1031 vs LOC vs hard money- What to do?

3 Replies

I own a property that is paid off and has a value around 160k and has a cashflow if about $600/month.

My goal is to increase my monthly cashflow by leveraging that property. So far the ways that I thought of were the following:

1031: I would potentially be able to turn this one property into doing 3 deals that have a cashflow of 300-400 each at 20% down. Or I could get into a multi unit property at 20% which would probably cashflow around $1500

LOC: I've found that Wells Fargo will do a Line of Credit of about 70% LTV with the property being the collateral with a 9% interest rate with a balloon. In this scenario I would continue to receive the $600/month cashflow from the property and have about $100k to do the BRRRR strategy with. I don't have a lot of experience with rehab and it seems a bit daunting, but by using this strategy I could continually grow my portfolio.

Hard money: by using the property as collateral I could work with a local hard money lender in order to do about the same strategy as above.

I’m a newbie just trying to understand the pros and cons of each and be sure I’m not missing any aspects of the opportunities. Any feedback is appreciated. 

@Taylor Dame seek the advice of an accountant on the 1031. You have to remember you are only paying taxes on the GAIN so what is your basis and what did you depreciate? A 1031 may not really help you a lot. The LOC is a great idea. Leverage and OPM is how you grow quickly. Just make sure the next investment is a quality cashflowing property then you cant go wrong with this business model.

@Taylor Dame , Personal opinion but anything with a balloon at this stage of the market is a recipe for disaster unless the leverage is approaching 50% or below.  And that's counter productive to maximizing leverage to increase coc returns.  

I don't think a paid off asset giving you cash on equity of 4.5% is all that hot.  And I'd be tempted to simply 1031 and get out of it.

But I don't like the 1031 for you at this point either because inventory is tight.  You're new and inexperienced and the timing restrictions will force you to by multiple properties at once when you'd be better of doing one new one at a time and growing your portfolio as your experience grows - slower yes but surer as well.

My suggestion would be to look at a simple cash out refi.  Bank the proceeds and use only enough to buy one property stabilize and put into service.  Then repeat.  You may actually save interest doing it that way rather than taking out that obscene loc at 9% even if you only took down one at a time through that as well.

Or if you can partner with experience or find one asset to absorb your 1031 with no stabilization or rehab required then that would work for you with the least brain damage.

@Taylor Dame - the LOC rates you were quoted seem quite high. You should be able to find a bank that can do a secured line of credit or a HELOC @ about Prime + 2-3%. Check out TD Bank, they offer HELOCs on investment properties.

The advantage to a line of credit is flexibility, but the trade off is exposure to a rising prime rate. Since we are currently in a rate tightening cycle, you should plan on rates adjusting upwards somewhat. The only way I'd really recommend a LOC for this purpose would be if you intend to make interest only payments. This strategy has more inherent risk, but if you know what you're doing it might be a smart move (also ***

But it sounds like you're looking for long term leverage, and for that, a LOC isn't ideal. For that, I'd do a cash out refi @ 70 or 75%. 25-30% of an equity cushion is plenty, assuming the property generates strong cash flow.

I'd avoid the 1031 route - when you sell the property, who's to say that you'll find another good investment within the 6 month window? Since RE prices are high currently, you may have a hard time finding a better investment property than the one you just sold. 

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