1031 exchange to invest in an out of state Turnkey?

[Hedy Kromer]

This is my first post on BP. I’m really on the fence & need some advice.I have a 3 bedroom single family house in Los Angeles, CA that I bought in 2009 right after the crash for $255K.It’s appreciated a lot & I currently have about $200K in equity in the house. It’s worth about $420K & I’m renting it out for $2300/month. Since I got such a bargain on it, it’s cash flowing well so I’ve never thought about selling it. I’m cash flowing about $500/month after all expenses & mortgage. But someone told me those numbers aren’t that great & I should sell it so I can use that equity to buy another property that would cash flow even more.If I do sell it, I guess the only option would be to 1031 exchange it since the capital gains tax would be ridiculous right? The problem is I’m not sure what property to exchange it for.I have a full time job so I was thinking about investing in an out of state turnkey property that is already rehabbed with tenants & property management already in place. The reason I’m thinking out of state is because I’m not finding any properties within driving distance that will cashflow. Here are my questions.

1. 1) Should I 1031 exchange it to use that $200K in equity to buy another property that would cash flow even more?
2. 2) If so, do you think buying an out of state turnkey property is a good idea?If not, what other suggestions do you have?
3. 3) Should I use the $200K to buy all cash for a single family/small multi-family or leverage it as a down payment to buy a larger apartment complex for say $800K?

The only criteria I have is that it’s turnkey with property management in place.I don’t want to worry about rehabbing & placing tenants since I don’t have the time.

[Joel Owens]

Hi Hedy,

What is the current loan rate on the property? Any pre-pay penalty ?

You could possibly refinance into a lower rate and make it cash flow more and although not pulling out the full 200k usually you can go up to 75%ltv for about 315k new loan.

That is IF the property appraises at your stated new value you think it is worth or higher.

Wouldn't buy turnkeys out of state with newly minted tenants with no track history of payment schedules. You might get more cash flow on paper but more headache and generally less equity growth due to to tenant quality and the area.

As for buying a larger property I would have to see your overall liquidity and net worth to see what makes sense. It sounds like you are looking for more return but want to stay passive.

I have many California clients doing a 1031 but they are exchanging 1 to 3 million in proceeds from selling apartment buildings and buying commercial in other states.

If you could put more money then the 1031 funds to get a larger property more options would be available.