Cash out refi vs 1031 exchange

Member since 2019 · 2 posts · 1 vote

Hello! I'm a side hustle investor of 5 single family homes (SFH). I created an LLC with 3 partners 5 years ago with the intent of buying 1 SFH a year for 5 years as buy & holds, with traditional commercial loans. After 5 years/properties, we plan on reassessing where we're at & what to do next. Well, we're there. We just completed our 5th purchase, which is now rented. We'd like to continue acquiring properties, & recognize we have quite a bit of equity in our 1st 3 properties we purchased due to timing & buying below market value. I'm curious if you all would recommend doing a cash-out refi on one of those properties to use as a down payment on another property, or if you would 1031 exchange into something else (multifamily, nicer property, etc.).

Thank you.

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Lincoln Decklever, This is an apples to oranges question that doesn't get at the heart. There's a why question behind it. Why sell the property now. You don't have to sell it to get money out. You can refi. So go deeper and ask why sell a property?

1. Is one underperforming? - A refi will never make a marginal performer perform better

2. Looming cap ex

3. opportunity to buy better cash flow without sacrificing equity

4. desire to change geographies or classes of real estate

5. The need for 100% of the equity from a sale and 1031 rather than 75% of the equity in a refi.

These are all reasons to sell and 1031.

If you like the property. If it will continue to perform. If there's no reason to sell. If a refi alone will strengthen your position overall - then a refi is the way to go and keep that property in your stable.

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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
3y
If the property can cashflow after paying PITI then I think a cash out might make sense. If you can't cashflow with current rates, it might make more sense to sell one if you can use the money to buy something that makes more sense for your goals. Have you called around and gotten a feel for what's available in terms of rental refinance / purchase loans? @Lincoln Decklever
[email protected]413-348-8346
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Lincoln Decklever, This is an apples to oranges question that doesn't get at the heart. There's a why question behind it. Why sell the property now. You don't have to sell it to get money out. You can refi. So go deeper and ask why sell a property?
1. Is one underperforming? - A refi will never make a marginal performer perform better
2. Looming cap ex
3. opportunity to buy better cash flow without sacrificing equity
4. desire to change geographies or classes of real estate
5. The need for 100% of the equity from a sale and 1031 rather than 75% of the equity in a refi.
These are all reasons to sell and 1031.
If you like the property. If it will continue to perform. If there's no reason to sell. If a refi alone will strengthen your position overall - then a refi is the way to go and keep that property in your stable.
The 1031 Investor5137 Reviews
Website View Page
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Celia Moore
Specialist · Portland, OR · Member since 2020 · 97 posts · 109 votes
3y
If you would like to increase your portfolio by accumulating more properties, the cash-out refi is a great option to utilize the equity and keep growing. If you feel that you don’t care for one of your properties and want to sell it for something better, the 1031 will allow you to defer the tax upon sale.
Please keep in mind to be fully tax-deferred with a 1031 exchange, you will need to purchase the next property at an equal or greater value than the property being sold and you will use 100% of the proceeds from the sale toward the replacement property!
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K S.
Member since 2021 · 401 posts · 254 votes
3y
I just did a 1031 exchange on an under performing condo a few days ago and it was a piece of cake. The transaction and escrow team did everything via docusign and only cost a couple thousand I think. I also have a cash out refi and was much more difficult as it's no different than applying for a mortgage. I was only able to do a 50% LTV which is fine because the home broke even afterwords. Your rate with a cash out will be worse because they assume you're using that for investment and not owner occupied unless you are of course.
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Lincoln Decklever
OP
Member since 2019 · 2 posts · 1 vote
3y
Thank you for the advice! I appreciate you putting it into simple terms. Listening to BP podcasts, they often talk about 1 or other, but I've rarely heard discussion about both (either/or) in the same podcast. I'll do some analyzing & investigating on my end & figure what works best for our situation.

Thanks again,
Lincoln
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Ash Hegde
Lender · Fort Lauderdale, FL (Lending in FL CT GA MI PA) · Member since 2022 · 470 posts · 349 votes
3y
Great advice in this thread. The 1031 exchange and cash out refinance are both valuable tools, it really comes down to your goals.
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Matt McCurdyBusiness Member
Real Estate Broker · Cedar Rapids, IA · Member since 2019 · 143 posts · 56 votes
2y
Quote from @Dave Foster:

@Lincoln Decklever, This is an apples to oranges question that doesn't get at the heart. There's a why question behind it. Why sell the property now. You don't have to sell it to get money out. You can refi. So go deeper and ask why sell a property?
1. Is one underperforming? - A refi will never make a marginal performer perform better
2. Looming cap ex
3. opportunity to buy better cash flow without sacrificing equity
4. desire to change geographies or classes of real estate
5. The need for 100% of the equity from a sale and 1031 rather than 75% of the equity in a refi.
These are all reasons to sell and 1031.
If you like the property. If it will continue to perform. If there's no reason to sell. If a refi alone will strengthen your position overall - then a refi is the way to go and keep that property in your stable.

@Lincoln Deckleve I agree 100% with everything @Dave Foster has posted. However, I would add one more thing...
Once you sell a property, you have ended the appreciation for that asset. There's no going back! Sure, you may feel it's worth the sale to upgrade to a higher cash flowing asset and/or larger property, but it's very important to recognize you most likely won't be buying a similar asset at that low of a price in the future. Quite honestly, when I calculate the cashflow and projected future return, 9 times out of 10 I typically refinance and use the cash to purchase the asset I would have purchased via a 1031. By owning both properties now, I ensure I see the benefit (appreciation and cashflow) of both assets and avoid creating a taxable event. 7-8% interest rates certainly make it more challenging now days, but the same could be said for selling your asset for top dollar and financing the new 1031 asset as well.

Full disclosure, I'm a buy and hold investor and recommend others to do so as well, but I also recognize 1031's have their place (I've done 2 myself). It just needs to be properly thought out to ensure you aren't losing on the exchange.
[email protected]319-450-6447
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