Keep paid off property or do 1031

Cincinnati, Ohio
Buying & Selling Real Estate
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Keep paid off property or do 1031

Jordan Blanton
Member since 2019 · 37 posts · 30 votes

Tenant is moving out of paid off property in August. The property was purchased seven years ago for 56k in a C- neighborhood, which is now paid off and worth approximately 170k. Light renovation of the kitchen and should be able to see increase of rent of $250-$300 month. After expenses, it will be cash flowing 1k/month.

My thought of doing a 1031 exchange seems like an option..trade in a 170k house for a few 250k homes and increase my portfolio by 600k. But that would decrease my cash flow significantly. In my local market, I can still find cash flowing properties in that price range, approx. 100-200 per SFH. Just tough to do in this market with mulitiple offers and a very tight window with the 1031. And before anyone asks, Multi-families are tough to get, as I've been outbid by cash offers three times now in the past two months. So to count on scoring one of those in the small window for a 1031 would be tough.

Should I just keep the property, do light reno's and increase rent and bank cash flow? Or get with an expierenced realtor, commit to 1031, and increase portfolio by considerable margin and sacrifice cash flow now? I'm 32 years old, with a good paying w-2 with an always abundance of overtime availability. Lastly, I do have enough cash reserve to acquire more property at the moment, which is my plan in the next 2-6 weeks. 

Thoughts are greatly appreciated. 

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Ty CouttsBusiness Member
Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes
2y

Hey Jordan,

There are a few pros and cons to consider for each option here.

Keep the Current Property and Increase Cash Flow
Pros:

Stable Income-Your current property is paid off and cash flowing $1,000 per month after expenses. This provides a steady income stream with minimal risk.

Appreciation Potential-The property has appreciated significantly since purchase, and you could continue to benefit from further appreciation in the future.

Minimal Hassle-You're already familiar with the property, and since it's paid off, you don't have mortgage payments or associated risks.

Cons:

Limited Portfolio Growth-Keeping the property means your investment portfolio remains concentrated in one property. Diversifying your portfolio can reduce risk and potentially increase overall returns.

Opportunity Cost-You might miss out on potential opportunities to leverage your equity and acquire more properties, especially in a market where finding cash flowing properties is challenging.

Pursue a 1031 Exchange
Pros:

Portfolio Expansion-A 1031 exchange allows you to diversify and increase your investment portfolio by acquiring multiple properties. This can potentially enhance long-term wealth building.

Tax Deferral-By reinvesting your proceeds into like-kind properties through a 1031 exchange, you can defer capital gains taxes, allowing you to reinvest more capital.

Market Timing-Despite the competitive market, a 1031 exchange gives you a defined timeline to identify and acquire properties, potentially putting you ahead of other buyers who might not be as motivated by a tight deadline.

Cons:

Lower Initial Cash Flow-Acquiring additional properties may reduce your immediate cash flow, especially if properties in your target market are not as cash flow positive as your current property.

Risk of Overpaying-In a competitive market, there's a risk of overpaying for properties just to meet the exchange deadline, which could impact your overall returns.

Either one is a valid option, but overall it depends what your financial goals and restrictions are. Hope this helped! Please feel free to reach out directly if you would like to discuss further or if you have any other questions!

[email protected]719-641-5169
Ty Coutts - Aslan Home Lending 543 Reviews
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  • Ty CouttsBusiness Member
    Lender · Denver, CO · Member since 2022 · 467 posts · 230 votes
    2y

    Hey Jordan,

    There are a few pros and cons to consider for each option here.

    Keep the Current Property and Increase Cash Flow
    Pros:

    Stable Income-Your current property is paid off and cash flowing $1,000 per month after expenses. This provides a steady income stream with minimal risk.

    Appreciation Potential-The property has appreciated significantly since purchase, and you could continue to benefit from further appreciation in the future.

    Minimal Hassle-You're already familiar with the property, and since it's paid off, you don't have mortgage payments or associated risks.

