Brrr or 1031 exchange

8 Replies

Hello BP Community,

I’m going to lean on you for some more advice. I own a portfolio of rental properties with a significant amount of equity. I was able to buy them below market rates and build more equity by rehabbing the units. They are renting well and provide a decent amount monthly of cash flow. Without considering any future appreciation, I feel that the properties have now reached the top of the market in value and rents. I’m currently in the process of a Cash Out Refinance with a local bank to gain access to the equity with the intent buy more rental properties. Even with competitive lending terms and rates this process will understandably create a significant reduction in cash flow and increase the loan to value percentage for the current portfolio of properties. By refinancing the current properties, I get to use the equity to buy 1 or 2 more properties. It’s my intention and hopes that the additional properties will offset the lost rental income.

I originally purchased the properties using the proceeds from the 1031 tax exchange. I had to pay the commissions and the 1031 escrow fees but I was able to take the capital gain from the sale of one property and roll it into 6 replacement properties. Here is where I get hung up. If I sell the properties and participate in another 1031 exchange I will have access to 25%-30% more equity than refinancing. This could now be used again to buy multiple properties all of which have the opportunity of forced appreciation through rehabbing and increasing the rents. I now wouldn’t have to carry a portfolio of properties that don’t have much room for appreciation and run the risk of being overleveraged.

I appreciate any feedback or personal experiences you are willing to share.

Ted


The IRS is not going to be too found of the cash out if you do the 1031 after, if you were going to do that you'd want to do the 1031 then the cash out.

@Matt K. I appreciate the comment. I apologize if my post wasn't clear. I'm looking to refinance or sell the properties and participate in a 1031 exchange, one or the other. Although it has crossed my mind that I could refinance out a big portion of the equity, sell and if I didn't participate in a 1031 it would reduce my tax liability. Although, that is not my intent at this time. 

@Dave Foster can help you out, I'd imagine if you're doing multiples it might be better to do a reverse 1031?

@Ted DeKowzan , CO is a crazy market right now and if you're in Golden that's ground zero just about.  I think @Matt K. s on to something if you're wanting to go from several smaller properties to a larger one.  In CO's market a reverse would work just fine.  But I get the sense that you're thinking to go horizontal or even cheaper with the replacements.  In that situation you would need multiple reverse exchanges and that could get pricey.

I'd say you may be better served eating this elephant one bite at a time.  Put your properties for sale and simply transition to the cheaper properties as your old ones sell in twos or threes.  You can mix and match and combine each exchange as long as the reinvestment amounts and timelines are correct.  

Thanks @Dave Foster for the advise. The rentals are actually in Colorado Springs. I gave up on playing games with the sharks swimming around the Denver Metro. The timing to sell all the properties individually and find a replacement or several replacement properties could be cumbersome. Finding good deals is difficult and I don't think I want that much stress in my life. I'm considering a hybrid of refinancing the properties that can maintain decent cash flow and selling the "cash suckers" in order to 1031 into some additional "value add" rentals. 

Unless I get an investor that wants to buy the whole portfolio then there is less stress getting all the timing requirements to line up.

Cheers,

Ted D.

@Ted DeKowzan , great plan.  I'd say make a three column list - 

Column A - The best performers with greatest amount of equity.  Keep and refi.

Column B - The worst performers with the least equity and greatest amount of gain/depreciation - sell and 1031.

Column C - The other worst performers with greatest equity and least gain/depreciation - sell and pay a little tax realizing the greatest cash free up.

@Ted DeKowzan my vote is for the 1031 if you can find a replacement property(ies). The leverage hurts cash flow and a refi resets the interest rates as well.

@Ted DeKowzan

With the strength of the current market and lack of inventory, a portfolio sale could make a lot of sense and would likely get very near market value (if not at full market value). We are starting to see more of these directly on the MLS and they have done very well, selling fairly quickly.

This method leaves a lot of stress and unknown factors off the table and limits the pool of potential buyers to serious investors instead of dealing with the potential issues of individual buyers looking to buy a owner-occupied unit. 

Phillip Bicker, Real Estate Agent in CO (#FA100069146)

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