Hold and Collect or 1031... If so, Bigger or Smaller?

[Anthony R.]

So I lucked upon a four family a few years back. When it appraised, it appraised for $20,000 more than the purchase price. Though fully rented it was collecting half of what it could at market value. Minimal repairs < $2,000. 

Fast forward three years. Based on comparables in the area and the increased rent I think the property has appreciated by $50,000. Couple it with the equity I have in the property and I believe that I can get a $75,000 profit from a sale.

The property currently cash flows very well. I have a 55 GRM and after principle, interest, taxes, insurance, water and capital expenditures I end up with a 600-800 profit each month if there's no repairs. Most months there isn't.

Alright, all that being said, I need some sage wisdom. If I keep the property then I will eventually pay close to double for it because of interest. However, it's self sustaining so, who cares right? However, if I sell it and use a 1031 exchange I might be able to put a hefty down payment on something BIGGER, or I can buy something smaller outright. 

Question #1:

To hold and collect, or to cash in and 1031?

Question #2:

Trade up and use the money as a down payment for something bigger? Advantages? Disadvantages? 

Questions #3:

Trade down and use the money to buy something outright? Advantages? Disadvantages? 

My rationale:

Holding - I have a good, cash flowing, property. Cash flow is king. It will appreciate and it will be paid off one day. (VA Loan so low interest rate and no PMI) However, as I mentioned above, I am essentially paying almost double for the building because of interest. Though I agree interest is a necessary evil to getting started, I firmly believe that I can do better with that money than the bank.

1031 | Trading up - Cash in, take the profits and continue to grow the business. It's more debt, it's a new building, it's more units, BUT it's more rent and more wealth building. Assuming it appreciates and I do well with it, it's one more step on building a rental empire. 

1031 | Trading down - Cash in, take the profits and buy a duplex outright. No mortgage, no interest, just the tax man, insurance and repairs, all of which I can write off. My cash flow would increase and my annual income would come down so it's easier to make it into a lower bracket. I would also have less repairs, less capital expenditures and less expenses because I will have half the units. 

So those are the options. Whhhhhattt to do.....

[Anthony R.]

By the way this is in Northeast Ohio. It's a pretty booming market right now. If that helps.

[Dave Foster]

@Anthony R.be careful in your buy down analysis.  The 1031 has some stringent rules regarding valuation.  In order to defer all tax you must do two things - Purchase at least as much as you sell and use all the proceeds in the next purchase.  

In your example, if you want to avoid tax you're going to have to buy at least as much as you sell.  If you want to avoid debt on that you will need to bring in cash from another source to add to the equity from the sale.  Otherwise you're probably going to end up with similar debt on the property you purchase - or a tax bill from only doing a partial exchange.

[Anthony R.]

@Dave Foster ahhh excellent point made. I didn't know about this rule. I guess we have narrowed this down to the first two options then. Very good. Thank you for the input.