Should it stay or should it go?

10 Replies

Not sure if this CA property purchased in 2011 is a keeper or if I should 1031 exchange it this summer when the lease is up. Some stats: Purchased for $148,000 and refinanced in 2015 with a cash out that was used to pay off consumer debt (prior to my education in REI!). Currently rented for $1665 to a tenant who has been there for 5 years and pays on time with minimal fuss (self-managed). Owe $200,000 with an appraised value at the time of the refinance of $300,000. I'm assuming the value has gone up a bit since then, but want to be conservative in my numbers.

As I see it I have 3 options:

1)  Do nothing and continue breaking even in regards to cashflow and slowly build up more equity.

2) Try to get a HELOC on it to access the equity. Purchase cash flowing properties in out of state markets where I am currently investing.

3)  Sell it and do a 1031 exchange.

There are pros and cons to each option.  I've been leaning toward the 1031 exchange, but haven't ever done one before and am concerned with the additional costs I haven't even considered.  I would have to put in approximately $15,000 to do some needed updates for it to get top dollar in this neighborhood and am not sure if that is worth it as well.  The thing I keep hearing in my head is the advice from more seasoned investors who regret ever selling a property...

Any and all advice is appreciated!

Krista

@Krista Roodzant ,  The 1031 will not add much in cost.  You can do one with a solid firm for much less than $1000.  The real issues with the 1031 are going to be the rigid timelines and the reinvestment requirements.  As the market matures it becomes harder and harder to find good replacement properties.  So some due diligence to check your market out prior to.  In any event you can always start a 1031 and if you the market doesn't look good then let it die with the 45 day identification period.  That gives you some time to lift up some rocks and see what's out there.

If you are a speculation investor then the prevailing attitude is keep it till you die. You may never benefit but someone will some day.

If you are interested in income and ROI then this is a very poor investment property and you would be wise to sell and reinvest elsewhere with the 1031.

@Dave Foster , I appreciate knowing the fees are that low and that if I initiate the process and cannot find a good replacement, I don't have to continue.  The costs to sell and the fix-up expenses will have to be paid out-of-pocket and cannot be recouped after the sale with a 1031 as well, so those are the unknowns that give me pause.

@Thomas 

@Thomas S. , I agree it is speculation to keep it, but it is in California...

That being said, I am currently purchasing out-of-state for income and ROI, so this property is an anomaly for the rest of my growing portfolio.

Thanks, both of you, for your insights!

I've looked into it with one of mine that has pretty similar numbers. The lenders I spoke with that would do a HELOC on an investment property were at 70% LTV. Even if your property appraised for $310k, you're looking at being able to pull out about $18k. Plus you are reducing the cashflow on that property. Higher payments on the CA property with $18k to put....where? I'd 1031 over a HELOC

@Krista Roodzant , If by costs of sale you're referring to fix up costs to make it sellable then yes that would end up being an out of pocket expense.  If youre talking about commissions and title insurance etc as closing expenses then that is all put on the settlement statement along with the 1031 fee so those some right out of the initial sale.

There is also a way to include fix up expenses on your purchase using a reverse improvement exchange.  They're a little more expensive than a regular 1031 but they can limit your out of pocket expenses and dramatically leverage the use of your 1031 dollars.

@Dave Foster couldn't she take the $15-18k out at the exchange and just pay tax on thst to pay off her improvements?  

@Krista Roodzant asking Dave a question for you there (:  if you decide to do an exchange, look for and think through replacement options before you list it so you have your strategy in place in case it closes quickly.  

Account Closed could take as boot and only pay tax on that amount.  If it’s just $20k or so that would be cheaper than a reverse exchange.  And depending on some particulars she may be able to wrap up all into the purchase and still defer all tax.  Sure Krista let’s pm and chat.