Cash out refi or Sell while market is high?

Question

Good morning BP. We're looking to expand and up against a decision to refi or sell. We have 3 SFRs that we are debating on doing a cash out refi or selling for a down payment on a larger MFR.

If we refi we will still have 3 cash flowing properties and won't be on the clock for a 1031exchange and have a robust down payment available.

If we sell we're have a larger down payment. Will be on the clock for a 1031 but will have less roofs to worry about.

What other things am I missing?

Randall Alan · Answer

There are several things to consider that you haven't mentioned... not the least of which is taxes.  If you sell, you will have to pay capital gains taxes on your profits.  That's at least 15% (for long term gains), and your actual tax rate for shorter than a year.

Another consideration is: what is your end goal?  If your goal is to grow the number of properties for passive income purposes, then holding onto your properties is the right way to go.  Doing the cash out gives you a lot of your profits and you get to keep growing.

We have sold several properties in the past year, but the ones we sold were ones that were problems for us... frequent turn-over due to bad locations, etc.

1031's while functional (letting you use your taxes to purchase your next property) only delay you in paying those taxes... I'm not a fan of 1031's because of that.  I don't want those taxes hanging over me later on.

Another consideration is what is the rate and term of your refi?  Will it cost you more than it's worth?  If you are reducing your principle and interest by refinancing, that is another vote for cash out refi.

All in all, if I were in your situation, I would cash-out refi as long as the numbers make sense and there isn't another reason why you would want to sell the properties.  It lets you grow your portfolio, and you will benefit from increased appreciation / tenant-paid loan pay downs, as well as the depreciation write-offs.

Randy

Dave Foster · Answer

@Chris P.

1. The quality of the current rentals - stress test them to see what their performance will be if you refi

2. Factors potentially affecting future performance - Cap ex, state of the neighborhood and other demographics.

3. Amount of cash you will free with a refi.

Those are what you consider first and foremost.

Done correctly a lifetime of 1031 investing will have you paying 0 in tax throughout your lifetime.  It doesn't have to be just delayed.  But that's not your first consideration.  Its the tool if your current properties fail any of the 3 criteria above.

Brenna Carles · Answer

Agree with Dave on this one! However, you personally need to see if keeping the property is worth the hassle aka the money you will gain each year from it. If not, you could sell and do a 1031 exchange. Make sure you set it up with a 1031 intermediary like Dave. Lastly, if you do not sell, you may want to look at a HELOC as opposed to refinancing because a cash out refi is one and done with closing costs. A HELOC is a revolving line like a credit card and usually do not have closing costs. Hope this helps!

Basit Siddiqi · Answer

@Chris P.refi's are great as you get to pull out cash and is normally not considered a taxable event.

Chris P. · Answer

@Randall Alan

Thank you for the reply Randall, these are great points. I'm leaning towards keeping them and doing the refi's as needed to expand for many of the reasons you mentioned.

Cash out refi or Sell while market is high?

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