Am I Crazy? Correcting a Real Estate Mistake

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FreelancerNYC
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Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

(*edit* please refer to new developments in the below post from July 5th. I have the chance to leverage my unit for a unit I prefer, but with some caveats)

Last Spring I purchased a $1MM ocean-facing 1-br condo in Miami Beach (2.85% 30yr) with plans to renovate and use it seasonally. A renovated unit 3 floors below mine sold for $1.55MM 3 months ago.I would need to invest about $125K in renovating to get more than that if I sold it.

Fast-forward to today and I realized I strongly prefer a different unit on what most would consider a less-desirable line (with only a partial ocean view). :oops: It’s much quieter and peaceful due to lack of street/HVAC/etc noise, which is more important to me than a jaw-dropping view. Basically, I’m not happy with my unit and would not enjoy it as much as the quiet one. This is causing me a ton of stress and regret.

To get out of this pickle, last week I made an offer for a unit on the “quiet” line for $1.1MM. The kicker is it needs the same renovation that my existing unit needs. Unfortunately, the sellers want $1.25MM (off-market deal — nothing is available on the market). They purchased it $900K 11 months ago. This is currently the norm for Miami Beach, and most deals in the building are cash. I would get a mortgage (I know the rate will be higher than my existing).

I dislike illiquid assets but this aversion has caused me to miss opportunities in the past. I’m hoping some Bogleheads can lend their perspective. Is this a reckless move, or understandable as long as I know what I’m getting into?

Options:
1. Buy the new unit for $1.25MM and sell existing unit for ~$1.4 without renovating (1031 exchange)
2. Buy new unit for $1.25MM. Renovate existing unit for ~$150K and list for ~$1.65MM.
3. Buy new unit for $1.25MM. Renovate existing unit. Rent out existing unit for ~$7500/mo (carrying cost is ~$5300)


Age: 30-35

Income: $800k - $1.3MM/yr (variable). Been with company for over a decade. Not a blue-chip company but not a startup either.

Assets:
Taxable: $5MM (90% VTI)
Roth: $135K (VXUS)
401K: $425K (S&P)
PE/VC: $175K
Cash: $150K
*Available margin: $2MM at 1.2% (floating, so only for short-term cash)
Home equity:
~$400k

Thank you. Happy Memorial Day
Last edited by FreelancerNYC on Tue Jul 05, 2022 12:01 pm, edited 4 times in total.
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JoeRetire
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by JoeRetire »

FreelancerNYC wrote: Mon May 30, 2022 2:16 pm Last Spring I purchased a $1MM ocean-facing 1-br condo in Miami Beach (2.85% 30yr) with plans to renovate and use it seasonally. A renovated unit 3 floors below mine sold for $1.55MM 3 months ago.I would need to invest about $125K in renovating to get more than that if I sold it.

Fast-forward to today and I realized I strongly prefer a different unit on what most would consider a less-desirable line (with only a partial ocean view). :oops: It’s much quieter and peaceful due to lack of street/HVAC/etc noise, which is more important to me than a jaw-dropping view. Basically, I’m not happy with my unit and would not enjoy it as much as the quiet one. This is causing me a ton of stress and regret.

To get out of this pickle, last week I made an offer for a unit on the “quiet” line for $1.1MM. The kicker is it needs the same renovation that my existing unit needs. Unfortunately, the sellers want $1.25MM (off-market deal — nothing is available on the market). They purchased it $900K 11 months ago. This is currently the norm for Miami Beach, and most deals in the building are cash. I would get a mortgage (I know the rate will be higher than my existing).
I'm not sure I understand the dilemma here, assuming you can afford it.

Sell your existing condo first, then purchase one that you are sure you actually want.
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ResearchMed
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by ResearchMed »

FreelancerNYC wrote: Mon May 30, 2022 2:16 pm Last Spring I purchased a $1MM ocean-facing 1-br condo in Miami Beach (2.85% 30yr) with plans to renovate and use it seasonally. A renovated unit 3 floors below mine sold for $1.55MM 3 months ago.I would need to invest about $125K in renovating to get more than that if I sold it.

Fast-forward to today and I realized I strongly prefer a different unit on what most would consider a less-desirable line (with only a partial ocean view). :oops: It’s much quieter and peaceful due to lack of street/HVAC/etc noise, which is more important to me than a jaw-dropping view. Basically, I’m not happy with my unit and would not enjoy it as much as the quiet one. This is causing me a ton of stress and regret.

To get out of this pickle, last week I made an offer for a unit on the “quiet” line for $1.1MM. The kicker is it needs the same renovation that my existing unit needs. Unfortunately, the sellers want $1.25MM (off-market deal — nothing is available on the market). They purchased it $900K 11 months ago. This is currently the norm for Miami Beach, and most deals in the building are cash. I would get a mortgage (I know the rate will be higher than my existing).

I dislike illiquid assets but this aversion has caused me to miss opportunities in the past. I’m hoping some Bogleheads can lend their perspective. Is this a reckless move, or understandable as long as I know what I’m getting into?

