Should I sell or leverage my equity?

Question

Hello everyone! New member here. I want to apologize in advance for not having my profile updated before posting. Quick intro: I am active duty military currently stationed in OKC, OK. I own five properties and getting ready to close on my sixth. All are LTRs except for my primary residence.

My purpose for this post is to get some advice. I purchased my very first property in Pensacola, FL during my flight training. At the time, I did not really know what I was doing or have the education that I do now. Fortunately for me, the property has not been doing too bad. I purchased it for around 150K in 2015. As soon as I transferred, I hired a property manager and it has been rented out consistently ever since. I have had absolutely ZERO issues with this property and every tenant I have had have been great. Seriously no issues at all. The only problem is that it only really cash flows about $60-80/Mo after all my expenses.

Obviously the past couple years have significantly helped RE appreciation and this property in particular is now valued around $2$50-260. It is a 3/2, 1277 SQFT SFH.

My question is, should I sell this property and possibly take home 100K to re-invest in multiple cash flowing properties in the OKC area or should I leverage my equity through either a Cash out Refi or HELOC to put that cash to work here locally? My mentor recommended the latter, but I am on the fence of possibly selling. If I cash out REFI, I could probably pull out about 40K at 75%LTV which would probably up my payment a couple hundred bucks. I think being 1-200 in negative cash flow is a small price if I'm able to secure a couple more local properties with that cash.

I am open to everyone's opinion. Thanks in advance.

Dave Foster · Answer

@Tony Longoria, The 1031 does indeed let you sell one property and purchase multple.  As long as the aggregate purchase of the new properties equals or exceeds your net sales price of the old property you'll defer all tax.  And another hack you could do is to only purchase one property but by doing that you'll have a lot of equity still in your new property.  So you could access that with a refi at any point after the 1031 is complete.

The timelines are what they are with a 1031.  But a couple of tricks could help your 1031.  It is perfectly fine get your new property under contract before your old property sells.  You just can't take title to the new property before your old property closes.  I get it that it's a crazy sellers market.  But you are. also a seller.  So why not use that power to get an extended closing on your sale and then get your new properties under contract.

You'll regret (both psychologically and financially) holding on to a property just because you refinanced it.  When you refinance as @Malcomb Stapel said you don't access as much money.  And your real cost of that increases exponentially.  Do a mental exercise and add that $200 negative to your new mortgage payment  of the refi and see what the cost of that money really is.

Kerry Baird · Answer

And figure 30% taxes on the sale, if you don't do a 1031.

Might be a good move if you are in a deployed to a tax-free location (as we often were).

Josh Maier · Answer

@Tony Longoria Houses are on average staying on the market here in Pensacola for 2-4 days receiving multiple offers site unseen. If you are wanting to offload the property now is probably a good time to do it. It sounds like your team has taken care of the property so you should be able to move it fast. However we also have had a 100% increase in rent in the last year so you may want to re calculate what the current rental value is on that property like Matt Jones said.

Matt Jones · Answer

@Tony Longoria I recommend talking to your property manager about the current rent vs market rent.  If you have a tenant that has been there several years or you just haven't done a market analysis of the rental rate recently you may be blown away by the current market rent.  It's not uncommon for rents to fall well behind market and Pensacola has seen a huge increase in rent since 2015(and even since 2019) so you may be able to refi and still cashflow positive by raising your rent to a more appropriate level.  It's a great time to sell with inventory so low but if your preference is to keep the property I'd just encourage you to dig deeper into the current numbers because it sounds like there is more opportunity there.

Also, on the 1031 exchange.  I believe that you can use the proceeds to buy more than one replacement property as long as you work within the timeframe and ID guidelines for replacement properties.  Most 1031 intermediaries would be happy to verify that for you and have an initial conversation at no charge.

Congrats on the nice chunk of equity & good luck!

Malcomb Stapel · Answer

@Tony Longoria  if you sell it and clear $100k, that is essentially 104 years worth of cashflow at your current number.

If you HELOC you will pull out less than half that and be negative cashflow on that unit to own more properties.

Have you considered selling it and doing a 1031 exchange? You could get into another property and have a lot more cashflow right off the bat. Maybe trade it in for an STR?

Should I sell or leverage my equity?

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