Cash-out Refi on Prop. A Before 1031 Exchanging Properties B,C,D?

1031 Exchanges
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Cash-out Refi on Prop. A Before 1031 Exchanging Properties B,C,D?

Philip Potosnak
Rental Property Investor · Greenville, SC · Member since 2017 · 5 posts · 1 vote
Hey BP! My wife @Christina Potosnak and I are in the early stages of performing a 1031 exchange on three SFRs (Properties B,C,D). We have a fourth SFR (Property A) that is paid off that we could tap equity from ~$120k by doing a cash out refi. Would it be better to cash out refi Property A before the closing of the first relinquished Property B in our 1031 exchange? Or after? I was thinking it would be advantageous to add the $120k from the cash out refi to add funds to our 1031 replacement property. The credit union at my employer also offers home equity loans equal to the equity we currently have on our primary home. This could raise an additional ~$90k to go towards 1031 replacement property.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Philip Potosnak a good plan.  One more avenue to pursue would be a reverse exchange using the equity as down payment and portfolio financing for the remainder.  Your QI takes title to the building or park and holds it while your other properties sell.  this can really help mitigate the risk from the tight timelines of three overlapping 1031 exchanges.  It also allows you up to 180 days of double dipping appreciation, cash flow, and depreciation.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Philip Potosnak, I'm curious to hear as well from some of our traditional mortgage friends because this one is a double edged sword.  Tapping equity from a property increases debt which a lender does not like.  And perhaps more importantly lenders like to make loans to a client in an otherwise static environment - nothing else going on but that loan.   However a 1031 increases cash assets and decreases illiquid assets.  So I can see a refi going both ways depending on lender.

    Most lenders we work with love the 1031 account because they can source and verify funds immediately.  This may make them look at your refi or subsequent purchase loan more favorably.

    The other bugaboo is going to be the timing of the 1031.  Since you've got the 45 and 180 day calendar staring you down you really don't also want the uncertainty of a refi at the same time.

    I'm guessing your consolidating B, C,and D to purchase a larger asset? if so then you may find that your borrowing power is stronger to maximize a loan directly against that asset rather than a series of refis. Having LOC's in your back pocket is a great strategy but it's also a nice fall back so be careful using it as a first option.

    As long as you're not refinancing one of the properties you're going to exchange quickly the 1031 will not be impacted.

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  • Philip Potosnak
    OP
    Rental Property Investor · Greenville, SC · Member since 2017 · 5 posts · 1 vote
    9y
    Thanks Dave Foster for shedding some light on this subject for a Newbie. Tapping equity is something that we've been thinking about as we get deeper into our 1031 exchange. I will ask the question at a real estate investment club meeting this week. Our ultimate goal is to acquire multi-family building or mobile home park so I'm leaning towards tapping equity post 1031 as the best way for us to raise capex funds for the replacement property. Yes, replacement properties B,C,D will be exchanged for a larger asset. Properties C,D are paid off.
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Philip Potosnak a good plan.  One more avenue to pursue would be a reverse exchange using the equity as down payment and portfolio financing for the remainder.  Your QI takes title to the building or park and holds it while your other properties sell.  this can really help mitigate the risk from the tight timelines of three overlapping 1031 exchanges.  It also allows you up to 180 days of double dipping appreciation, cash flow, and depreciation.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    1Reply
  • Philip Potosnak
    OP
    Rental Property Investor · Greenville, SC · Member since 2017 · 5 posts · 1 vote
    9y
    Dave Foster Thanks for the reverse 1031 exchange information. This is certainly something that we will consider if we find what we've been looking for before our relinquished properties close.
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  • Andriy Boychuk
    Rental Property Investor · Staten Island, NY · Member since 2013 · 480 posts · 197 votes
    9y

    @Philip Potosnak let me know if you have any questions about mobile home parks. Also, you are welcome to visit the mhp investing section on the forum

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