Best equity usage...1031, refi, HELOC, or nothing?

9 Replies

I own 8 properties (11 rentals).  My first property in Golden, CO has doubled in value since i bought it back in 2005.  I now live in Moab, UT which is where the rest of my rentals are.  I'm trying to figure out the best plan for the Colorado property.  Some of the options I see:

A.  Sell it.  Keep the money that I've already made into a reserve account (I'm a little low right now) and take the capital gains and reinvest it in 2 properties either in Moab or somewhere closer to me.

B. Keep the property, but either refinance it (costs money and rates are higher) or get either a HELOC or Home Equity Loan, and then take the money and do what I mentioned in A. This would put me at cash flow zero for the CO property, but projections are that the Colorado market will continue to appreciate, so I would hopefully be getting that, plus some more reserves and 2 more properties.

C.  Do nothing....

I look forward to input as there is a wealth of knowledge on this site.  Thanks in advance!

Hey Megan, 

Thats awesome that your CO property did so well in going up in property value. Regarding option A something to consider is if you would pay taxes. I know @Mindy Jensen loves not paying capital gains tax and talks about if you have lived their in two of the last 5 years I think it is. Is that the case for you? 

With option B your Golden property wouldn't cash flow? Even taking in to account that you can't pull more than 75% of the equity out? From what you've provided, it sounds like that property is an outlier for you- has it been difficult to manage from afar? Could you sell it, but two properties closer by and cash flow close to what you do now? If so, that's probably the route I'd take. Congrats on your portfolio, sounds like you've done well! 

@Megan Arzt I would make a twist on item A. Identify properties in your area and put them under contract. Then sell your Golden property and do a 1031 exchange into the new properties. You will postpone capital gains and likely increase your cashflow which over time will help your reserve account.

@Justin Brown I have not lived there in 8 years, so that option is out.  Although it would be a great one!  

@Bill S. I guess I forgot to mention in item A that if I was to sell, I would definitely do a 1031 exchange.

@Corby Goade I ran my numbers again and even below 75% I just break even. I could probably push rents up $200 and cash flow a little, but it may be an outlier. I had just been starting to think about that last week, so I'm glad you voiced that. It was my first property (originally my primary residence), and it often seems to be the case that those are outliers. I didn't buy it as a rental. The idea of rentals hadn't yet crossed my mind. The almost $350- HOA fee doesn't help anything. Also, I could sell my Colorado property, keep out the money I've put in (reserves - quit the day job), and then probably buy 2 more properties (1031 exchange) and cash flow more than I do now. The problem is that my market, Moab, has gotten very pricey. I was considering Fruita, CO or Grand Junction, CO, but I don't really know those markets. So if anyone has insight into those markets I'd love some!

Thanks!

@Megan Arzt you might want to make a connection with @Teri S. about the Grand Junction area. Have you considered Short Term Rentals in Moab? Travel is a big thing there and those two seem to go together.

@Bill S. Actually 2 of my rentals are nightly rentals.  Last year those two made more than my other 6 (at the time) combined.  I am quickly seeing that market change though as 5 new hotels and a ton of new nightly zoned rentals get built.  I am also wondering if I should sell those while that market is hot and 1031 them into something else.  It seems a bit too early for that though, but it is something that I might do down the road a little.  I bought my 2 well enough that could they could both cash flow as long term rentals as well.

I would love to talk to Teri - I will reach out.  Thanks!

Megan - We bought a property in Fruita near the entrance to CO Nat'l Monument - offered asking -5k, and was accepted immediately. Next day, offer came in at offer +10k, and another two days later for asking.

Suffice to say, we were very happy and still are. Fruita market is great - I have a wonderful realtor who I'm happy to recommend to you.

Let me know - happy to help out.

As @Bill S. said, if you're going to be reinvesting in new real estate you really should look at deferring that tax and depreciation recapture.  If your gain is $200K that's a tax of around $50K by itself.  In a 1031 the government lets you reinvest that $50K for your benefit.  What can you make as a return on an investment of $50K - 10%.  That's 5k a year in your pocket.  Something to think about.

I like Bill's advice . Find something to exchange into first -- don't want to be left holding the bag. The inventory here is so low that anything that is appropriately priced sells super quick so I don't think you'd have any concerns about timing on this end. 

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