1031 EXCHANGE OR CASH OUT REFI

8 Replies

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!

Hi @Justin Frye - congrats on the deal. Personally, I would refi and put the cash out towards the next deal, but it sounds like my goal (cash flow) is quite different than yours. If you're really only looking to grow into larger and larger multifamily as quickly as possible, I'm guessing 1031 would get you there faster.

Also, I'm investing in the Cleveland market. Feel free to reach out if there's anything I can help with in the future.

@Kyle Lewis thank you so much and to be honest I’m still heavily considering doing the cash out REFI for that very reason, but I’m kind of stuck in between a rock and a hard place seeing how both could potentially be the right decision. I will definitely reach out and add you to my investor list! Look forward to potentially working with you in near future.

@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!

Wow @Dave Foster great answer and outlook I never really thought about it from that standpoint. I guess considering how I have a COC return of 16% it might make more sense to just do the cash out refi and try and snowball from there.