Arlington VA Investment Options

[Krista Dodson]

Good morning.

We own a SFR property in the the very sought after Arlington, VA area, that we are currently renting with a $900 monthly cash flow, after CapEx holdback, P&I, T&I. We are self-managing with no issues. We have about $300K in Equity in this house, and the mortgage is on a 4% interest 30 year note with 26 years remaining.

We moved to Richmond, VA several years back, and are beginning our real estate investment journey into rental real estate in this market. We are specifically looking to BRRRR, refinancing all in. In finding cash to invest with here in Richmond, we are looking at several options:

1 - HELoC on the Arlington Rental Property - will be able to get approximately $200K-240K in buying power at 6.25-6.5% interest only payments.

2 - Sell property in Arlington - Cash out $300K, use this cash to purchase property down here in Richmond. 

Thoughts??

Any other strategies we haven't considered yet?

[Clayton Mobley]

@Krista Dodson Wow, you already have so much great input! Man I love BP.

Ok, so I think you've already gotten the input from both sides of the appreciation/cash flow argument. I don't like to bet on appreciation because it's not guaranteed, as someone already noted, but other people feel differently - it's all about risk tolerance. I'm not familiar with your market, so I can't speak to the potential there - but I'm a cashflow guy anyway ;)

What I will comment on is your 1031 option, which I really think you should consider. While your current prop is cashflowing well enough, you have a ton of equity there that could be parlayed into a nice little portfolio. What are the comps for a prop like yours in the area? Sounds like you could be pulling out a tidy sum.

As to your question about 1031s, you absolutely can exchange for multiple props! It isn't one-to-one, you just have to be exchanging like-kind, which means real investment prop(s) for real investment prop(s) - not selling a rental and buying fine art, for example.

There are some rules for 1031s, which sound kind of daunting but are actually pretty clear cut once you understand them. And you need to enlist the aid of a Qualified Intermediary to execute a 1031, so you'll have someone on your team that knows all the ins and outs.

The two timelines you need to adhere to are:

• Identify replacement properties within 45 days of selling your current prop - which means you should be looking before you go to market if you think your property will sell quickly.
• Purchase one or more of your identified properties within 180 days of selling your current prop. You have to purchase identified properties, you can't switch to another replacement prop after identification.

In addition, there are some rules about identified props that you need to be aware of:

• Typically, you can identify up to three like-kind properties. Remember that you will owe capital gains tax on any amount of gain that isn't rolled into a new property (this gain is called 'boot') so you want to identify properties that are of equivalent value or add up to the value of your current prop.
• If you want to identify more than three properties, you can, but:
  • The total value of all the properties you identify cannot exceed 200% of the fair market value of your current prop. So if the FMV of your current prop is $400k, then you can identify as many props as you want as long as they don't add up to more than $800k.

OR

• You can identify as many props as you want, with an unlimited total value, IF you purchase at least 95% of the total value. So if you identify 6 properties with a total value of $1 million, you need to purchase however many properties add up to $950k or more, which means you'd need to put in  $550k of your own money in addition to the $400k from the sale of your current prop.

It sounds like a lot, I know - and of course there are more details with regard to financing that are better addressed by a QI - but this is a super powerful tool, both for tax deferral and legacy building. Potentially, you can continue to 1031 your investment props (whenever you're ready to sell the new ones) until you die. Then your heirs inherit your props with a stepped-up basis, and neither they nor you ever have to pay any CG taxes (unless they hold them until they appreciate more, of course). It's a long-term strategy, but a really powerful one.

Anyway, sounds like you're in a pretty great spot with several good options. Best of luck!

Clayton