Capital Gains or High Interest Rates

[Carolina S.]

Hello BP community. 

I'm in the DC/ VA area and I'm under contract in one of my properties. I'm thinking of doing a 1031 exchange with it. If go that route, I would need to spend about $850k total. If don't do a 1031 exchange and decide to pay capital gains, I would have about $450k free of taxes (this accounts depreciation and other costs). So, I'm trying to decide between the two options below:

Option 1: Buy a couple of properties and split the money from the 1031 exchange for the down payments. I'm looking at a $600k price point each. Which means I will still need to finance about $400k for each property at about 9% rate (the rate is high because we'll using a commercial loan as we'll be purchasing the properties under an LLC). This gives me very little or zero cashflow on the properties. At this time, I'm not looking to invest out of state.

Option 2: Pay capital gain taxes and use it to finance my primary property renovations. I still have a mortgage on the primary of about $450K at a 3.8% rate. If I finance the renovations, I would be able to keep that rate. The renovations will increase the value of my primary from $800k to about $1.6M. However, there will be a lot of equity trapped in my primary. I know I could look to refi to get the equity out but then I would loose the 3.8%. Would it be worth paying capital gains then?

If I decide to go with option 1, I will have to borrow the money for the renovations at my primary and it may make it harder to qualify for a loan given the little or no cashflow.

I appreciate any input.