No Cash Flow / Sell or hold?

Question

Hey!

I currently owe 260k on a rental property and it's worth around 600k but not producing any cash flow. Should I sell or hold? This is the only property I own and value is rising a lot every year. I would be investing profits in either multi-family or airbnb friendly single family houses in Los Angeles area where I'm struggling to find deals (although I know they're out there). Thanks!

Thomas S. · Answer

Sell. You could die next week, next month, next year and never benefit one dime from this investment without cash flow.

Ken Dillard · Answer

You have to ask yourself what is your goal?  IF the goal is cash flow and your current property is not, then it sounds like you would take the appreciation and fund other deals.  But before I got rid of one rental and jumped to other multi-rentals I might stop and figure out what would I do differently to ensure I don't end up in the same situation.

Dave Foster · Answer

@Yali Sharon, Yes, on both counts.  Your exchange must be from investment to investment.  However, If you can be patient for another year or two it is possible to sell your rental, use a 1031 and by another "really really nice" rental and after using it for investment long enough to satisfy intent convert it into your primary residence.  Once again, as long as you own that primary you will not trigger a tax.  And if and when you do sell  you may meet the primary residence requirements to exclude a portion of the gain tax free!  That's kind of the holy grail of 1031 investing right there (in second place is dying and leaving the property to your heirs at a stepped up basis - but thats a distant second).

And the reinvestment requirement is two fold.  In order to defer all tax you must purchase at least as much as your net sale and use all of the proceeds in the next purchase or purchases.  Type and number of properties does not matter.  the amounts do.

And if you do purchase less than what you sell or take some cash to follow the @Thomas S. philosophy and go to Tibet or on a cruise, you will only pay tax on that portion and will still defer the tax on the rest.

Dave Foster · Answer

@Yali Sharon, This is exactly what the 1031 exchange is designed to facilitate.  You've to a greatly appreciated asset that is underperforming in terms of cash flow.  If appreciation is what you want then you obviously must consider the appreciation potential of anything you would go to compared with where you're at.

However, if you're wanting to maximize cash flow then the 1031 let's you move that asset in other types/locations/price points that can let you put that equity to work.

@Kevin Wang, nailed it that the most important criteria is that if you want to avoid all tax you must purchase at least as much as your net sale and use all of the proceeds to do that.  But you're actually not restricted to only 3 properties (although there are some identification rules that apply). And you can allocate the cash in anyway you want in a multiple purchase situation.

Of course you're repositioning yourself this whole time without triggering the tax on the $400K+ of gain you probably have locked in.  Which in your case is really the govt letting you continue to invest their $150K of tax for now and you get the benefit.

Archie Robb · Answer

Without knowing much about the property it's hard to give sound advice. However, I would seriously consider selling just because you can upgrade to a bigger property with more units and cash flow a bit immediately and cash flow quite a bit once you get all units up to market rents.

Airbnb can be great in certain areas. Feel free to PM me if you need any help for the LA market.

Yali Sharon · Answer

Very helpful! So if I understand correctly for a 1031 exchange I must re-invest the entire amount of sale and not just the profits earned, correct? I've also heard that I can't re-invest from an investment property to a primary residence purchase which would mean I'd have to continue renting in LA.

@Thomas S. True! Important reminder... This is something I often think about in life - that there's an ending right around the corner. It's the primary reason I spent 2016 traveling the world. However now I'm not in a good position for getting a loan because of that...

No Cash Flow / Sell or hold?

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