Best way to maximize funds; sell or cash refi?

Question

Best way to obtain cash to expand real estate capital? I have a home we purchased with a solo 401k, that was rehabbed, and ready to sell with appraisal of $250k. If I sell I can have funds to use again for next project. Or an option to obtain a cash out refi to get 80% out and keep home as a rental with $1500/mo rental income. Do most investors just use equity to buy more? Or just rehab and keep on buy/selling? Best advise to maximize best use of cash,

Thanks

Jonathan Taylor Smith · Answer

Hello @Jess A. - My goal is to grow a large portfolio of rental properties, so selling is not on the agenda for me. I spent most of 2018 refinancing properties at 65% to 75% of appraised value (be careful of that 80%), which in most cases allowed me to pull out all of my cash plus some profit. And in a couple of cases my tax free refi cash out profit was greater than what I would have been left with after paying taxes if I had sold the properties. Plus, by keeping them, I get monthly positive cash-flow, annual tax benefits, chance of appreciation over time, and eventually a free property from the pay-down of my mortgage by my tenant.

Why sell and get paid only once, when I can get paid almost as much (if not the same amount or more) via refi when accounting for taxes on the sale and Realtor commissions, etc... The numbers are certainly not accurate (just a made up example), but it seems like the choice is to sell today and get (let's say) ~$50K one-time; or keep it and get an accumulated $500K over 25 years or so, plus have a legacy to leave when I die and a bank I can potentially withdraw from every 5 years or so with another refi as/if needed in the future.

I cannot speak for you, but for me, I see selling for cash today as a crime against my future self, child and future grand-children. What's better for my future? Having sold a bunch of houses for cash that is long since spent; or still owning a bunch of houses that are kicking out cash each month with tons of equity present that I can tap into for even more cash at any time?

With the possible exception of a 1031 Exchange to get a larger / better property tax free, I'm NEVER selling anything. But that's my right answer... Yours may be different.

J.T.

Clayton Mobley · Answer

@Jess A. I agree with @Jonathan Taylor Smith that this depends on your goals. I also would need a lot more data about the current prop as a rental to know how to advise. $1500 is the anticiapte rent rate, where is that info from? What expenses are you including, will you self-manage, what are the taxes and insurance, do you have a mortgage on the prop, if so how much, what are your payments, how recently were the big-ticket items updated (roof, flooring, HVAC, water heater)? Those kinds of details really make or break an investment.

My other question would be: was this your primary until recently or has it always been held as a rental? If it was your primary for at least 2 of the last 5 years, you can qualify for the Sec 121 exemption for the capital gain ($250k for single, $500k for married filing jointly). If the numbers don't work out as a rental, this is your best bet for selling. You can then take that tax-free cash and use it as several downpayments on solid cash flow props.

If it's been a rental, you might qualify for a 1031. The first step is determining if it's a viable rental property. Then you look at selling strategy if the answer is no.

Again, it depends on your goals. Are you doing a BRRRR thing, trying to buy distressed and force equity, wanting to invest in your own market? Or is your goal simply cash flow with as little time and effort as possible?

Post some additional details about your goals and current prop data and the BP community will be better able to advise. Feel free to tag me.