What would you do if...

Question

I have a SFR that I bought 25 years ago and have refi'd a few times, pulled money out over the years, so my basis is low but my mortgage isn't as low or as paid off as I'd like.  That said, I do have a good interest rate on my mortgage (3.625%) and I have about 50% equity in the property.   It is currently rented and is cashflow positive.

Because it has appreciated and I have a good amount of equity in it, I'm debating my next steps.  I'm researching 1031 exchanges and Delaware Statutory Trusts (DSTs), but because I have a mortgage on the property, that seems (to me) to complicate things a bit.

If you were me, what would you do?

Specifics:  house is in the SF Bay Area, bought for low $200k, mortgage is low $400k.

Ann Seffens · Answer

Thanks for the info Dave!  I'm still doing research on DSTs.  So far, I'm not impressed with the projected returns and have to pick my jaw up off the ground regarding the fees.

Mark H. Porter · Answer

Like many others on here,  I’ll tell you my mantra for building wealth - EVERYTHING is for sale.

Right now you have a bit of a dilemma. Interest rates, from legitimate banks asking no points and reasonable fees, is over 7%.  Though you have reasonable equity you could pull out in a 1031, banks have tightened up on commercial lending with LTV’s (70%) and DSCR’s (1.25) and some even ask for a deposit account worth 10% of the loan.  This isn’t to say it’s not worth it, you just need a good deal more effort than in the past.

Cash is king right now.  Interest rates have stalled a lot of sellers who would be exchanging low interest rates for much higher.  Get a very good realtor experienced in 1031’s, a bank that knows what they’re doing, and @Dave Foster to guide you through the process.

Joe Villeneuve · Answer

Sell it, take the equity out, and move forward.  Right now your equity ($400k) is only buying you a property worth $800K.  That same equity should be buying you a property worth $2M...and the CF that goes along with it.  You're losing money...fast.

Eric Fernwood · Answer

Hello @Ann Seffens,

What I would do depends on how the property has performed in the past and is likely to perform in the future. So far, we have completed over eighty 1031 exchanges, mostly from California. Below are some of the more common reasons clients have given for moving their investments out of California.

• Rent control and the difficulty of removing non-performing tenants.
• The populations of the Bay Area and California are decreasing.
• High operating costs: income taxes, property taxes, insurance, etc.
• Rising crime

When considering an alternate location, take into account all of the major recurring costs. Below is a table comparing California to three other states.

Sources:

• Average property tax rate
• Average Insurance Cost
• State income tax rate

So you have some perspective, what are the basic operating costs for a $400,000 property in the four states?

This does not take into account indirect costs like rent control, etc.

You asked about DSTs. I do not know enough to comment. I found this article to be informative on DSTs. However, if you do a 1031 out of California, there may be no advantage to a DST.

Hope this helps.

…Eric

David M. · Answer

@Ann Seffens

keep looking for your next good deal...  Some people think good REI's should be growing on trees the instant they look...

As for what yo ushould do, its a toss up and really dependent on your goals.  Its been 25 years..  Are you still looking to build your wealth?  Do you want to continue to be in this investing as you continue to get "older?"

If you just plain sell now, sure you'd have to pay back the appreciation and any capital gains tax, but at least you'd have your money out "free and clear."  If you 1031 this, you will sort of definitely need to "swap 'till you drop.'  I've looked into DST and OZ funds for myself and they really don't fit my needs.  They may or may not fit yours.

Oh, the amount of times you've refi'ed shouldn't affect your cost basis.   Unless you mean teh rif costs themselves adding to your basis.

So, if you are looking at DST's, sounds like you are looking to "get out."

Ann Seffens · Answer

I would love it if I could find properties with 80% LTV that cashflow, but I have scoured Zillow/Redfin to find properties that cashflow, and have come up empty handed.  Thoughts on finding cashflowing 80% LTV properties?

Dave Foster · Answer

@Ann Seffens, Delaware Statutory Trusts are the easiest way to deal with debt in a 1031 exchange.  We have lots of clients who use them to absorb excess debt they do not want to leave on their balance sheets.  Each DST comes with it's own institutional debt.  This debt is represented as a % for instance a $ 1 mil building 50% leveraged has $500K of debt.   You have 50% equity so if you sold your property for $500K then you would end up with $250K of proceeds and the need to buy $500K of real estate.

You can buy the DST mentioned above because your $250K of cash is actually buying you $500K of the DST.  And best of all the assumption of that debt is non-recourse to you personally.  But even better would be to buy a DST that may be 75% leveraged.  So a cash investment of $250 buys you $1 mil of the DST.  You get the amortization, depreciation, and appreciation (all IRR numbers) on $1 mil.  And you get the cash flow (the other IRR number) on the cash you put in.  Then frequently makes the DST much more attractive than when just looking at cash flow off your equity.

Caleb Brown · Answer

So it's worth 800K? If so I'd 1031. If you have 300-400K you can definitely go into a MF or several SF's. Yes your interest rate is great BUT you are missing out on some extra cashflow if you 1031'd along with appreciation if you owned multiple properties. You can keep and keep doing HELOCs on it

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