Hi bought a personal residence condo in 2009 for 480K in Southern California. The area has improved. It's been rented out the past 7 years, minus a 9 month personal-residence stint where I refi'd to a great rate (3.62%). I only owe 270K now. The condo should be worth about 620K now and I would like to buy a place to live in (immediately or eventually). So I am wondering: 1-should I cash out refi and take a higher interest rate to have cash in hand for another down payment? OR 2-Should I sell the property, take the $ and buy another place as a 1031 exchange and then move into it in a few years?
I'm not in a rush to buy but do want to maximize the equity and get something nice I would want to live in myself eventually. I don't want to go back to that condo because the neighborhood is nice but not close to my industry.
What is the best move, long-term?
@Mary Gold sounds like a good position to be in!
Ok, first I would more accurately define both of those options.
1 - Cash Out Refi: explore the rate you would be getting right now. How much higher is it? What would that do to your monthly payment? Will the rent cover all of that and more? Will you have to adjust any numbers to contribute the same amount of cash flow & savings to monthly reserves on the property? I have a feeling once you really see the monthly net effect on your income/savings, that will give you a better idea of where you want to go.
2 - 1031 Exchange: these I do not have much experience in so I suggest consulting with an expert in the field. The whole "like-kind" criteria surrounding the exchanges may make going from an Investment rental property to a Primary residence property difficult. I have not found a definitive answer to that but perhaps you can in a consultation. Another consideration for the 1031 is actually finding the property you want in the given time frame you need to meet the exchanges requirements (45 days after closing on sale of property, you must ID up to 3 potential properties to use for exchange. Then another 180 days after the close on sale of your property, you must close on the exchanged property you ID). While that sounds like a lot of time, inventory is low and demand is high so keep that in mind when scheduling your time frame for everything.
Certainly you're aware of the tax advantages/disadvantages at this point but I think it is important to really see the amount of money you'll save/spend/lose in each option first. Best of luck!
First off, welcome to Bigger Pockets and congrats on your first post.
Second, I think you have to think of your personal income and speak with a reputable accountant to make sure that whatever suggestion you get from anyone on here, that it does not effect you negatively in your specific circumstance.
BUT, with that being said there are a few things to consider and a possible third option.
A. If you buy another personal residence, what price range are you looking at? (i.e will you exceed the total amount of the $750,000 mortgage deductible for a personal residence, becasue that would negatively effect you in our new tax code)
B. If you refinance, what rate will you get, and how does that play out over the loan? Also assuming you will be moving into an investment vs a personal residence your rate will be up quite a bit
C. I would also talk to a 1031 profesional on transfering the asset becasue you currently have it as a "personal residence" the taxes may not be as bad as you think, and/or if you are a joint filier you have additional benefits to the profit of that sale
Anyways, Im not sure this will help, but based on the information, these should be a few questions you may want to ask or look further into.
@Alexander Zurn , I think @Mary Gold , has the right idea. "Like kind" for 1031 purposes is any kind of investment real estate for any other kind of investment real estate. What she would be doing is selling an investment property and buying an investment property and then later in a couple of years possibly converting that property into her primary residence. Nothing wrong with that. There's even a 2 year safe harbor from the IRS with some other stipulations.
The only thing I can think of that might push the balance either way is that if you 1031 you'll have to be getting investment financing on the new property which might not be as advantageous as you would like. And then after two years you're stuck either with a higher interest rate than you want or a second refinance into owner occupied.
On the other hand though if you refi you have access to less cash. You can get an owner occupied interest rate from the get go. You don't have to use it as investment for 2 years before moving in. But... you're still stuck with the investment property and must decide whether to later sell and take the profit taxable. Or do a 1031 into another investment property which might stretch you if your plan doesn't include holding investment real estate for life.
Thanks to you all! Great points by each of you. Great point about the 750K limit and the new tax code, Nabil. And Alexander, definitely worth looking at real numbers. You're right.
I think @Dave Foster understood my conundrum most closely and gave me the most relatable response. I'll be talking to a professional financial advisor as I think I would like to explore selling and getting a multi-unit if possible. So a combo owner/investment possibility.
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