Brrr or 1031 exchange

[Ted DeKowzan]

Hello BP Community,

I’m going to lean on you for some more advice. I own a portfolio of rental properties with a significant amount of equity. I was able to buy them below market rates and build more equity by rehabbing the units. They are renting well and provide a decent amount monthly of cash flow. Without considering any future appreciation, I feel that the properties have now reached the top of the market in value and rents. I’m currently in the process of a Cash Out Refinance with a local bank to gain access to the equity with the intent buy more rental properties. Even with competitive lending terms and rates this process will understandably create a significant reduction in cash flow and increase the loan to value percentage for the current portfolio of properties. By refinancing the current properties, I get to use the equity to buy 1 or 2 more properties. It’s my intention and hopes that the additional properties will offset the lost rental income.

I originally purchased the properties using the proceeds from the 1031 tax exchange. I had to pay the commissions and the 1031 escrow fees but I was able to take the capital gain from the sale of one property and roll it into 6 replacement properties. Here is where I get hung up. If I sell the properties and participate in another 1031 exchange I will have access to 25%-30% more equity than refinancing. This could now be used again to buy multiple properties all of which have the opportunity of forced appreciation through rehabbing and increasing the rents. I now wouldn’t have to carry a portfolio of properties that don’t have much room for appreciation and run the risk of being overleveraged.

I appreciate any feedback or personal experiences you are willing to share.

Ted