate since that is where the income comes from\n\nI'm not gonna capitalize $50,000 in vacancy ($50,000/10% =$500,000) when it will only cost me $75,000 to lease up the space.  But thanks for the $500,000 discount when you sell to me because you do not understand direct capitalization!", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "f8nr11r", "text": "Stabalized does.  He is saying you can buy at 7 or 8 without vacancy concerns. Which is true", "replies": [{"id": "f8of9mb", "text": "&gt;Stabalized does.  He is saying you can buy at 7 or 8 without vacancy concerns. Which is true\n\nHuh?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "f84l7i9", "text": "The commercial market is highly fragmented and much more relationship-driven than residential. Simply sifting through listing databases is going to leave you blind to the best deals. So, make sure you have a strategy for seeing the kind of deals you're interested in. Taking the time to network with brokers in your markets is important. Make sure they know what you're looking for and what your investment approval process is. I built a tool to help with this: https://targets.towerhunt.com.", "replies": [], "depth": 1}, {"id": "f84u567", "text": "You can get a commercial loan for a portfolio of SFR. The rates won\u2019t be the same but if your expertise is in SFR, and you can keep finding deals, money is available.", "replies": [{"id": "f854dad", "text": "I will look into but this is in Canada which is ultra conservative.", "replies": [{"id": "f85fpie", "text": "can you use private money to make all cash offers?", "replies": [], "depth": 3}, {"id": "f876gsn", "text": "Shouldn\u2019t be a problem in Canada.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "f85eyl7", "text": "Not sure how many houses that you own and what you owe on them, but  if you have that much equity you could do a cash out refi on one or a few of them and use the cash to pay off a house or two. That or get a commercial portfolio loan for all of your properties which is probably easier.", "replies": [], "depth": 1}, {"id": "f85r56j", "text": "What does \"force appreciation\" mean?", "replies": [{"id": "f85x7wn", "text": "Make capital improvements that increase the NOI and consequently the value of the building.", "replies": [], "depth": 2}], "depth": 1}, {"id": "f8a36pf", "text": "Look for a 1031 exchange you can pivot into and skip the taxes.", "replies": [], "depth": 1}]