Options:
1. Buy the new unit for $1.25MM and sell existing unit for ~$1.4 without renovating (1031 exchange)
2. Buy new unit for $1.25MM. Renovate existing unit for ~$150K and list for ~$1.65MM.
3. Buy new unit for $1.25MM. Renovate existing unit. Rent out existing unit for ~$7500/mo (carrying cost is ~$5300)

Age: 30-35

Income: $800k - $1.3MM/yr (variable). Been with company for over a decade. Not a blue-chip company but not a startup either.

Assets:
Taxable: $5MM (90% VTI)
Roth: $135K (VXUS)
401K: $425K (S&P)
PE/VC: $175K
Cash: $150K
*Available margin: $2MM at 1.2% (floating, so only for short-term cash)
Home equity:
~$400k

Thank you. Happy Memorial Day
Your location says " Manhattan/Miami Beach". Is the "Miami Beach" this other property that you purchased a year ago, or do you already live there (full or part time)?

Lots of questions:

I think you should first: Slow down a bit. (You've already actually made the offer on the "new" place?)
You asked: "Is this a reckless move, or understandable as long as I know what I’m getting into?" DO you actually "know what you are getting into"?

You've already purchased a property, and rather quickly decided it isn't what you really want. Good catch there. However, take the time to try to make the next purchase a wiser decision.
How well do you know this other building and unit? It may not have HVAC noise, but maybe the garbage trucks congregate there throughout the day... or some other "nuisance" that may not be obvious from a few quick views.

Also, why did you go looking for this unit? Did you just happen to hear about it, or were you actively looking due to dissatifaction with your current property?

You mention a 1031 exchange. Was the other already an investment/rental, and will this new one be that also?
Have you used the property yourself?

Is it just you or are there other family members who might have an opinion that matters?

You seem to have the money, especially if your income is stable/secure, but if you aren't careful, unnecessary and expensive transactions (e.g., real estate) could start using that up.

Option 2 makes little sense. Renovating the current property with so little expected profit is risky. These things almost always cost more and take longer than planned, and that's especially the case these days. It wouldn't take much for that not to be worth the renovation money.
Do you have experience with renovations and selling?

Do you want to be a long-distance landlord? It can go well, or... "not so much". :annoyed

I'm sorry to put a damper on things, and all the more so, because I've done a few renovations (and made nice profits, a hefty percentage of what the renovations cost, several times as much), I've had rental properties, and it can all turn out well.
Or it can become a nightmare. One can make good money... or lose it.

I think you should step back and look at your longer term goals - at the least 5-10 years if you are buying million-dollar properties. How often would you really use it? Would it make sense to rent something instead, or perhaps until you get a better feel for the area and specific buildings/locations?

Finally, keep in mind that having not purchased illiquid assets in the past might also have *saved* you money, depending upon the what, where, and when.

Is your main residence in Manhattan? How stable is that? Do you own? How long? Are you happy with the place?
There's a lot we don't know, much of it relevant to what you are considering now.

Good luck no matter what!

RM
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tunafish
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by tunafish »

1 seems the least stressful.

Speaking from experience I would say never be a landlord.
LittleMaggieMae
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by LittleMaggieMae »

Options:
1. Buy the new unit for $1.25MM and sell existing unit for ~$1.4 without renovating (1031 exchange)
This gets you where you want to be with fewer/more predictable "drama" and probably sooner than later.
2. Buy new unit for $1.25MM. Renovate existing unit for ~$150K and list for ~$1.65MM.
This sounds like a lot of drama and stress that may go on for months and months and months. Have you ever reno'd a condo in Miami Beach? Are you local for this reno or doing it long distance? Are you will to pay for someone to manage this project for you? This effects your financial plan short term (until you sell it - and while you figure out what to do with the proceeds from the sale and how it effects your income/taxes/whatever....)
3. Buy new unit for $1.25MM. Renovate existing unit. Rent out existing unit for ~$7500/mo (carrying cost is ~$5300)
This sounds like even MORE drama and stress - you have to spend months doing the reno and then find a qualified tenant and then continue to deal with the condo (all the yearly stuff associated with it.) And then the sporadic drama/stress of it becomes part of your life - until you sell it. This effects your financial plan LONG term.

I guess it comes down to how much drama and stress do you want in your life and how long do you want it to go on? :)
I know some people are adrenaline junkies and thrive on stress/change/drama. So there's no right or wrong answer.
It's all about your personal style and emotional needs.

FWIW: you've got the income and I don't see how you will take a great life changing loss on the "mistake" no matter what path you choose - it might pinch a little but it's survivablefd (and could provide years of "adrenaline"). Figure out what you envision your life being like in 24 months... and then choose a path.
Weathering
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Weathering »

Spend $300k to make the current unit what you want (quieter HVAC, wall insulation if it's noisy, triple pane windows, motorized blinds, etc).
In a down market, (Florida is highly cyclical) the second unit will not keep its value the way the current unit will.
In an up market, the current unit will pull further ahead of the second unit in value.
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HMSVictory
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by HMSVictory »

I agree with the above poster to make your unit more desirable for your needs - renovate it to your taste.

