Should I Sell active real estate in trade for passive real estate?

Reasons for considering a trade of one or more assets for another asset of the same class:

• Selling in a depreciating area to purchase in an appreciating area. Consider selling in a glutted market in order to leverage the equity into an apartment complex at a discount in a market affected by lack of available financing to increase cash flow and hedge against further loss of value
• Estate planning. Exchanging several homes into larger apartment complexes so that the apartments later can be sold by the estate and the value split equitably amongst the heirs, or so that the asset may later be transferred into a trust for estate planning purposes.
• Increased cash flow. Single family residential can be more expensive on a price per square foot basis, exchanging for apartments or NNN commercial can reduce maintenance expenses and increase cash on cash return.
• Termination of active management duties.  Apartments and NNN commercial complexes are easily outsourced to management companies so that the owner may travel, etc.
• Moving equity into a property that can be refinanced.  Many owners of bare land have not considered the income stream that can be created by exchanging into an income producing apartment which would provide income in retirement.
• Moving equity into property or properties that are considered more liquid – an example would be exchanging two apartment buildings for single family residences in urban neighborhoods close to the city center.
• A hedge against inflation – In uncertain economic time’s one thing that is certain is that rents tend to rise.  You can safely plan for moderate to aggressive rent increases that improve your financial performance.
• Leveraging relationships – Contracting with a professional management team will give you direct access to the immediate attention of their vendor relationships saving you costly time and repair dollars during ownership.

Case study: Mr. Jackson is considering converting several single family residences into one large apartment.  He has been an active landlord for thirty years and feels safest in real estate because it is a commodity he understands.  He has had several health issues and maintaining several rentals has become a strain.  He has reasonable income from the homes but no longer wants active real estate responsibilities.  Mr. Jackson takes the homes and sells them totaling one amount of relinquished debt and one grand total of sales price.  Within the timeline of his exchange, he identifies an apartment complex in an area of town close to the tech sector with healthy wages.  His cash on cash return increases because of increased rent per square foot and a lower cost per unit acquired in the apartment.   This value is net of the cost of active management.  Mr. Jackson elected to employ a new management firm and deliver to them management standards so he could travel without worry.  The new management is active in the field and aggressively markets, providing Mr. Jackson with a lower vacancy rate than he himself could obtain.  His asset is protected by their effective maintenance relationships and practices.  Monthly reports and income checks are now the extent of his participation.