1031 EXCHANGE OR CASH OUT REFI

[Justin Frye]

So my question begins with stating that I have a duplex in a highly desirable area in Columbus Ohio in which I’ve just got done rehabbing both sides. I’ve had the house appraised and I’ve got over $80,000 In equity in the property, I’ve come to the realization that I can now either do a cash out Refi on it and pull the equity out and repeat the process very similar to the BRRRR process it I can 1031 exchange it and look into maybe applying the equity into a larger 15-25 unit property. I should probably state my goals seeing how this question would very much depend on what those are, my goals right now are to move into apartment investing and eventually syndication. I figured if I could start out small or smaller than most larger apartments I could gain the knowledge and experience from owning and operating and apply that down the road with larger acquisitions. I Would like any and all advice as far as doing the REFI or 1031 exchanging the property and shooting for something much larger with a lot more units. Doing either or would be my very first of either refinancing or doing a 1031 exchange so I would preferably like to weigh out my options and decide what would be best and fit my goals the best. Any and all advice would be greatly appreciated!

[Dave Foster]

@Justin Frye, Back up a little bit.  Your goals are awesome but none of those projections will help you get to the right decision on the question you're asking - Refi or 1031.  

First you've got to drill into what the performance of that property will be. Real numbers real NOI real ROE. That will give you a good indicator of whether to keep it or not.

If it's a good returning property then a refi might be warranted.  The chief complaint against refi is that you get less of your equity out so your purchase power is less than in a sale and 1031.  But if the current property is performing then it may be worth it.

If that property is not performing at a level you would want then no refi in the world is going to work as well for you.  You'd be refinancing a sub par property in the hopes of improving your portfolio.  That's like building a new house on an inferior foundation.

Answer the question of how that property will perform and that will tell you whether to 1031 or refi.  There's a lot worse things in the world than having a couple smaller properties that are kicking it performance wise before you become the MF mogul.  That's a nice training ground!