I'd think everyone wants an Ocean view but YMMV..... now let me address the more pressing issue:

Man you got over $6M in investments and make $1M a year. This transaction is not a big deal for you. If you owed both condos, paid cash for them and one burned to the ground (wo insurance) it wouldn't change your life. My point is you have an enormous income and plenty of savings - stop stressing out over simple stuff. If you want to move to a different unit go for it. Life is short - even if it costs you a few bucks just do it.

PS there is zero chance I'd have a mortgage. You are in effect borrowing on your house to invest in VTI in taxable account.

Just pay cash for the place. :shock:
Stay the course!
mortfree
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by mortfree »

Earplugs or noise canceling headphones would be cheaper.
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

ResearchMed wrote: Mon May 30, 2022 2:50 pm
Your location says " Manhattan/Miami Beach". Is the "Miami Beach" this other property that you purchased a year ago, or do you already live there (full or part time)?

Lots of questions:
Thanks very much or the comments. I should clarify two things for other commenters:

1) The “noise” that turns me off of the place I bought is primarily on the balcony. The HVAC is from a neighboring hotel and the car sounds are directly below, so there’s nothing I can do about either. From inside the unit, I can also here the loud beeping from semis backing into the receiving office of the same neighboring hotel. I would otherwise want to spend hours each day working on the balcony, as I do in my current rental down the hall, which brings me to point #2…

2) Since I was going to renovate the unit I purchased as my home, I’m renting a different unit down the hall on the line I now want to live on. I know this is excessive, but it’s temporary.
How well do you know this other building and unit? It may not have HVAC noise, but maybe the garbage trucks congregate there throughout the day... or some other "nuisance" that may not be obvious from a few quick views.
I know the building very well. I rented three monthly units here during Covid workations, bought a place a few months later, then moved here from NYC a year ago. The unit I now want ($1.25) is 3 floors below where I’m presently renting and I know the silence/location is what I now want.
Also, why did you go looking for this unit? Did you just happen to hear about it, or were you actively looking due to dissatifaction with your current property?
I’m renting a unit 3 floors above it in anticipation for a renovation that should have been completed last month (has not even started thanks to permit issues. Welcome to Miami). Very quickly after moving into this rental, I realized I prefer this line. The $1.25MM option is an off-market unit slightly lower than I’d like to be, but I still prefer it over my noisy direct-ocean.
You mention a 1031 exchange. Was the other already an investment/rental, and will this new one be that also? Have you used the property yourself?
I never lived there and would not in its current state. It’s disgusting and looks like it hasn’t been kept up since the early 90s. I bought it with a tenant in it so my CPA said a 1031 exchange is doable. (The tenant was paying $4500/mo in rent for the decrepit place).

Option 2 makes little sense. Renovating the current property with so little expected profit is risky. These things almost always cost more and take longer than planned, and that's especially the case these days. It wouldn't take much for that not to be worth the renovation money.
Do you have experience with renovations and selling?
I tend to agree this is a speculative impulse of mine. The area is awash in NYC money but there’s no guarantee I’ll get a return on the reno. Miami is also a disaster when it comes to permits and delays. I haven’t done a renovation but I know the headache potential.

How often would you really use it? Would it make sense to rent something instead, or perhaps until you get a better feel for the area and specific buildings/locations?
I’ll use it regularly. This part is as close to certain as I can get.
Is your main residence in Manhattan? How stable is that? Do you own? How long? Are you happy with the place?
I got rid of my NYC rental when I moved down here to Miami Beach a year ago. I will go back to NYC at some point over the next year, but I will keep a condo here and use it for at least 3-6 months/yr thereafter.
momvesting
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by momvesting »

Can you renovate to reduce noise? While it isn't a Miami condo, when we first moved into our current home, which is three houses down from a major road, it was very noisy. The hardwood floors, tiled bathrooms, granite countertops, and stone showers and backsplashes just reflected noise like crazy. We just invested in a lot of cloth and soft furniture and accessories and it made a drastic difference. As part of your remodel, buy things like cushioned barstools and dining chairs, upholstered chairs and coffee tables, large, plush throw rugs, layered curtains with a sheer layer and a heavier cotton cloth layer, throw pillows, and even softer wall hangings, like canvas paintings instead of anything metal or glass. I even bought some of those small, washable plush bathroom rugs and slid them under the couch (you cannot see them) to help reduce noise reflection. I also have one small entry wall that is sort of enclosed on the sides and I added a patterned floor-to-ceiling curtain that hangs behind a small entry table and just adds interest and reduces noise. If you have a balcony, you can also add plants and soft furnishings out there to further reduce noise. I would exhaust all noise-reducing options before considering moving. Hire a designer and stick with wood for things that must be hard surfaces (like a desk or dining table) and avoid glass and metal as much as possible.
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

HMSVictory wrote: Mon May 30, 2022 3:52 pm I agree with the above poster to make your unit more desirable for your needs - renovate it to your taste.

