I’ve narrowed it down. 1031 or cash out refi

12 Replies

I have a paid off condo in Scottsdale, Az that I’d like to leverage to get into a few more deals. I own a few properties but still consider myself a newbie. I’ve looked into all sorts of ways to use this condo as leverage to get access to more cash and do more deals. For my goals I’ve narrowed it down to doing a cash out refinance or selling it and doing a 1031 exchange. I wanted some feedback on how best to move forward with each of these:

The condo is worth $165k (paid off) and I am currently cash-flowing at a little over $600/month after HOA/taxes. My goal with the new loan would be to cashflow at the very least $200/month. In order to achieve that the most I would be able to take out in cash would be around $60k on a 30yr loan at 4.125% (estimates). In my local market I’ve recently been able to achieve a 10 cap with 13-15% roi. That would be my baseline for investing the cash into 1 or more deals here in Idaho.

My questions are:
Do you have specific parameters when doing a cash out refinance that you like to follow?
would you do a 30yr loan on a refi or would you go shorter?
Would you be ok with less cashflow on the original property after the refi with the idea that you’ll gain more on the deals done with the cash?

Option #2- 1031 Exchange:
As I’ve mentioned this condo is paid off and has appreciated really well. I bought it in 2010 for $58k and they are now trading at $160-165k consistently. With the cashflow at just above $600/month I also see the value of a 1031 exchange. I live in the boise, Idaho area and I am fairly confident I could use that money to do 1-3 deals here in Idaho while meeting my parameters of 10cap and 13-15% roi. The largest factor in a 1031 that makes me nervous is the short timeline to identify the properties and go under contract within the 45 days of my property closing, it I’m confident I could make it happen.

My questions are:
Do any of you have parameters that you like to see when deciding to do a 1031? For example in the current market if someone were to purchase it today it would be a 7% cap and a -6% roi. Compared to when I purchased it in 2010 at a 18% cap and 25% roi. Or do those numbers not mean much to you when making the decision?
Would you even consider doing a 1031 with a property that is cash flowing well?

Overall, what strategy would you implement? The cash out refi or 1031? What experiences have you had with either? What were some of the harder aspects of each?

Thanks for any feedback.

Hi @Taylor Dame

I have used the cash out refi a few times to buy my next property.  I think it is a great method. I did the due diligence on using a 1031 exchange, but found a refi would be cheaper and give me more flexibility in buying the next deal.  Also if you have a property that is cash flowing and is not giving you any major maintenance issues, I would keep it.   Interest rates on mortagages are still historically quite low so if you can lock in for 30 years to give you a lower monthly payment on your refi, it is probably a good idea.  You will be beating inflation after a few years.  My only caveat is to not over extend yourself with too may purchases right now.  Boise has seen meteoric appreciation since 2011 and prices could dip and you want to also be able to buy as prices are declining.  Just my thoughts.  Nathan

Hi @Taylor Dame ! Great job on the purchase during the low in AZ!  I personally would pursue the Cash out refi ...as I would be very doubtful you could ever come close to repurchasing something at that price point in Scottsdale.  Nice to have that diversification and foothold in a desirable resort area.  I wholeheartedly believe in the Boise market...but I don't have a $58,000 property to help you buy.   Have a fantastic day! 

Congrats for being in this position man.

I don't have any advice, just happy to see you're doing well!

@Taylor Dame , "the short timeline to identify the properties and go under contract within the 45 days of my property closing" would likely make me feel too hurried, too. And you know what can happen when you're under that sort of time-pressure, right? So, I'm inclined to support the posts above that recommend going with a cash-out refi - ESPECIALLY if you can get those loan terms you quoted! (In any case, you'd still be up for capital gains SOMETIME in your future). Congrats on having such great options. Good luck with those 13-15%+ ROI deals...

@Nathan Carter thanks for taking your time to respond to the discussion. I appreciate the feedback. What do you mean by the cash out refi being cheaper? Are you currently working on anything here in the Boise area? 

@Jonna Weber thanks for the comments. The comment of diversification is something I hadn’t condisdered. Thanks 

@Taylor Dame , I'll second that question to @Nathan Carter .  I've never heard of a 1031 exchange being more expensive than a refi.  If so then I need to raise my prices!  

Some of your decision is going to depend on what kind of roi you can get in new purchases.  Your 25% roi/18 cap is a nice trophy to put on the mantle but the song you need to be singing is "What have you done for me lately".  

When you say that the 7cap/6% doesn't meet your parameters of  10/13 I wonder why there is even a question of holding on to it.  Is it just the 45 days?  Because the two greatest advantages that a 1031 would offer are a lower cost for more money to invest, and you get rid of the dog in your portfolio to purchase properties that fit your parameters better.

Those who are looking for the trophy or the unique or the specialized use property and are looking from a distance may have trouble finding what they want in that time.  But rental properties that are the norm are commodities.  The addresses may change but the general characteristics don't.  The same things are generally available within a given time span.

If you're not confident that the type of properties you are looking for are readily available then you need to first re-examine your parameters and see if their realistic.  That could take you to a whole different decision on keeping a 7 cap 6% property.  If you are confident the types of properties you want exist then the 45 day period is really more of a psychological impediment rather than an actual barrier.

Hi @Taylor Dame and @Dave Foster I am happy to clarify.  When I mentioned the 1031 not being cheaper I was looking a few factors.  This was in Washington DC several years ago and the cost of the process was about $2k.  I believe 1031 fees are about half that now and would likely be cheaper in Boise than DC.  So on a straight fee basis a 1031exchange is less expensive than the refi.  But, I have been able to refi into lower interest rates reducing my cost of capital on the existing property and reducing expenses.  Also, I factored in that if I was not able to find a suitable replacement property in 45 days and also close on the new property in 180 days I would face significant capital gains taxes.  So, considering all of this, I found the refi to be a better option for me.  I think the 1031 exchange is an excellent strategy and one I intend to use in the future, but when I definitely know I have the time to find a suitable replacement property.  Good luck on your decision. Nathan

@Nathan Carter , Thanks for the clarification.  You're right, one off exchanges usually by attorney's with no economies of scale have been known to be that high.  Today, the norm is much more like $700 - $1000.  for a garden variety exchange. I'm either moving to DC or raising my prices :)

Kudos on the extended analysis. 

COR is WAY more expensive than a 1031. I sold and bought two new properties earlier this year via 1031. Yes, it was hectic, but I got pretty good deals in the end, though it was a hustle. 

For a COR I'm looking at 10K + for two houses, for a 1031 I'm looking at under 2K to sell one house and buy two more.

You can also identify a lot of properties within the 45 day period and only close on a few of them if you want. The key thing is that you identify them within 45 days. I started to add additional properties to my list just in case other deals fell through. Luckily the other deals made it.

Originally posted by @Taylor Dame :

@Jack B. I'm curious on those costs you mentioned. Would you mind going a bit more into depth on the $10k+ for COR vs the $2k for 1031?


Most lenders I've talked with charge about 5-6K to to a COR. I know that's what I've paid and then some on investment purchases (actually my investment purchase closing costs were usually 6K++.

The 1031 via my attorney was 500 for sale of property and 750 per new property purchased. 

Keep in mind if you sell and do a 1031 exchange you'll pay closing costs and realtor fees when you sell. In my mind, I would hold on to the condo unless you see a substantially better opportunity.

Also, you might consider a heloc, which would give you more flexibility. You don't have to pay interest on the money until you're ready to use it.