Refi and get negative cashflow or 1031?

Buying & Selling Real Estate
10yFollow

Refi and get negative cashflow or 1031?

Hanbin Y.
Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes

Hello,

I've been struggling to decide whether I need to sell my property and 1031 to a larger portfolio, or refi it.  Please help me!

The property is a B-class SFH in Lawrenceville, GA, 30044. Purchased with cash for 130k two years ago and rented for $1200. It's built in 1980 with 4b/3b and 2-car garage. 5-7yr old roof, other big items in mid-lifetime. 2200 sq ft with 0.6 acre lot. Average location (not great school, but good tenant base). Now the property is worth 150-160k according to my PM. I'd like to pull out 100k for a downpayment for a portfolio in Birmingham.

But from my calculation (using numbers from the past two years), it will be $50/month negative cashflow, mainly because the 6.7% interest for foreign nationals, and because I use historical numbers for maintenance. The historical maintenance were high because I had a bad tenant and PM in the first year, and had a building compliance issue. Now the second PM and tenant has much less repairs. But it's only been 8-months with the second tenant so I can't guarantee anything.

Three reasons I may want to hold on to it: 1) it has appreciation prospect (better than the 60-70k SFH portfolio in Birmingham IMO). 2) The lease is till October, so I can't sell it to a homeowner currently. 3) it has a pretty big lot that I can potentially sell to a future investor for subdivision.

Three reasons that I may want to 1031 exchange: 1) get 135k cash after commission instead of 100k, and no negative cashflow subsequently 2) reduce the number of markets and PM of my portfolio, so that I can focus more on one market (I want to stay passive with my full-time job) 3) get out of it before major expenditure hits (don't think it's going to happen in 4-5 years though)

If you were me, what would you do? How do you evaluate the situation?

Thanks in advance!!

PS: for refi, it's 30yr fixed, 6.7% interest, 3-2-1 pre-pay penalty

For the calculation, I use 5% vacancy, $65/month repair, $130/month Cap Ex, 12.78% management (including 8% management fee, one month lease up fee, and estimated $350 move-out cost), $730 insurance, $2300 tax, $587.32 mortgage (if refi).

0Reply
72 views

20 Replies

Jump to latestLatest
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Hanbin Y., You mentioned a higher interest rate for foreign nationals.  Not sure if this applies to you but if you own that property in your name and are a foreign national then there are some specific guidelines you're going to want to be aware of if planning on doing a 1031 exchange.  In general 1031 is available as an option to defer tax even for a foreign national but you cannot simply do a regular deferred exchange without some preparation.

    A 1031 for a foreign national will exempt you from the 15% FIRPTA withholding but only if one of the two following criteria are also met.

    1. You do a simultaneous exchange where your sale and purchase happen at the same time with other 1031 documentation present.  or....

    2. You apply for and receive a withholding certificate that allows you to exempt from FIRPTA by virtue of the 1031.  This certificate and take several weeks to months to get so I would start early in the process.  Unfortunately some of the information required is specific to the transaction so a contract must be in place prior to application.  It is a catch 22 situation in many ways for the foreign investor.

    This might be a motivation to refi now and contribute into a domestic entity that your accountant can set up so you can avoid the FIRPTA trap when finally ready to sell.

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Matt Motil
    Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes
    10y

    Keep in mind that most times lenders are going to look at your DSCR when refinancing investment property. You will need your income from the property to cover a minimum ratio of your debt service, typically 1.2x. The only way you can pull cash out in a refi situation is if (a) the property appraises for the higher value, AND (b) you have enough income in the property to cover 1.2+x the debt.

    If it were me, taking a negative cashflow position is a dangerous proposition. I like all my properties to be self-sustaining. What happens when you need a major repair, or a tenant loses their job and decides to stop paying rent and you have to evict them? Now you're paying out of pocket to keep the property afloat when it's already underwater to begin with. 

    If I were in your situation, I would 1031 exchange and put the money into something that will get you the kind of return you are looking for.

    0Reply
  • Jay Y.
    Real Estate Agent · Atlanta, GA · Member since 2012 · 134 posts · 22 votes
    10y
    $1200 sounds on the low side for a 4/3. When is the tenants lease up? You should be able to get at least $1350 because the market is really hot right now. 30044 is also my farm area so I know the area well. Also what part of Birmingham, hopefully in the southern suburbs?
    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    I would sell based on the fact that now being valued at $160,000 it is no longer a positive cash flow  investment.

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Dave Foster Dave, thanks for the good point about 1031. I did not know it has this level of complexity. Who's involved in foreigner's 1031? Should I hire a CPA, attorney, etc? Do you recommend anyone in Atlanta?