I'd think everyone wants an Ocean view but YMMV..... now let me address the more pressing issue:

Man you got over $6M in investments and make $1M a year. This transaction is not a big deal for you. If you owed both condos, paid cash for them and one burned to the ground (wo insurance) it wouldn't change your life. My point is you have an enormous income and plenty of savings - stop stressing out over simple stuff. If you want to move to a different unit go for it. Life is short - even if it costs you a few bucks just do it.

PS there is zero chance I'd have a mortgage. You are in effect borrowing on your house to invest in VTI in taxable account.

Just pay cash for the place. :shock:
Thank you for this, sometimes I need to hear it. Both places are gut renovation jobs FWIW. But I can’t renovate out the industrial noise plaguing my ocean-facing unit.

As for the cash/mortgage option, I don’t want to take a cap gains tax it and buy in cash, but at current rates I would consider making accelerated payments. My industry is somewhat volatile and tends to ebb and flow with tech valuations. 90% of my income is commission-based, which makes me weary about depleting my armageddon war chest by paying cash..
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

momvesting wrote: Mon May 30, 2022 4:10 pm Can you renovate to reduce noise? While it isn't a Miami condo, when we first moved into our current home, which is three houses down from a major road, it was very noisy. The hardwood floors, tiled bathrooms, granite countertops, and stone showers and backsplashes just reflected noise like crazy. We just invested in a lot of cloth and soft furniture and accessories and it made a drastic difference. As part of your remodel, buy things like cushioned barstools and dining chairs, upholstered chairs and coffee tables, large, plush throw rugs, layered curtains with a sheer layer and a heavier cotton cloth layer, throw pillows, and even softer wall hangings, like canvas paintings instead of anything metal or glass. I even bought some of those small, washable plush bathroom rugs and slid them under the couch (you cannot see them) to help reduce noise reflection. I also have one small entry wall that is sort of enclosed on the sides and I added a patterned floor-to-ceiling curtain that hangs behind a small entry table and just adds interest and reduces noise. If you have a balcony, you can also add plants and soft furnishings out there to further reduce noise. I would exhaust all noise-reducing options before considering moving. Hire a designer and stick with wood for things that must be hard surfaces (like a desk or dining table) and avoid glass and metal as much as possible.

Thanks. These are all good ideas, but unfortunately 90% of the noise that bothers me is on the balcony and can’t be materially minimized (the neighboring HVAC is part of an enormous hotel). I spend 4+ hours/day working from the balcony in this quieter rental, whereas the noise on the balcony on my place down the hall is such that I don’t derive any peace from being on it and can’t stay out there for any length of time. This would not bother me in the slightest in NYC, but here I want serenity.
j9j
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by j9j »

I can relate to putting value in quiet living/workspace. Go with option 1.
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HMSVictory
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by HMSVictory »

FreelancerNYC wrote: Mon May 30, 2022 4:15 pm
HMSVictory wrote: Mon May 30, 2022 3:52 pm I agree with the above poster to make your unit more desirable for your needs - renovate it to your taste.

I'd think everyone wants an Ocean view but YMMV..... now let me address the more pressing issue:

Man you got over $6M in investments and make $1M a year. This transaction is not a big deal for you. If you owed both condos, paid cash for them and one burned to the ground (wo insurance) it wouldn't change your life. My point is you have an enormous income and plenty of savings - stop stressing out over simple stuff. If you want to move to a different unit go for it. Life is short - even if it costs you a few bucks just do it.

PS there is zero chance I'd have a mortgage. You are in effect borrowing on your house to invest in VTI in taxable account.

Just pay cash for the place. :shock:
Thank you for this, sometimes I need to hear it. Both places are gut renovation jobs FWIW. But I can’t renovate out the industrial noise plaguing my ocean-facing unit.

As for the cash/mortgage option, I don’t want to take a cap gains tax it and buy in cash, but at current rates I would consider making accelerated payments. My industry is somewhat volatile and tends to ebb and flow with tech valuations. 90% of my income is commission-based, which makes me weary about depleting my armageddon war chest by paying cash..
Gotcha. Gut renovate the one with piece and quiet (which is priceless) and sell the other one. You've earned the right to enjoy where you live.
Stay the course!
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ResearchMed
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by ResearchMed »

FreelancerNYC wrote: Mon May 30, 2022 4:10 pm
ResearchMed wrote: Mon May 30, 2022 2:50 pm
Your location says " Manhattan/Miami Beach". Is the "Miami Beach" this other property that you purchased a year ago, or do you already live there (full or part time)?

