Taking Profits from a Performing Asset to Expand Portfolio

[Elliot Fuller]

Hello BP, it's been a while since I've been on here.

Bottom line up front: How might you proceed if you had a cash-flowing property that had appreciated significantly, and wanted to take the next steps to expand your portfolio?

Longer version:

San Diego SFR Rental - Purchased 2013 for $353,000
Financing: VA loan $0 down at 3.25%
Refinanced: 2.25% in 2020
Remaining: $292,000
Approximate Value: $650,000 (no major improvements, just market appreciation)
Cash Flow: $425 after the refinance and several years of hiking rent.

North Carolina Primary Residence - Purchased 2018 for $192,000
Financing: Conventional 5% down at 4.25% (PMI rolled in)
Refinanced: 2.75% in 2020
Remaining: $182,000
Approximate Value: $240,000-$260,000 (added bedroom & bathroom ~ $50,000 reno)

We are considering selling the CA SFR to build additional wealth. Should I even be considering this, if it's cash flowing $425 a month, and giving us about $9,200 annually in principle pay down, with an "almost free" interest rate? The build-up in equity is making me salivate.

1.) Thought about 1031'ing it into a small apartment complex, but I am unfamiliar with financing options for that, and since we are, at this point, accidental amateur RE investors, I'm thinking a jump straight into multifamily apartment complexes probably isn't the right choice.

2.) More beginner-friendly, thought about selling it and using the proceeds for down payments on several duplexes outside of CA. We would eat the capital gains tax losses and fees from the sale, but we could hopefully match or beat the cash flow from CA property, diversify into several units, and have more room for appreciation.

3.) Selling it and paying off our primary residence would be an emotional win, allow us to pocket more of our income ("virtual cash flow"), leave us a little extra cash to purchase another SFR or duplex investment property, and allow flexibility for potential job transitions in the future.  Selling would also renew our VA benefit eligibility, and we could buy a new primary residence with zero down, opening up our current home to tenants.

4.) Instead of a sale, do a cash-out refi?  What would happen if we took enough equity out to invest in several other properties, and then the market corrected?  Wouldn't we be at risk of being underwater on the home if the market swiftly corrected?  On that same note, a cash-out refi would raise our mortgage payments on the home and eat into our cash flow, is that correct?  Maybe I'm not looking at this aspect of it correctly.

Although I understand the basics of these options, there are a lot of scenarios for me to wrap my head around from a wealth management standpoint, and I'm struggling to find the one that makes the most sense.  Dave Ramsey says to pay off your mortgage... Brandon Turner says to use leverage to build wealth.

From Brandon Turner's book, there are 3 ways to accumulate wealth with RE: Appreciation, cash flow, and loan paydown. Right now I feel like the CA SFR has run up so much with appreciation, that it would be wrong to not at least consider taking profits and finding a new opportunity(ies) that can capitalize on all 3 methods of wealth accumulation.

How might you proceed here?