Cash flow is King, or is it..

[Wes Sherwood]

Hello BP community. I absolutely love these forums and have learned so much since joining  BP a few months ago. So firstly, thank you to all that post and help people like myself in their RE journey. I'm hoping to receive some feedback from y'all. 

My goal:

$1000 - $1500 monthly cash flow within 3-5 years.

I currently own to two SFH homes out of state. One is located in Spokane, WA and the other is just outside of Birmingham, AL. Both are currently rented and under Property Management. After all expenses (maintenance, CapX, PM fee's) they are breakeven properties.

There might be 90-100k in equity in Spokane property and 50-60k in the Birmingham property. (according to Zillow) 

I had Spokane's loan modified in 2013. Because of the modification, the agreement states if and when I sell the property the bank gets 25% of the proceeds. I'm hoping I can refinance into a new loan and not have that 25% hanging over my head? 

My ultimate plan is to 1031 both properties for SFH's in the Midwest (Oklahoma City and or Kansas City)
however, the appreciation rate has been really strong in Spokane these past few years, but is that reason enough to hold on to a property that is not cash flowing.

Can anyone make a good argument on why I should wait on doing a 1031 now vs later? Is Potential/speculated appreciation reason enough??

Thank you in advance for your feedback..

[Randall Alan]

So my first question is why would you buy a property that doesn’t cash flow??  So many will, so why buy one that makes you no money on a monthly basis?  What happens when something breaks... now you are negative cash flow... but with appreciation. I have 41 doors, and my worst performer is doing $278 a month, while several of my best performers  are doing over $700-$1100 a month after all expenses.  Caveat... I self manage, so have no PM FEE.  I also really try to buy my properties right... I have many properties that at closing had $50,000+ in equity just by finding good deals, then appreciation on top of that!  

Here is one we paid cash for.  It rents for $1,400 a month.  It cash flows close to $1,100 a month.  When we bought it in 2018 the Zillow was $95,000... today it’s $127,000. This is a more rare one, but the $500 a month net on a financed property is pretty common in central Florida where I live.  So my suggestion would be to sell both properties if they don’t cash flow, and then take your profits and invest in properties that both cash flow and appreciate.  

As for the 1031 part... I’m not a huge fan of them... you are basically kicking your tax liability down the road.  It’s not that it’s a bad thing... i put it in the same category as a tax deferred investment vehicle like a 401k.  Ultimately you will have to pay the (tax) piper unless you plan on holding onto it until you die.  I’ve found we have been able to write off much of our tax liability on sold properties through depreciation on other properties in our portfolio, so I didn’t even need the benefit (Or complications) of the 1031.

Make sure you understand all the intricacies of 1031’s as well... for instance, the funds you receive on your sales can’t touch any of your accounts... they have to go directly to a fiduciary to qualify into the 1031.   You pretty much need to be ready to go into your next purchase at the time of your sale.  It’s just more effort I want to go to . I’m sure it works great for many people.. I just like to have a cleaner portfolio that doesn’t have the complications that 1031s bring.  

All the best, and best of luck!

Randy