Updated 8 days ago on . Most recent reply
Exit Strategy / 1031 planning
Hi! I'm getting into the real estate game a bit and trying to answer a difficult question about when to exit a property vs. just pull equity out.
I have owned a condo in Philadelphia in a gated community (great location, easy to rent, but very high HOA - $600-900!) for 8 years, but have been renting it out now for 3+ years. I had previously refinanced it to a 10-year 2.25% loan when it was my primary residence, so even though I have a negative cash flow of almost $500/month, my equity gain is still pretty good due to the low interest rate. It will be paid off in 5 years at this rate, and at that time, I would cash flow maybe $1500/month at current rents.
But, right now, I probably have nearly $400K equity tied up in that property.... and the question I am struggling with, as I now live in Sacramento and am trying to buy some multifamily units in the area (path of progress, local market that I know), is how to best use that capital.
1) Sell the property outright - as my actual appreciation isn't much (maybe 20-40K), I don't think my capital gains taxes would be super high. BUT, this would give me the flexibility to take my time to find the right properties and get out of a negative cash flow condo.
2) 1031 exchange - try and sell this property (which in the philly market, might take some time) and buy 2-3 Sacramento properties that cash flow without an HOA.
- My worry is the timing and actually being able to buy some properties in a reasonable time, though I guess if I failed, worse case I would pay the capital gains tax above?
3) Should I just keep this property but maybe cash-out refinance nearly 100-150K out of this property (even though it would be at a higher tax rate) so that I postive cash flow on a 30-year loan and then redeploy that capital in Sacramento? Is it worth it to keep this property because of its location and long term rentability?
Appreciated your thoughts as I try and work through this!
Most Popular Reply
The 1031 route can definitely be powerful if you’re able to redeploy into stronger cash-flowing assets, but I agree the biggest challenge is timing and making sure you don’t rush into a deal just to meet the deadlines.
If you do decide to go that route and start looking at replacement properties, I’d be happy to underwrite any deals you’re considering and give you a clear breakdown of returns, risks, and what I think the deal is actually worth.