Lots of questions:
Thanks very much or the comments. I should clarify two things for other commenters:

1) The “noise” that turns me off of the place I bought is primarily on the balcony. The HVAC is from a neighboring hotel and the car sounds are directly below, so there’s nothing I can do about either. From inside the unit, I can also here the loud beeping from semis backing into the receiving office of the same neighboring hotel. I would otherwise want to spend hours each day working on the balcony, as I do in my current rental down the hall, which brings me to point #2…

2) Since I was going to renovate the unit I purchased as my home, I’m renting a different unit down the hall on the line I now want to live on. I know this is excessive, but it’s temporary.
How well do you know this other building and unit? It may not have HVAC noise, but maybe the garbage trucks congregate there throughout the day... or some other "nuisance" that may not be obvious from a few quick views.
I know the building very well. I rented three monthly units here during Covid workations, bought a place a few months later, then moved here from NYC a year ago. The unit I now want ($1.25) is 3 floors below where I’m presently renting and I know the silence/location is what I now want.
Also, why did you go looking for this unit? Did you just happen to hear about it, or were you actively looking due to dissatifaction with your current property?
I’m renting a unit 3 floors above it in anticipation for a renovation that should have been completed last month (has not even started thanks to permit issues. Welcome to Miami). Very quickly after moving into this rental, I realized I prefer this line. The $1.25MM option is an off-market unit slightly lower than I’d like to be, but I still prefer it over my noisy direct-ocean.
You mention a 1031 exchange. Was the other already an investment/rental, and will this new one be that also? Have you used the property yourself?
I never lived there and would not in its current state. It’s disgusting and looks like it hasn’t been kept up since the early 90s. I bought it with a tenant in it so my CPA said a 1031 exchange is doable. (The tenant was paying $4500/mo in rent for the decrepit place).

Option 2 makes little sense. Renovating the current property with so little expected profit is risky. These things almost always cost more and take longer than planned, and that's especially the case these days. It wouldn't take much for that not to be worth the renovation money.
Do you have experience with renovations and selling?
I tend to agree this is a speculative impulse of mine. The area is awash in NYC money but there’s no guarantee I’ll get a return on the reno. Miami is also a disaster when it comes to permits and delays. I haven’t done a renovation but I know the headache potential.

How often would you really use it? Would it make sense to rent something instead, or perhaps until you get a better feel for the area and specific buildings/locations?
I’ll use it regularly. This part is as close to certain as I can get.
Is your main residence in Manhattan? How stable is that? Do you own? How long? Are you happy with the place?
I got rid of my NYC rental when I moved down here to Miami Beach a year ago. I will go back to NYC at some point over the next year, but I will keep a condo here and use it for at least 3-6 months/yr thereafter.
Hi again FreelancerNYC,

I sent you a PM with more thoughts.

RM
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Katietsu
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Katietsu »

You buy million dollar properties and sell NYC condos. I have not. But, I do not understand how you are going to meet the personal use limits required for a 1031 exchange.
retire2022
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by retire2022 »

Op

Have you tried a noise reduction consultant?

Or architect who is familiar with insulating walls and window inserts and or homasote board?

http://www.homasote.com/
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Watty
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Watty »

FreelancerNYC wrote: Mon May 30, 2022 4:15 pm Both places are gut renovation jobs FWIW. But I can’t renovate out the industrial noise plaguing my ocean-facing unit.
You seem to have a lot going on in your life so doing any renovations would add a lot of stress and you already sound a bit frantic.

If this was a vote I would vote for "none of the above" and suggest that you find some other quite place that does not need a lot of renovation other than things like paint and new carpets.
blackbird
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by blackbird »

Option 1b. Sell existing for $1.4mm.
SuzBanyan
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by SuzBanyan »

Katietsu wrote: Mon May 30, 2022 7:11 pm You buy million dollar properties and sell NYC condos. I have not. But, I do not understand how you are going to meet the personal use limits required for a 1031 exchange.
I have the same question. The replacement property would need to be purchased as an investment property, I.e., with the intention of using it as a rental property. If the OP can’t live in it for the foreseeable future and will need to keep renting a different unit for personal use, I’m not sure of the value in buying the not on the market unit. And if you rent a property, then eventually use it as your personal residence, it continues to carry with it this nonqualified use period (in both the old and new units) when you eventually sell and may limit the amount of gain you can exclude.
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

You’re correct, and thanks for pointing out. So it won’t be a 1031 exchange, since it will be my residence. I didn’t explain the rest of my plan to my CPA but I would before moving forward (1031 or not is luckily not material to the decision in this case).
Circe
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Circe »

Another consideration would be the over-heated housing market. Maybe Miami condos will be different from the rest of the country, but prices are not going up like they were.

See if you can quickly unload the one you currently own if you're not going to use it.
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

OP here. There have been some “developments,” which may change the calculus a bit. Grateful for input from this forum:
  • I received two unsolicited cash offers for $1.5MM for my condo (purchased last year for $975K). A trusted realtor familiar with the building believes it would sell for $1.6-$1.7MM if I listed it. Rather than listing it immediately, I’m attempting to dangle it to sellers on the line I want who want to swap for the better view. Which brings me to development 2:
  • I emailed a list of all owners in the building, offering to purchase their condo on the lines I wanted for up to $1.x (I needed to get their attention, and that was in fact my max). I also offered to trade my unit for theirs or sell it to them (again, my unit has a premium because of the direct-ocean view, but I’m willing to eat that to get the outdoor scene I want. Two responded via their realtors (who also live in the building):
  • Neighbor A is only willing to trade units. He doesn’t want to leave the building. He won’t allow me to buy his while I list mine for more, but he would gladly trade up for the more valuable unit that I’m willing to exchange. It sounded like the seller would be willing to pay some amount of the difference in order to get my unit. This is TBD, but let’s say $0-$100K. His would go for ~1.4MM if listed.
  • Neighbor B is only willing to sell (and is moving buildings), so no “trade.” Her condo is on a materially higher floor and may move buildings. She wants very close to the $1.x I was willing to part with for the best unit on that line. Hers would go for $1.5 if listed.
I’m willing to do either of these deals and take the equity haircut. That is how sure I am that I want this other unit for quality of life purposes. This obviously creates some cash flow considerations. My problem is that I don’t know which is preferable after taxes and transaction costs.

