Equity in Denver: 1031 exchange or cash-out refinance??

8 Replies

BP Nation! 

Thought I'd do a little crowdsourcing on a question here in Denver: To 1031 exchange or to cash-out refi? We're leaning one direction, but it's fun to see the thinking of the BPsphere. Here's our scenario

  • 1br condo bought in 2015 for $188,000
  • Currently worth $300-$320k
  • $120-$140k of equity
  • $1675 all-in monthly payment (PITI + utilities + repairs/capX ... this is a furnished rental)

We want to leverage that equity to double our assets. It's just a matter of the method we use to do that. What say you?

    It depends on you to an extent, the real question is do you think the market your looking at is going to be able to get you a home you want to use your 1031 money on. Personally, I am a bigger fan of the cash out refi because it gives your more options.

    I would lean cash out refinance simply because you can take the cash out, put a renter in there to pay down your mortgage and access the equity again in a few years. It's basically a well that fills itself up

    @James Carlson My wife and I had the same sell/hold dilemma with our property. We decided that keeping the property, while retaining access to equity was the best course of action. 

    Instead of completing a cash-out refi, and locking in those 30 years of higher payments, we opted for a more specialized loan. What we have is a 1st position Line of credit that's tied to a zero balance sweep checking account. Every dollar we deposit in our normal banking is swept directly towards our remaining balance, lowering interest cost. So we're putting idle funds to work, while growing our credit line availability. When the market turns, we'll simply write a check from our line and purchase our next investment in cash. Each property we purchase using the line will pay off faster than the last with the additional income. 
    It's a been a great tool for us! We're able to enjoy our monthly cashflow, see continued appreciation, and maximize flexibility going forward.  

    Thanks for all the help. Interesting to see where some of you are leaning. We're in Denver. High prices. I guess I'm not super interested in refinancing into a higher mortgage with the cash flow slim on this condo already, but it's in a great building in a great location that I think will continue to perform well for years. 

    The benefits of doing the 1031 in my mind were to access all the equity. With a cash-out refi, we can only get so much.  

    @James Carlson , You hinted at both of the biggest advantages for you in doing a 1031.

    1. You don't erode an already slim NOI with a refi that increases costs.

    2. You access 100% of the equity (after closing costs)

    Something else to think about

    -If you can't find what you want in CO or if you feel that CO is plateauing then the 1031 allows you to exit that market and pull that profit off the table (to go to another table where cash flow might be better)

    I would think doing the 1031 in your position would be best.  You can leverage your real estate license to strengthen your offer by tossing the commission back to the seller.  I would think that would be the thing that tips it in favor of the 1031. Curious to know if you think the same. I often think about getting my license just for this reason.  

    I've been considering the same thing for about a year now. In my instance, a refi will cost more monthly and reduce already low/no profits as taxes in my area went up and I am needing to add property management (previously self managed). If you have your eye on another, more productive property, it may be the way to go unless you have a buy & hold strategy.

    I had a great conversation with @Dave Foster yesterday, and he presented some ideas and alternatives I thought were worth considering.