Trading up a Midwest Rental (decent cash flow) for a more expensive one (0 cash flow)

[Layne T.]

Hi BP Team,

Curious as to if you can add any other nuances to my decision making below.

Current Holding - Midwest home, for sake of ease let's estimate 100k of equity within a 200k value. Let's ignore closing costs/broker fees etc. for now. Cash flows a few hundred bucks a month, nothing significant. 30-year old property.

Potential Transaction - Trade in/1031 this property and move that 100k into a 400k value nicer/newer property. Would break even/no cash flow.

Current Holding Pro's of Keeping - 100k of mortgage left gets paid off eventually, resulting in pure cash flow (net of taxes/insurance/etc.). Much faster paydown. Cons of Keeping - older property, roof has been replaced but there will come a time when pipes start freezing/bursting with age and eventually will have to keep patching those or do a full gut that won't pay for itself.

Pro's of Newer Property - Newer build, start time clock over again on key component repairs, higher chance of appreciation. 
Con's of Newer Property - Zero cash flow to start, and won't be getting paid off anytime soon with higher cost.

What do you think?

Thank you - 

[Bill B.]

If you need to feed the new house a few hundred a month (because of vacancies, repairs, whatever.) can you afford it? If so it’s probably something I’d do. You’re paying down the loan on an additional $200k by giving up “a few hundred per month” ($200k for 30 years at 1% interest is $643/mo). You’re also paying off $475/mo principle the first month, the worst month. 

You mention eventual the $100k loan will be paid off and you’ll have much higher cash flow, well that would be even more so with this home. If thsi home is nice enough you could move in to it some day that’s additional upside. If you keep growing and go past 4 loans it will help if they are bigger loans, if you want to retire off just 4-6 homes instead of 10 this will help. 
 

My only caveat again is that you have to be willing and able to feed the property a few hundred months if you have to. This need should go away as rents increase. (Another benefit of the new property with the higher rents. You’ll be increasing rents $100 or $100’s instead of $25’s or $50’s.)

Good luck. Reach out to someone like @Dave Foster for advice and guidance if you go forward with the 1031, he’s great and helped me with mine last year.