In a “trade,” I’m not even sure what exactly occurs, but is it safe to say if I wanted a similar cash position to that I’m in now (rates aside), I would need to either: 1) Sell my unit to the neighbor, pay the first mortgage off with the proceeds, and put the remaining cash towards a down payment on a new mortgage, OR 2) If neighbor A just wants to pay the $100k to me in exchange for title transfer with the lawyers (likely), I would draw on a credit line (near-SOFR rate), buy the unit, and then refinance to replace the credit line.** This rate will be slightly less attractive.

**Caveat: I know we can get into selling stocks to pay cash, borrowing to invest, etc. all day, but I’ve always disliked the idea of paying cash for a house, and especially when I would need to sell shares and take a tax hit in order to do so. The current rates my existing lender is quoting me are still within my “acceptable” range to prefer VTI + mortgage > home equity.

tl;dr: Is trading my 1.6MM condo for unit A (worth 1.45) preferable to purchasing unit B (worth 1.55) and selling mine for 1.6? I know these are crazy numbers, but I’ve thought about this for six months and have my heart set on one of these two options. Thanks
Last edited by FreelancerNYC on Tue Jul 05, 2022 10:10 am, edited 1 time in total.
Valuethinker
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Valuethinker »

FreelancerNYC wrote: Mon May 30, 2022 2:16 pm Last Spring I purchased a $1MM ocean-facing 1-br condo in Miami Beach (2.85% 30yr) with plans to renovate and use it seasonally. A renovated unit 3 floors below mine sold for $1.55MM 3 months ago.I would need to invest about $125K in renovating to get more than that if I sold it.

Fast-forward to today and I realized I strongly prefer a different unit on what most would consider a less-desirable line (with only a partial ocean view). :oops: It’s much quieter and peaceful due to lack of street/HVAC/etc noise, which is more important to me than a jaw-dropping view. Basically, I’m not happy with my unit and would not enjoy it as much as the quiet one. This is causing me a ton of stress and regret.

To get out of this pickle, last week I made an offer for a unit on the “quiet” line for $1.1MM. The kicker is it needs the same renovation that my existing unit needs. Unfortunately, the sellers want $1.25MM (off-market deal — nothing is available on the market). They purchased it $900K 11 months ago. This is currently the norm for Miami Beach, and most deals in the building are cash. I would get a mortgage (I know the rate will be higher than my existing).

I dislike illiquid assets but this aversion has caused me to miss opportunities in the past. I’m hoping some Bogleheads can lend their perspective. Is this a reckless move, or understandable as long as I know what I’m getting into?

Options:
1. Buy the new unit for $1.25MM and sell existing unit for ~$1.4 without renovating (1031 exchange)
2. Buy new unit for $1.25MM. Renovate existing unit for ~$150K and list for ~$1.65MM.
3. Buy new unit for $1.25MM. Renovate existing unit. Rent out existing unit for ~$7500/mo (carrying cost is ~$5300)

Age: 30-35

Income: $800k - $1.3MM/yr (variable). Been with company for over a decade. Not a blue-chip company but not a startup either.

Assets:
Taxable: $5MM (90% VTI)
Roth: $135K (VXUS)
401K: $425K (S&P)
PE/VC: $175K
Cash: $150K
*Available margin: $2MM at 1.2% (floating, so only for short-term cash)
Home equity:
~$400k

Thank you. Happy Memorial Day
Economic principles:

- what you paid in the past for something is irrelevant. It's what it is worth in the future that matters

- the amenity value counts as part of the "value" of a property, and will factor into your calculations (even if it is hard to put a number on it)

- the exception to the first point is a tax related one - crystallising a loss or taking a gain. Then, book cost does matter. But you are on that

- it's always better to take pain up front. Admit the mistake, and move on. Humans are short term risk averse in the domain of losses. Or in English, taking a loss causes, in the short term, twice as much psychic pain as taking a win of the same amount gives pleasure. Therefore "Sell your losers. Run your winners" in life but our built-in short termism is the reverse.

Therefore

- if you would not buy something now, for its current price, then you should sell it

- 1 is your best option. 3 is a whole new set of problems (being a landlord) and a tie to an apartment you will never be truly happy owning.

-2 is superficially attractive but:
a. everything building-related is costing more and taking longer. Renovations have a way of getting more expensive. Most renovations don't lead to equivalent increases in value, at least in the short term
b. it risks throwing good money after bad. What if real estate prices fall?

