Would you 1031, or take the cash and BRRRR?

Buying & Selling Real Estate
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Would you 1031, or take the cash and BRRRR?

Account Closed
Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
I am ready to take the next step in my real estate investing career, but I’m torn about how to proceed. I thought maybe I could get some guidance from the more experienced investors here. I have a rental property in the Seattle area that an experienced realtor is confident I can sell for $400,000. I owe $185,000 on the mortgage. I’m getting ready to sell, and move my money into another market for more cashflow. I love the concept of the BRRRR method, because it allows me to recycle my money over and over. If I sold I would be liquid, and could pay cash for properties allowing me to BRRRR. The downside of course is capital gains tax. The amount of tax I would have to pay makes me sick to my stomach to think about. Having cash will give me more opportunities to find off market deals, and give me a competitive advantage. Either way this is certainly not a bad problem to have. I’m in a good position. Which decision would create the most wealth in the long term?
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Matt K.
Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
8y
Originally posted by @Jaron Walling:

How long have you held the the rental property and how depreciation recapture will you have to pay? $200K could buy 2-3 properties in a cheaper market that's for sure. 

If you want to 1031 exchange you'll have 45 days to target 3 properties and I believe 6 months to close on a property (or multi properties) so that's something to consider.  

In my opinion I'd jump the gun on the 1031 and find cash flowing properties in a smaller market. 

 You can also do a reverse and get the replacements locked down then sale the Seattle one... little more complicated than this but not impossible...

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    8y

    How long have you held the the rental property and how depreciation recapture will you have to pay? $200K could buy 2-3 properties in a cheaper market that's for sure. 

    If you want to 1031 exchange you'll have 45 days to target 3 properties and I believe 6 months to close on a property (or multi properties) so that's something to consider.  

    In my opinion I'd jump the gun on the 1031 and find cash flowing properties in a smaller market. 

    2Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y

    You can do a cash out refi on a 1031 and complete a similar concept to the BRRR..... might take a little work to find some properties that will work though. Depending on what your cost basis is, you could buy the house with the gain and then use the non taxed part to do construction etc... or do a HELOC and buy house all cash.

    Will say though, BRRR is going to be harder to carry out then you might expect for a variety of reasons. Construction in most major metros is booming, that means trades/goods are in demand (read that as $$). Then you have a lot of nervous appraisers who typically value properties close to what they sell for (you'd need +20% gain on your remodel to get the money back out). Lastly you have tons of people scrambling to buy a house (homeowners and "investors") with low inventory in some markets... this again means you're paying close to market price for something.

    You might find it's easier to find a property that's nearly rent ready (maybe needs minor updates) and is outdated but still good condition. If you buy cash you could use delayed financing to get most your money back out and use that to go after another property. You could always remodel in the future when things aren't booming and unemployment is super low...

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  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Jaron Walling:

    How long have you held the the rental property and how depreciation recapture will you have to pay? $200K could buy 2-3 properties in a cheaper market that's for sure. 

    If you want to 1031 exchange you'll have 45 days to target 3 properties and I believe 6 months to close on a property (or multi properties) so that's something to consider.  

    In my opinion I'd jump the gun on the 1031 and find cash flowing properties in a smaller market. 

     You can also do a reverse and get the replacements locked down then sale the Seattle one... little more complicated than this but not impossible...

    3Reply
  • Account Closed
    OP
    Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
    8y
    Jaron Walling Matt K. Thanks for your input. I’ve owned it 4 years and 8 months. As far as depreciation recapture that’s something I had not yet considered. Thank you for pointing that out to me. I’ll have to dig into my past returns. I’ve decided to consult a CPA to get an accurate assessment of what I’ll owe before I decide to go this route. The more I research this the more I realize how little I know. Matt K. I am not opposed to buying something that is almost rent ready. We save a lot of money so if I have to leave some money in a deal it’s ok. We would have it back in a few months.
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  • Jason Dillard
    Real Estate Broker · Greer, SC · Member since 2013 · 548 posts · 271 votes
    8y
    @Jonathan Hulen Too expensive not to 1031. You don't have to replace debt, gain, and recapture in same property. You could replace all debt in one and own another free and clear. Since we rarely use banks, it's normal for us to purchase something with nothing down (all debt). If you're only using banks you are handcuffed.
    2Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Account Closeds suggestion of a reverse exchange is spot on.

    Yes there's a very exacting process and timeline for the 1031 exchange. But it's very manageable and there are different ways to mitigate risk at several stages during the process.  Of course the greatest risk is simply that you can't find good replacement properties.  In that case you just let your exchange die and pay the tax.  There is no penalty for starting but not completing an exchange.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    8y

    Not sure that you are a good candidate for a 1031 exchange, because there is one CRUCIAL piece of information missing - and that is your basis in the property. Your basis in the property could be high enough that your capital gains are not large. Then you would also have to have financing on your purchased replacement property (or properties) totaling to the balance of the loan owed.

    If the basis is sufficiently low that you have a big gain, then worth considering a 1031, but without a large gain you might want to pass on that since you will incur fees too ($1000 or so is not unheard of).

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