Cash-out refinance (VA to Conventional) or 1031 exchange?

Question

Hello Team, I have a 4Bed/2.5Bath SFR in Central Texas with a tenant leased til OCT 2022 and a property manager agreement til 2023. It is not cash flowing but I am breaking even because the property taxes are killing me (I guess I'm building equity/appreciation). There's 275k mortgage left (VA loan) and the comps are selling around 400k-420k and Redfin/Zillow estimate it as 390k. I have two questions: Can I sell the property via 1031 Exchange with a leased tenant and property manger? Or should I cash out refinance into a conventional loan and use the equity/VA Entitlement to purchase another property?

My gut is telling me to sell since I don’t see myself investing into Texas anytime soon. I’m currently stationed near Ft Lauderdale but I’m originally from Arizona and would like to purchase a multi family there. Thoughts? I’m a rookie as you can tell. Thanks a bunch!

Kevin Manafi · Answer

Hey @David Navidad,

If the comps are really where you are saying they are, then you are in a great position. Having options is nice.

The decision on whether to do a cash-out refi and keep the property or sell outright and do a 1031 Exchange into a different property all comes down to what you are trying to accomplish. For example, the property is only breaking even on cash-flow...is this because the rents are under market? Do you think the market that the property is in will see rent price growth over the coming years? If so, and if you are looking for a monthly passive income, then perhaps keeping the property and just taking your equity out to roll into another property would be the best move.

However, if you aren't looking to stay in Texas and don't want to stick it out, then selling with that much equity is another solid option and gives you more flexibility to take that money and reinvest elsewhere.

Dave Foster · Answer

@David Navidad, There's no problem selling your property with tenant and management in place. As a matter of fact it might actually command a premium in this crazy cash rich market. That doesn't affect your ability to 1031 at all.

As I read between the lines of what you said I see a property that isn't cash flowing and is rented at an amount that may be above or at the top of market. Unless your refi rate is substantially lower than what you have now, a refi will only drive that performance lower.

David Navidad · Answer

@Kevin Manafi Thanks a bunch! I was thinking very similar. Everyone I spoke too said that I was renting it very high. My property manager said that it wouldn’t rent but within a week I had a tenant. So I’m not sure if I got lucky or if the rents are truly increasing. Time will tell. It’s also a military town and decent housing is limited. Right now I’m leaning towards the 1031 exchange but that’s just because as an inexperienced investor I believe it’s the “safer” option. I really need that all powerful wisdom from the BP wizards haha

Cash-out refinance (VA to Conventional) or 1031 exchange?

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