How to make the decision to take appreciation versus cash flow?

Question

I am a novice investor and I have a single family rental in Glendale AZ that I have owned for 5 years that has appreciated approximately $250K. It cash flows (rent less PM, taxes,insurance, no mortgage pmt) for Approximately $1500/month. I don’t know how to analyze my numbers to make a decision and I’m not sure my assumptions are accurate. . I would try and do a 1031 exchange.   Any advise would be appreciated. Thank you

Todd Anderson · Answer

Kathy,  I think the first step is to use some of the great tools on BP to analyze how your current investment is Preforming versus what a new investment might look like.  BP has great calculators that will help you look at the deal form strictly the numbers side.

Depending on how the current deal is working, you can look at getting your equity working better for you.  Whether that means a "cash out refi" assuming you can get rates that work, or a 1031, get your money working for you.

I work with many investors that are looking to use a 1031 to move an older depreciated property into a New Construction investment property that will work well for Cashflow, Appreciation, and will give them great tax benefits with the reset depreciation.

Feel free to connect if you have more questions.

Dave Foster · Answer

@Kathy Creighton-Smith, the Internal Rate of Return (IRR) is the metric that captures the entire picture of the total return of owning real estate.  Cash flow, Amortization of the loan, depreciation tax benefit, and appreciation are all calculated in the IRR.  Run this first.  For some reason BP doesn't have this formula on this site.  But it's the one you want.

Then look at that number.  Do you like it?  Is the property healthy and easy to manage?  Then look at refinancing rather than selling and 1031ing like @Adam Bartomeo said.  But make sure you run the IRR again on the old property after a refinance to make sure your return is what you want.  And I would also run a consolidated portfolio IRR on both the old property and new property together to get a true picture.

If you don't like the property you have.  Or are not satisfied with your return on it then consider a 1031 exchange.  You can move into any type of investment real estate anywhere in the country.  But even more importantly you can allocate your proceeds any way you want.  You mentioned you had $250K of appreciation and no mortgage.  You may have purchased it for around $200K five years ago.   That would mean that if you sell and 1031 you'll have around $450K of cash.  You could buy two $200K properties for cash if you're in a conservative mood.  And use the other $50K as a down payment on a $250K property.

What does that mean - You didn't pay a penny in tax on that $250K.  You went from 1-3 properties.  You only have one loan and two properties still free and clear.  That's a recipe for cooking with gasoline!!!

Mike Dymski · Answer

Nice work, you've earned $340k in five years.  You should be giving us advice.

Tim Casey · Answer

Hey there! Congrats on the appreciation and cash flow from your property in Glendale—those are solid numbers to start with. When deciding whether to hold, sell, or exchange, you’ll want to look at a few key metrics: your current return on equity (ROE), potential returns from reinvesting, and your goals for the property.

Given your appreciation and the fact you're considering a 1031 exchange, it might make sense to evaluate if moving that equity into a larger or more profitable property could accelerate your growth. The 1031 can defer capital gains taxes, but it’s crucial to identify a like-kind property and complete the exchange within the IRS timelines. Make sure you’re clear on those and consult with a tax advisor to confirm your assumptions. Happy to help dive deeper into your options if you’d like!

Adam Bartomeo · Answer

Why would you do a 1031? Why not refi and reinvest the equity? There would be plenty of cash flow to pay the new mortgage. This would allow you to keep the assest, cash flow, and reinvest the equity.

Jackson Harris · Answer

Hey Kathy, I agree with most other commenters on here. If you have something that has appreciated that much and you're cash flowing I'd hold onto it if you can!

Use some of that equity to buy another property if you want, but selling I wouldn't say is your best option. I have an STR in Glendale and cash flow because of that, but if it was an LTR I'd have a little bit of negative cash flow so I'd recommend holding onto it especially with all of the new development in Glendale.

Carrie Matuga · Answer

@Kathy Creighton-Smith are you looking to sell it or would you potentially consider a cash out refinance so that you could continue investing both strategies would work. The question is are you comfortable reducing your cash flow so that you can take advantage of the equity that you have in the house to buy more properties? And with those additional property or properties cash flow together more than owning just a single asset? Especially when you start to add in depreciation and other tax benefits, it may be worthwhile to consider. If it were me, I don’t know that I would make a decision until I had another property in mind because if you were doing a refinance, you could do both the purchase and refinance in the same timeline. I’m happy to talk more reach out. Let’s connect.

Ashish Acharya · Answer

You need to look at net cash flow. I am sure the interest rate is great on this.

I would get LOC to pay into equity vs. selling this.

Kyle Gardner · Answer

Have you lived in the house for any of those 5 years? You should take advantage of the personal residence tax benefits. Then invest.

Josh Young · Answer

@Kathy Creighton-Smith

You need to calculate your Return on Equity and then figure out if you can get a better return investing the money in something else.  Personally I would look at doing a cash out refinance to buy more property instead of selling, but a lot depends on your specific situation. Here is a link to a post I did that might help you.

https://www.biggerpockets.com/forums/12/topics/1108744-how-t...

How to make the decision to take appreciation versus cash flow?

Most Popular Reply