Refi and get negative cashflow or 1031?

[Hanbin Y.]

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).

[Hanbin Y.]

@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.