So go for 1. Take the pain, and be done with it.

It was a mistake. Clearly you can afford to make that mistake. You won't be living in your car.
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mrmass
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by mrmass »

Maybe you know this. Read the 1031 requirements beforehand.
https://fnrpusa.com/blog/1031-exchange-boot/
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ResearchMed
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by ResearchMed »

mrmass wrote: Tue Jul 05, 2022 10:03 am Maybe you know this. Read the 1031 requirements beforehand.
https://fnrpusa.com/blog/1031-exchange-boot/

The first line in your link is:

"A 1031 Exchange is a type of real estate transaction that allows investors to defer taxes on the profitable sale of an investment property as long as the proceeds are invested into another property that is considered to be “like kind...”"
[emphasis added]


Nothing like this has been allowed for residential property for quite a long time.

RM
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

Please see the latest post above. The original options are different now. There are two options: Trade my unit for unit A, or purchase unit B and list mine. 1031 is out, as is purchasing the lower floor unit for 1.25 (no longer for sale and too low considering the above two options are on higher floors). Are there financial implications to favor one vs the other? Please ignore any mention of 1031 Exchanges.
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by av111 »

FreelancerNYC wrote: Tue Jul 05, 2022 9:27 am OP here. There have been some “developments,” which may change the calculus a bit.
tl;dr: Is trading my 1.6MM condo for unit A (worth 1.45) preferable to purchasing unit B (worth 1.55) and selling mine for 1.6? I know these are crazy numbers, but I’ve thought about this for six months and have my heart set on one of these two options. Thanks


Are you thinking trade means different than buy and sell. In option 1 both of you sell your current homes (incur tax on profit) and then buy the new home

In option 2, same thing happens also

If you like both the target units the same, you get 50k more value in the second option
AV111
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

Are you thinking trade means different than buy and sell. In option 1 both of you sell your current homes (incur tax on profit) and then buy the new home

In option 2, same thing happens also

If you like both the target units the same, you get 50k more value in the second option
I guess what's confusing me is the term "trade" can mean two routes:
  • A) trading 1 title for the other, then pulling cash out of the new unit to pay off my existing mortgage.
  • B) selling my unit to owner B, and simultaneously buying their unit with a mortgage, putting the proceeds to the down payment. (Seems convoluted and more of an inconvenience to them)
Both neighbors own their units outright, whereas I have a mortgage on the one I'm looking to offer in exchange for theirs (most deals in the building are cash).
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by JediMisty »

Weathering wrote: Mon May 30, 2022 3:39 pm Spend $300k to make the current unit what you want (quieter HVAC, wall insulation if it's noisy, triple pane windows, motorized blinds, etc).
In a down market, (Florida is highly cyclical) the second unit will not keep its value the way the current unit will.
In an up market, the current unit will pull further ahead of the second unit in value.
+1
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

JediMisty wrote: Tue Jul 05, 2022 12:21 pm
Weathering wrote: Mon May 30, 2022 3:39 pm Spend $300k to make the current unit what you want (quieter HVAC, wall insulation if it's noisy, triple pane windows, motorized blinds, etc).
In a down market, (Florida is highly cyclical) the second unit will not keep its value the way the current unit will.
In an up market, the current unit will pull further ahead of the second unit in value.
+1
As mentioned, this is unfortunately not an option. The only question at this point is how "trading" A or B impacts the financial decision.

Nothing can be done about the noise in the unit I'm looking to trade, which is from a large hotel HVAC next door and the car port down below. It's quiet inside, but I spend 5 hours a day working/relaxing on the balcony and there is no escaping the noise on that line. It's a known issue and defeats the purpose of having an ocean-facing unit when I can trade for a partial-ocean unit that's dead silent on the balcony.
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ResearchMed
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by ResearchMed »

FreelancerNYC wrote: Tue Jul 05, 2022 12:51 pm
JediMisty wrote: Tue Jul 05, 2022 12:21 pm
Weathering wrote: Mon May 30, 2022 3:39 pm Spend $300k to make the current unit what you want (quieter HVAC, wall insulation if it's noisy, triple pane windows, motorized blinds, etc).
In a down market, (Florida is highly cyclical) the second unit will not keep its value the way the current unit will.
In an up market, the current unit will pull further ahead of the second unit in value.
+1
As mentioned, this is unfortunately not an option. The only question at this point is how "trading" A or B impacts the financial decision.

Nothing can be done about the noise in the unit I'm looking to trade, which is from a large hotel HVAC next door and the car port down below. It's quiet inside, but I spend 5 hours a day working/relaxing on the balcony and there is no escaping the noise on that line. It's a known issue and defeats the purpose of having an ocean-facing unit when I can trade for a partial-ocean unit that's dead silent on the balcony.

I understand the nature of the problem.
But please be careful about expecting "dead silence" in the new place, now or in the future.
You could have neighbors who like open windows and blast music or have parties, and you could hear that.

Don't set yourself up for a second "regret".

