I’ve narrowed it down. 1031 or cash out refi

[Taylor Dame]

I have a paid off condo in Scottsdale, Az that I’d like to leverage to get into a few more deals. I own a few properties but still consider myself a newbie. I’ve looked into all sorts of ways to use this condo as leverage to get access to more cash and do more deals. For my goals I’ve narrowed it down to doing a cash out refinance or selling it and doing a 1031 exchange. I wanted some feedback on how best to move forward with each of these: Option #1 - CASH OUT REFINANCE: The condo is worth $165k (paid off) and I am currently cash-flowing at a little over $600/month after HOA/taxes. My goal with the new loan would be to cashflow at the very least $200/month. In order to achieve that the most I would be able to take out in cash would be around $60k on a 30yr loan at 4.125% (estimates). In my local market I’ve recently been able to achieve a 10 cap with 13-15% roi. That would be my baseline for investing the cash into 1 or more deals here in Idaho. My questions are: Do you have specific parameters when doing a cash out refinance that you like to follow? would you do a 30yr loan on a refi or would you go shorter? Would you be ok with less cashflow on the original property after the refi with the idea that you’ll gain more on the deals done with the cash? Option #2- 1031 Exchange: As I’ve mentioned this condo is paid off and has appreciated really well. I bought it in 2010 for $58k and they are now trading at $160-165k consistently. With the cashflow at just above $600/month I also see the value of a 1031 exchange. I live in the boise, Idaho area and I am fairly confident I could use that money to do 1-3 deals here in Idaho while meeting my parameters of 10cap and 13-15% roi. The largest factor in a 1031 that makes me nervous is the short timeline to identify the properties and go under contract within the 45 days of my property closing, it I’m confident I could make it happen. My questions are: Do any of you have parameters that you like to see when deciding to do a 1031? For example in the current market if someone were to purchase it today it would be a 7% cap and a -6% roi. Compared to when I purchased it in 2010 at a 18% cap and 25% roi. Or do those numbers not mean much to you when making the decision? Would you even consider doing a 1031 with a property that is cash flowing well? Overall, what strategy would you implement? The cash out refi or 1031? What experiences have you had with either? What were some of the harder aspects of each? Thanks for any feedback.

[Nathan Carter]

Hi @Taylor Dame

I have used the cash out refi a few times to buy my next property.  I think it is a great method. I did the due diligence on using a 1031 exchange, but found a refi would be cheaper and give me more flexibility in buying the next deal.  Also if you have a property that is cash flowing and is not giving you any major maintenance issues, I would keep it.   Interest rates on mortagages are still historically quite low so if you can lock in for 30 years to give you a lower monthly payment on your refi, it is probably a good idea.  You will be beating inflation after a few years.  My only caveat is to not over extend yourself with too may purchases right now.  Boise has seen meteoric appreciation since 2011 and prices could dip and you want to also be able to buy as prices are declining.  Just my thoughts.  Nathan