Cash out refinance or 1031?

Question

I’m interested in putting the equity to work from my current rental. I’ve identified Midwest markets where I could pick up multiple properties that would generate even more cash flow than my current SFR.  What I’m exploring is how to fund the new properties ie 1031-ing or doing a cash out refi to unlock the equity. Thoughts?

John Warren · Answer

@Bryan Champ the big question in my opinion is whether or not you can still cash flow on the first property after you do a cash out refinance. As long as you can pull equity out and still see decent cash flow why not hold onto it?

The 1031 exchange is an amazing tool when the time comes to trade up, but you have to keep in mind that you will lose 7-8% of the sales price to the costs you incur- title, attorney, surveys, commissions, concessions, etc.

Dave Foster · Answer

@Bryan Champ. Both ways work.  If you refi you don't get access to as much equity.  But you get to keep your rental now.  I'd start with the current rental - Is it performing well now?  How will it perform if refinanced?  Do I want to keep it?  If answers are yes then refi.

But if it's probably not the best property to hold on to then the 1031 is the ticket to sell and buy two or more  rentals that will have better NOI and be more what you're looking for.

Steve Vaughan · Answer

Excellent points from John and @Dave Foster (as usual) .

Cost is a major factor.  So are hassles.  I sell headache property.  Don't go through the cost and pain of a refi only to realize you actually don't like the property and end up selling it anyway. Double costs.

My max allowed cost of capital is 7%. I've flinched as people told how they tapped $42k but it costed them $7k to get it.  My last couple were $2800 to get $38k, $3k to get $118k.

Bryan, how much equity are you estimatimg on a refi and a sale and what are the costs of each?

Jaron Walling · Answer

Boise, Idaho is really ramping up from what I've heard. Lots of companies are trying to relocate or expand business to the city because of low cost of living and excess to outdoors. I'd aim for the REFI unless the property sucks or doesn't cash-flow afterwards. Either way you're in a great position. Good luck man.

Cameron Tope · Answer

@Bryan Champ - both @Dave Foster & @John Warren make great points.

I would also consider the benefits of growing a large portfolio vs staying small. Yes your returns won't be as high due to the lack of leverage but you'll have a lot of cushion in the next crash.

Best of luck!

StacyA McBain · Answer

If you can keep it and still cash flow, I'd lean toward a refi, unless you want to take advantage of this long-running strong market and capitalize on the gain/current values. When looking for cash, a heloc on your primary residence could be another option. There are multiple ways to structure it. As long as keep in mind that your home is the collateral.

Jared Stasch · Answer

If you refi then you will have to keep in a certain amount of the equity in order to keep a cash flow which will probably be very minimal. And then you lose that money to use on the next property.  The problem is hoping the market will continue to appreciate versus buying a property you know you can raise the value on and grow your equity. I would take adding equity over cash flow every day due to my investment goals. Sooner or later your property will need paint, a new roof, landscaping, something will break, and there goes the cash flow. If you are trying to build your wealth quicker then finding value add properties, raising the value and selling it to put into another value add property is the quickest way to build your equity and return on investment. It's not an easy road to take since you are constantly looking for the next deal however you can keep your annual returns pretty high and not have to rely on the market appreciation to get you buy. At least that is my opinion.

You are right that Boise doesn't make sense anymore but why go to the Midwest? What are your goals when looking for the next investment? I have some properties in the area we are looking to flip so let me know if you would rather stay local and I can help you find something that will cash flow and have room to grow equity. Those properties are still out there, it just takes a lot of digging and a lot of offers.

Ryan Hall · Answer

Bryan - I am in similar boat with one of our Boise 4plexes.  Let us know what you end up deciding and how it goes. I'll PM you to bounce ideas.

Bryan Champ · Answer

@Jaron Walling

Boise has seen a lot of growth and it’s been great for my holdings.  But given the price increases in Boise I am looking at places like Indy and KC to get better returns.

Bryan Champ · Answer

@Steve Vaughan thanks for the response. The property has performed great and rented for 3 years without vacancy. been a huge winner for me.  My plan was to REFI but wanted to hear some additional perspectives and everyone seems to be saying the same thing.

Many thanks all!

Cash out refinance or 1031?

Most Popular Reply