Just starting out after 10 years as a landlord

Buying & Selling Real Estate
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Just starting out after 10 years as a landlord

Erin Genz
Rental Property Investor · Colorado Springs, CO · Member since 2018 · 8 posts · 8 votes

Hello all,

I have two rental properties in Colorado Springs that were both our primary residence before becoming rentals.  We've had one of the rentals for 10 years and after owning the property for 15 years, the frustration level has outpaced the value to me so I thought I'd toss out a question to the community.  We expect to get about $150k out of the property when we sell.

Do we take the cap gains hit, pay off the mortgage on the second rental ($80k) to increase cash flow on that property and do something else with the remainder (pay down our mortgage, invest, etc.)

or

Do we 1031 exchange into something else?  If we go this route, I would love any insight from others' experiences since we've never actually purchased a property as a rental before. 

We're working toward financial independence so the question really comes down to increased cash flow vs. decreased liabilities.  All opinions welcome!

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Doug Shapiro
Real Estate Broker · New York, NY · Member since 2014 · 140 posts · 58 votes
8y

Hi Erin,

Do the 1031 exchange!  Speak with an accountant and/or 1031 exchange intermediary to find out exactly how much you would save from a tax perspective.  

The reason why you wouldn't pay off the remaining loan on your other property is because your cash would be tied up in that asset completely and it would reduce your rate of return.  Better to use that cash to invest in something that will give you a higher return and not cost you thousands of dollars because of taxes. 

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  • Doug Shapiro
    Real Estate Broker · New York, NY · Member since 2014 · 140 posts · 58 votes
    8y

    Hi Erin,

    Do the 1031 exchange!  Speak with an accountant and/or 1031 exchange intermediary to find out exactly how much you would save from a tax perspective.  

    The reason why you wouldn't pay off the remaining loan on your other property is because your cash would be tied up in that asset completely and it would reduce your rate of return.  Better to use that cash to invest in something that will give you a higher return and not cost you thousands of dollars because of taxes. 

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Erin Genz, you can't separate your life as a real estate investor from your core values and your goals.  There's so many questions for you to answer first that have nothing to do with real estate investing.  Figuring out tax bills etc - that's the easy part. 

    What's not easy is defining for yourself what does financial independance look like.  Is it lots of income but little margin? Is it debt free but not extravagant?  Is it freedom today or gratification sooner rather than later.  No right or wrong answers just your answer.  But to try to figure out what to do with a rental simply by the numbers you gave is a non-starter.  

    Was the second property your primary for 2 years within the last 5?  That might change things if you could sell that one tax free.

    What would you do with the money from the sale of the first one?  Pay off bills or high interest things.  Very few people are buying into rental assets that are yielding more than 6-7% these days.  Paying off student loan debt at 6.8% is a very attractive alternative.  But you've got the tax bill.  So....

    Would you be willing to buy additional real estate.  Can you function and do you want to function as a landlord.

    So many questions - I do 1031s and I wish it was as easy as saying that's the right answer.  But it may not be.

    Start with a discussion with your inner self.  then do the math as @Doug Shapiro suggests.  Then chart your course.

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  • Erin Genz
    OP
    Rental Property Investor · Colorado Springs, CO · Member since 2018 · 8 posts · 8 votes
    8y

    @Doug Shapiro, thanks for the reply!  I hadn't realized there were folks who exclusively focus on 1031s (which in hindsight, duh!) so I'll definitely try to find someone in the local area to speak with regarding pros and cons.

    @Dave Foster, you've nailed my issue precisely.  The only debt we have is the mortgages (2 rentals and our primary residence) so we're really battling psychology on whether it feels better to have zero debt moving forward or the cash flow from continuing to own rentals.  Unfortunately the one we're going to sell hasn't been our primary for 10 years and the other one, which does meet the criteria, is a much better rental for us.  Hence the quandry!  

    A little clarifying question on the 1031, do you have to buy something priced as high or higher than what you're exchanging or do you just need the financed piece to be at least as large?  The house is probably going to sell for $270k-ish but the mortgage is down around $110k. 

    Thanks again!

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    8y

    @Erin Genz, There's a two part rule of reinvestment.  If you want to defer all tax you must 

    1. Use all of the cash proceeds  ($160K ish).  and 

    2. you must purchase at least as much as you sell ($270K ish minus closing costs).

    You can purchase less than what you sell and you can take some cash if you want.  You will pay tax on that difference or cash but shelter the rest of your gain in the 1031.

    So that opens up other possibilities of doing a partial exchange and paying off some high interest debt but using the 1031 to shelter the rest off the gain.  Sky's the limit!!

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