1031 or hold due to low interest rate( 3.375 / 20 year)?

Question

Hello BP Community,

I have a property in California with about 270K in equity, but no cash flow, just breaking even. I am considering selling and doing a 1031 to buy properties in Florida or Tennessee.

Initially I was thinking I would buy a couple of SFH, I am not an expert, but perhaps looking into Duplexes or a house in Nashville where I could Airbnb.

Any thoughts on this strategy? Or would it be best to hold, since eventually I will cash flow and have a great rate on the loan?

Thank you in advance for your thoughts!

Christian Espana · Answer

@Luka Milicevic I am selling the investment property in California and buying in Nashville.  I purchased my primary residence after the last bubble in a great area so if I ever decide to rent, it will cash flow quite heavily.  Where in TX would you consider?

Christian Espana · Answer

@Dave Foster  great point and one I didn’t really think about.  I’m pretty sure I want to move forward with a 1031 exchange and purchase a NOO STR in Nashville or possible multiple SFR in Cape Coral.  Are you by chance able to help with the 1031 or could recommend someone.  I live in California.  Let me know and I can PM you to discuss further.  Thank you for the info!

Dave Foster · Answer

@Christian Espana, If you have no cash flow then. you probably are not able to take advantage of depreciation write off as well.  So that is building up without you having the opportunity to truly use it.  Keeping a neutral asset for probable appreciation is not a bad thing.  But just remember that making a 0% return for 10 years and a 10% return for 10 years is still just a 5% return for that entire time.  Appreciation should be the icing on the cake.

Kumar Gaurav · Answer

Great Point Dave, I did not think about depreciation. If I understand it correctly when there is no cash flow or negative cash flow, it probably makes sense to sell as there will be tax benefit on the Capital gains vs Cash flowing property?

Kumar Gaurav · Answer

@Christian Espana

Hello,

Have you considered tapping on its equity by refinancing or HELOC  and investing in another property?

Luka Milicevic · Answer

@Christian Espana

Sell everything you own in California and move to TX or TN.

That's what the smart money is doing.

Dave Foster · Answer

@Christian Espana, I sent a colleague request to you.  You can also PM.

Dave Foster · Answer

@Kumar Gaurav, Yes sort of.  Depreciation is incredibly invaluable to offset positive cash flow making ordinary income tax free ( well at least until you sell).  A property that is not making cash flow is wasting the depreciation benefit because of it's limitations.  So we see a lot of 1031 investors exchanging into properties that have greater depreciable basis so they can really capture the full value of depreciation.

Capital gains and depreciation both can be deferred in a 1031.

Justin Summers · Answer

Something else to point out.. Make sure to check with the local zoning office to make sure that short term renting is legal.. Many realtors will tell you oh.. everyone does it.  Make sure it's legal or else the city decides to crack down on the illegal short term rentals you will be screwed.. Miami Beach did this and started fining people $20,000 for the first offense of renting short term and $40,000 for the 2nd offensive.  some owner's got hundreds of thousands in code fines.

Christian Espana · Answer

@Justin Hoggatt I lived in the property from 06 to 13 and has been a rental since 2013.  The lease expired a few years back and my tenants are now month to month.  I was just going to give them notice to vacate so I could sell without having to worry about tenants.   I don’t expect the market to appreciate heavily but you never know here in Sonoma county.   I will probably need exterior paint and roof in the next 6 years so also considering those costs in deciding to hold or not.  Airbnb shows potential of 8.4K/month for this property but no idea what my actual cash flow would be.   Thanks for your feedback!

1031 or hold due to low interest rate( 3.375 / 20 year)?

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