Keep Current Condo or 1031 for better margins?

Question

Hi BP forum,

My wife and I recently moved in to our first single family home and stumbled our way in to real estate investing after house hacking our condo and keeping it as a rental property.  With high HOA fees we break even every month on the property and are hoping to increase the rent next August.  With a property that is appreciating well and is a break even property, would it make more sense to do something like a 1031 exchange and look for a better property like a SF or townhouse for a better ROI?  Another option would be to hold on to this property and potentially use the equity for a down payment on another property some day.  Any advice is greatly appreciated.  We live in Northern VA for anyone who knows the market.  Our condo is a 2B/2BA in Tysons Corner with a ton of new development and looks promising from an appreciation standpoint but that's a gamble considering all expenses aside from mortgage, HOA, and utilities will be on us.

Thanks!

Lien Vuong · Answer

100% agree with @Dave Foster and exercise your tax free gains option. Why own a condo where you have little control over, break even, be confined by HOA bylaws? I would sell it and recapture that equity into another property where you're experiencing higher appreciation and more cash flow.

Ultimately you have to think whats the highest and best use of your $ - you'll find your answer that way.

Dave Foster · Answer

@Paul Ellington, if you lived in that property two out of the previous 5 years you can sell and take the first $500K of profit tax free.  No need to 1031.  That's the move I would make.  Appreciation often turns into dreams of sugar plums.  And you've got the opportunity to sell tax free now.  Use the cash to better your position or purchase more real estate.  Whatever you want.

Paul Ellington · Answer

Thanks Dave and Lien! My biggest concern is we would have to take out a loan as a rental property whereas we have a current mortgage based on a primary residence (i.e. put 3% down and PMI is lender paid).  In our area I'm not sure the equity we have would be enough to cover 20% down required on a larger rental property like a townhouse.  I'm also unsure about the process of applying for a loan for a rental property.  My understanding is the requirements are much higher in terms of being approved for a rental property loan vs. a primary residence.