    Cons:

    Limited Portfolio Growth-Keeping the property means your investment portfolio remains concentrated in one property. Diversifying your portfolio can reduce risk and potentially increase overall returns.

    Opportunity Cost-You might miss out on potential opportunities to leverage your equity and acquire more properties, especially in a market where finding cash flowing properties is challenging.

    Pursue a 1031 Exchange
    Pros:

    Portfolio Expansion-A 1031 exchange allows you to diversify and increase your investment portfolio by acquiring multiple properties. This can potentially enhance long-term wealth building.

    Tax Deferral-By reinvesting your proceeds into like-kind properties through a 1031 exchange, you can defer capital gains taxes, allowing you to reinvest more capital.

    Market Timing-Despite the competitive market, a 1031 exchange gives you a defined timeline to identify and acquire properties, potentially putting you ahead of other buyers who might not be as motivated by a tight deadline.

    Cons:

    Lower Initial Cash Flow-Acquiring additional properties may reduce your immediate cash flow, especially if properties in your target market are not as cash flow positive as your current property.

    Risk of Overpaying-In a competitive market, there's a risk of overpaying for properties just to meet the exchange deadline, which could impact your overall returns.

    Either one is a valid option, but overall it depends what your financial goals and restrictions are. Hope this helped! Please feel free to reach out directly if you would like to discuss further or if you have any other questions!

    [email protected]719-641-5169
    Ty Coutts - Aslan Home Lending 543 Reviews
    WebsiteView Page
    3Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    2y

    It depends on what part of your life you are in.

    Are you still aggressive when it comes to increasing your passive income to help fund your lifestyle / retirement?
    If yes, you may want to consider doing a 1031 exchange for the additional properties.

    If we assume a 4% appreciation on assets, If you hold onto the $170,000 property, you can assume there will be about 6,800 of annual appreciation.

    If you have $600,000 of assets, you may experience $24,000 of annual appreciation.

    You may experience less cash flow but there is a higher potential of appreciation.

    Best of luck to you.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.880 Reviews
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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    2y

    @Jordan Blanton, great thoughts by both @Ty Coutts and @Basit Siddiqi.  With the 1031 you do have the discretion also to reposition out of low appreciation markets and into higher appreciation markets.  As well as moving from higher cap ex exposure to lower cap ex exposure.

    Cash flow may go down but when the other components of the IRR go up ( appreciation, depreciation, and amortization of the loan) your IRR goes to the moon and more than offsets any drop in cash flow

    Just make sure you stress test and can withstand any drop in cash flow.

    The 1031 Investor5140 Reviews
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    2Reply
  • Gregory Wilson
    Member since 2024 · 238 posts · 132 votes
    2y

    Putting aside the issue of whether the property continues to appreciate or levels out at the ~170k which we cannot judge, if you actually do the numbers, it will not work out to where a sale is a better option than continuing to enjoy the cash flow, reinvesting those funds in further upgrades or further investment. A 1031 is not a choice unless your you know something negative about your property not present in the target. You pay a bunch of fees, are under the gun time wise and have to reinvest the entire gain. What would the point of that be other than to unload the property at its peak. There are good reasons to do a 1031, but trading out an appreciating property with excellent cash flow without a predicate investment (one you have to have) is not one of them.

    I'd suggest that you actually do the numbers to see for yourself.

    0Reply
  • Twannisha Jackson
    Rental Property Investor · Cleves · Member since 2023 · 132 posts · 82 votes
    2y

    I would keep the property, take the extra cash flow & invest in more rentals/real estate strategies. maybe start another business. never sell the house unless i absolutely have to. 

    0Reply
  • Peter W.
    Member since 2020 · 351 posts · 329 votes
    2y

    I think you should do an home equity loan and purchase 1 or 2 more properties or a 1031 exchange. The answer comes down on whether the property is too much of a hassle and whether you are likely to find reasonable deals in your market. You should be able to pull 120-130k out—which is a downpayment on two 250k properties. The downside, of course it’s that you are going to go have limited cash flow in exchange for greater equity growth.

    1Reply
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