Sell vs. Hold vs. Cash out Refi

9 Replies

First post on BE so hoping this 'test' provide some interesting answers.

I have a property in Austin, TX (78704) that's generating 8% CAC returns.  I've had the property for 9 years and it's appreciated 75% since 2006.  The market is 'bubble hot' in that zip code at the moment, with 0 inventory and multiple competing offers for every listing.  I can tweak a few things and get my CAC to 10% in the next couple of months (refi, rent increase). 

Should I hold on to this property or take advantage of this ridiculously hot market, sell, and take my gains (of which I would do everything I could to minimize the tax hit)?

After going through a number of BP podcasts and posts, I figure I have 4 options:

  • Hold for the long term.  Continue enjoying nice returns, principal accumulation, debt reduction and accept that I'min a great market that's not likely to go drastically South anytime soon.
  • Sell and Reinvest:  Realize quadrupling your initial equity investment is damn good, take advantage of this market and invest in a bigger property, ideally through a 1031 (note: I don't have anything lined up yet so pulling off a 1031, especially in my current market of Seattle, might be tough).
  • Hold, Cash-Out Refi: Refi the property at a lower rate and take out some cash to us for future real estate investments that my wife and I plan to make in the next 3-6 months.
  • Hold, obtain a HELOC: See if I can get a HELOC lined up so that we can access funds when needed...although I have no idea how interest rates here would compare to the cash-our Refi
    1. I know that I'm hitting on some general, differing philosophies of RE investing, but curious to know if folks out there have some opinions?

    John

    Welcome to BP. If the property is preforming well with little maintenance, I would cash out refi and purchase more property that way. Hang on to the property. You get tax free cash to purchase another property. Of course your cash flow will go down due to you leveraging. But hopefully your new property will help offset that.

    Selling and exchanging is another option. But if the property is doing well, I would just hang on to it. I wouldn't recommend you sell and pay the taxes on any gain you acquire though. To me, you have two options: Cash out refi to buy more property, or 1031 exchange.

    Hold with a cash out refi is the only option I ever consider. I get all my cash out (plus part of my equity) right away to move it into the next deal.  My cash keeps moving, but leaves behind a source of passive income (cash flow) from a property that I have no cash risk left in.

    Hi John,

    Welcome! This falls into the category of good problems to have :)

    I'm in a very similar position with a condo I own (and rent remotely) in Boston. I'm sure you'll get some creative ideas of how to use your equity but I suggest that your best path really starts by evaluating your short & long-term investment goals, options for reinvestment, hassle of your current unit and especially a financial analysis of your options.

    I'm a numbers guy so I created excel spreadsheets to model my various options with this condo: rent until mortgage is paid off, cash-out refi & rent, sell now, rent & sell in X years, etc) to calculate the IRR for each scenario. The IRR analysis will allow you to compare your options financially taking into account different timing and cash-flows. Don't forget about taxes and all operating expenses in your IRR calcs (if you don't know how to run IRRs, search BP, google or YouTube and you'll any # of resources to learn).

    My analysis showed that I would achieve the best IRR by holding and renting 1.5 more years then selling right before I hit the IRS capital gains tax (I moved out of it 1.5 yrs ago)... the neighborhood is appreciating fast due to a subway extension opening in 2 years.

    Run your IRR analysis and evaluate your options... then decide if what the best move is.

    @John Lusk

    I personally would do a cash out refinance - with a fixed rate and see if you can also get a HELOC afterwards to maximize the cash out on the property. A HELOC is an ARM so it is risky to take too much out this route if you plan on holding the property long term. Rates will go up. They are so low right now.

    If you are 80 years old cash out otherwise you seem to know the options pretty well

    @Jacobus Bor why would you cash out if you were 80 wouldn't you want your heirs to benefit from your investments.

    it depends on your tax rate.  If you don't have a high income, you may not pay much tax on the gain so it may be worth selling and paying a little tax so you can take all of the depreciation on the new property.  Cash out refi's are always good.  Only do a 1031 exchange if the new property is a better deal, not just to defer taxes.

    All,

    Many thanks for the great feedback.  It's definitely a great problem to have, but one that's nonetheless wrought with long-term implications.  Based on the feedback I've received thus far, I'm inclined to do the following:

    • Inquire about Cash-Out refi's, what rates I can get for a 30 year fixed, how long it will take to close, etc.
    • Pull out the amount of equity that I've put into the place up to this point. While I'm certain that more is available, I'm hesitant to over-leverage when I'm not exactly sure where the money is going.
    • Ideally use that cash for another investment property (or two).  Seattle is a tough market right now, so if I can't find anything that meets my goals and criteria, I'll use the cash to pay out a higher interest loan that I'm currently carrying.
    • I do like the idea of at least looking at HELOC rates. My inclination tells me that I can get better rates from other existing assets (i.e. cash-our refis, LOC against existing accounts, etc.) but the thought of being able to move very quickly on any deal is very intriguing.

    Again, many thanks for all the feedback. I'll continue to keep an eye out for other words of wisdom!

    John

    Originally posted by @Ron Shepherd :

    it depends on your tax rate.  If you don't have a high income, you may not pay much tax on the gain so it may be worth selling and paying a little tax so you can take all of the depreciation on the new property.  Cash out refi's are always good.  Only do a 1031 exchange if the new property is a better deal, not just to defer taxes.

    Ron is right on the money.  The 1031 Exchange should put you in a better position than you were before.  If it doesn't, then you should not be doing it.  The economics should drive the decision to do the 1031 Exchange and not the tax deferment.

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