Which is better investment in these two scenarios

Question

Hi All,

I have a question about which route is a better investment regarding 1031 exchange.

Background: One property purchased five years ago at $160K. Currently, the value is $260K and the current rent is $2,000/month.

Scenario 1: Keep the current rental property. No 1031 Exchange and No Cash-out Refi.

Scenario 2: Sell the current rental property at $260K and do a 1031 Exchange to buy a rental property at $260K (all cash, no finance). The rent for the new rental is $2,500/Month.

Assume all the carry-on expense for the new rental is $250 higher than the current rental property.

Which route you would like to proceed? and Why.

Alex Olson · Answer

@James Li I would look at your current return on equity. You have $100,000+ tied up in the one property you purchased 5 years ago. By leveraging that $100,000 (plus the other amount you put on that property when you bought) you can buy a nice fourplex here in the Midwest that will cash flow (I would guess) greater than what you have now. And, not sure how much you love this property you currently own but you get more of what you want with your next purchase. I look to maximum leverage. A good calculation to tell you if this is a good idea or not is to use the Return on Equity calculation. I am happy to show you how this works in more detail.