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Matt Motil Thanks for the good point! Somehow my lender can lend me 100k based on their DSCR calculation. I guess they don't take into account the Cap Ex and some other cost in the calculation. I'll start looking into the 1031 part.

    1Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Jay Y. Hey Jay, it's a little lower than I would expect. But I checked the rent meter and it seems 1250 is the median price. I saw very little above 1300 unless it's in a different neighborhood or comp. Do you have any properties in that area? Would love to connect and discuss!

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Jay Y. For Birmingham, the portfolio is in the north suburbs (35215). It's 60-70k for $800 rent. And I checked the historical price did not drop too much during 07-08. So it provides some cushion for me if any downturn occurs in the next few years.

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Thomas S. The thing is, it will cashflow positive if I refinance a less amount. And it may appreciate more in the future. Do you think it's good to hold on to something like that? And if I sell it, the portfolio that I purchase won't appreciate as much (at least historically).

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Hanbin Y., I'll reach out with a pm to you.

    D

    The 1031 Investor5137 Reviews
    WebsiteView Page
    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    In reality you are not positive cash flow. To calculate roughly with expenses at 50% and rent at $1200 that only leaves $600 for a return on the cash lying dead in the property. At a equity value of $160,000 a 5% return is $666/ month.

    That leaves you with a negative cash flow depending on month to month expenses. Long term you will likely see 0 cash flow and for that reason I would have no interest in the property.

    Appreciation is pure speculation and not something I rely on ever. It is maybe a bonus some day assuming I am not killed in a car accident tomorrow or the place burns down and the insurance comes up short.

    My first option is always to make money today not maybe tomorrow.

    0Reply
  • John Patton
    Investor · Birmingham, AL · Member since 2016 · 315 posts · 206 votes
    10y

    The Birmingham area of 35215 is east side. Check your high schools. Any properties with City of Birmingham schools cost less and get less rent. I have 3 properties sfh in the area last 8 years.

    Huffman and Erwin (county) are ok. Good schools are Clay and Pinson, check them out.

    You can go 1 block in 35215 and rent change from 750 to 950 along with the crime.

    Ride thru the neighborhood about 11 am and see what is like. Good luck out there.

    0Reply
  • Leslie Pappas
    Professional · San Francisco, CA · Member since 2014 · 876 posts · 301 votes
    10y
    Originally posted by @Hanbin Y.:

    Three reasons that I may want to 1031 exchange: 1) get 135k cash after commission instead of 100k, and no negative cashflow subsequently 2) reduce the number of markets and PM of my portfolio, so that I can focus more on one market (I want to stay passive with my full-time job) 

    Hi Hanbin, if you're an accredited investor and you decide to 1031 exchange, you might consider reinvestment into DSTs. They are hands-off, institutional grade real estate investments, and they allow you the option to diversify. If that interests you, you can start to learn more at my website. Please let me know if I can help. Leslie

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Thomas S. I see what you're saying. Yes I'm considering selling it. But if I sell to a investor for 150k, will anyone buy into this? Just feel like it's a crappy investment with this price. And I know no homeowner will be interested in an occupied property...

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @John Patton Thanks for your comment! I'll PM you for more details about Birmingham. Love to hear from experienced folks.

    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Leslie Pappas Leslie, I'm not an accredited investor...yet. If things go right, I'll be one in 10 years! Will let you know then. LOL

    1Reply
  • Jay Y.
    Real Estate Agent · Atlanta, GA · Member since 2012 · 134 posts · 22 votes
    10y
    Hanbin Ying I have 4 houses in 30044, 1 in 30043 and 1 in 30046. I rented out a 3/2.5 about 1800 sf last month in 30044 for $1250. I thought it would be over priced but it actually rented out in about 10 days! Are you getting the Birmingham houses through a turn key provider? I've been looking over there myself but I would like to avoid Centerpoint area if possible.
    0Reply
  • Hanbin Y.
    OP
    Investor · Atlanta, GA · Member since 2014 · 42 posts · 7 votes
    10y

    @Jay Y. Jay, let's discuss this in PM. Just sent you the request.

    0Reply
  • Doug Johnson
    Investor · Frisco, TX · Member since 2015 · 84 posts · 52 votes
    10y
    As a passive investor, have you considered investing in apartments in a syndication group? I am invested in 4 apartments thru Partnerships and the returns are pretty good. My B'ham SFR is doing well, but the apartments are less headache. I am looking a couple of apartments in the B'ham area now.
    0Reply
  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    10y
    The bad things about the refinance is that you need be monitoring your dept to income ratio of you are trying to go after my bank financing.
    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free