Sell to Trade Up or Refi Till You Die??

Question

Hello all, I am at a decision point and would appreciate outside perspective.

I have a property that has gained a good bit of equity which can be used for another purchase.  In the past I have refinanced properties to tap equity as opposed to selling the property to purchase larger properties.

There are a lot of smart and successful investors who advise selling a number of smaller properties and consolidating to larger properties for economies of scale, which makes sense.

My preferred method has been to refinance properties that I own because I know they are well maintained with solid tenants and streamlines systems in place.   While you would extract more equity through a sale the costs are a lot higher with commission, closing costs, and 1031 exchange fees.  Another benefit to refinancing the property, and the flip side to the economy of scale, is diversification by owing multiple properties and not consolidating a portfolio into 1 or 2 large buildings.

What has been your experience either trading up or refinancing and what have you learned?

Thanks.

Gene Hacker · Answer

Account Closed   For me, the market helps make that choice for me.  In the rural area I primarily invest in, there are plentiful SFH deals that will cashflow nicely.  But larger properties are not as common.  I would like to eventually expand into larger properties but that would mean I would have to invest in new areas.  I have a solid team in my area so out of convenience I have stayed with smaller properties.

Your market may give you clues into which direction to go.  Run the numbers on a few scenarios.

Charlie Fitzgerald · Answer

Selling to free up capital to buy more/bigger properties may be a taxable event whereas refinancing to extract equity to buy more/bigger properties never is.  I also like having my holdings spread across different property types, so I am not a believer in selling rabbits (SFR) to buy elephants (MF).  Lastly, for the very good reasons you mention, I like SFR properties.  So, if it were me, I would refinance to get my cash and roll that into additional properties of whatever type and availability met my fundamentals.

Account Closed · Answer

Gene thanks for your input.  In my case both scenarios, larger properties or smaller properties, are options so deal flow may dictate.

You bring up another really good topic about investing in suburban/rural area,  I have just started looking into some new areas.

Thanks again for your feedback and good luck with the single family search.

Wilson Churchill · Answer

There are advantages to both strategies. When selling a property, you may get more proceeds than you would from a refinance, since the refinance is limited to a percentage of the value (which is often lower than the market value). But it all depends on what replacement property is available. You would have to compare the cash flows from refinancing and buying vs. selling and buying to see which provides a greater return.

Sell to Trade Up or Refi Till You Die??

Most Popular Reply