RM
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

I understand the nature of the problem.
But please be careful about expecting "dead silence" in the new place, now or in the future.
You could have neighbors who like open windows and blast music or have parties, and you could hear that.

Don't set yourself up for a second "regret".

RM
Thanks for the reminder. In this case I'm intimately familiar with the building, having rented 4 different units over the past 1.5 years across both lines in question. I'm currently renting the unit 5 floors below the "B" option in my scenario above (since I was about to renovate mine down the hall). The line I want is in an alcove and not exposed to the outside roads or neighboring buildings at all, just the pool and landscaped grounds. It's very quiet and that's what I'm after.

I suppose the best-case is this:
1. I submit an offer for Unit B for $1.5. If accepted, sell mine for $1.6
2. Since I bought mine for $1MM, I pay off the mortgage and put $600K proceeds towards Unit B, + the ~$250K I have tied up in my unit as the original down payment.
3. Mortgage the remainder and call it a day.

Would you agree?
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by Bud »

Thanks for the reminder. In this case I'm intimately familiar with the building, having rented 4 different units over the past 1.5 years across both lines in question. I'm currently renting the unit 5 floors below the "B" option in my scenario above (since I was about to renovate mine down the hall). The line I want is in an alcove and not exposed to the outside roads or neighboring buildings at all, just the pool and landscaped grounds. It's very quiet and that's what I'm after.

I suppose the best-case is this:
1. I submit an offer for Unit B for $1.5. If accepted, sell mine for $1.6
2. Since I bought mine for $1MM, I pay off the mortgage and put $600K proceeds towards Unit B, + the ~$250K I have tied up in my unit as the original down payment.
3. Mortgage the remainder and call it a day.

Would you agree?
[/quote]

Yes - I agree.

At some point fretting details loses value when it no longer contributes to solving the problem. One way to think about the challenge is that money is a medium of exchange - if the unit has value to YOU, then that is what is important and exchange the funds necessary to acquire it. In your case, this seems especially true because the market values are within about 10% of each other.

Make the necessary decisions and move ahead to acquire the unit you want.

All the best.
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by av111 »

FreelancerNYC wrote: Tue Jul 05, 2022 11:58 am
Are you thinking trade means different than buy and sell. In option 1 both of you sell your current homes (incur tax on profit) and then buy the new home

In option 2, same thing happens also

If you like both the target units the same, you get 50k more value in the second option
I guess what's confusing me is the term "trade" can mean two routes:
  • A) trading 1 title for the other, then pulling cash out of the new unit to pay off my existing mortgage.
  • B) selling my unit to owner B, and simultaneously buying their unit with a mortgage, putting the proceeds to the down payment. (Seems convoluted and more of an inconvenience to them)
Both neighbors own their units outright, whereas I have a mortgage on the one I'm looking to offer in exchange for theirs (most deals in the building are cash).
Titles do not just exchange. To do it right, both parties create sell transactions with attorneys and escrow involved. So it is like 2 different MLS listings except there are no agents
AV111
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ResearchMed
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by ResearchMed »

av111 wrote: Tue Jul 05, 2022 5:18 pm
FreelancerNYC wrote: Tue Jul 05, 2022 11:58 am
Are you thinking trade means different than buy and sell. In option 1 both of you sell your current homes (incur tax on profit) and then buy the new home

In option 2, same thing happens also

If you like both the target units the same, you get 50k more value in the second option
I guess what's confusing me is the term "trade" can mean two routes:
  • A) trading 1 title for the other, then pulling cash out of the new unit to pay off my existing mortgage.
  • B) selling my unit to owner B, and simultaneously buying their unit with a mortgage, putting the proceeds to the down payment. (Seems convoluted and more of an inconvenience to them)
Both neighbors own their units outright, whereas I have a mortgage on the one I'm looking to offer in exchange for theirs (most deals in the building are cash).
Titles do not just exchange. To do it right, both parties create sell transactions with attorneys and escrow involved. So it is like 2 different MLS listings except there are no agents

Right.
To be even more clear: You will sell your unit the them. They will sell their unit to you. You will presumably plan to have both closings at about the same time, with the same attorneys (separate for each, but in one place).

That means that any financing will be starting again. If these are not cash purchases, then mortgages will need to be arranged in a timely fashion, etc.

Now... do keep in mind and plan how you'll each be moving your furnishings and belongings, given that neither of you is "leaving first to leave an empty place for the other..."

RM
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FreelancerNYC
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by FreelancerNYC »

Thanks all for the wisdom/insights. This removes some fog and gives me the clarity of thought I needed to move forward.
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Re: Am I Crazy? Correcting a Real Estate Mistake

Post by SuzBanyan »

For whichever of the “trade” options you choose, you will need to plan on how you will pay the capital gains on the sale of your property.

As to which trade is “better”, a concurrent closing on the “A” trade means you won’t have to worry about having sold your condo without having purchased a replacement (or vice versa). For the “B” unit, it is possible you will be contractually obligated to purchase B even if the sale for your condo falls apart (or vice versa).
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