Exchange from High value to Lower value RE

[Dan Johns]

My wife and I have been following Bigger Pockets for the last couple of years including a few podcasts. I’m writing because I need a sounding board. 

I'd been involved in REI a number of years ago and in the 2008/2009 downturn took hits along with everyone else. I came out of the mess holding two prior homes that became rental properties due to being upside down. Cap rates and rental values aren't good on either of these.

Regardless, since starting to follow Bigger Pockets, over the past twelve months, we’ve closed on two more income properties and are starting to rebuild our portfolio.

However, my current opportunity has me talking myself in circles and not gaining much clarity. I’d greatly appreciate your feedback.

Here’s the situation:

The two investment homes I mentioned above in the north Phoenix area. One was purchased in 2005 for about 317K. Today it is work just about $280K; 8 years after the crash!

The second was purchased for 485K and is just about back up to about that same market value.

Both of these properties were originally my homes and became rentals when I moved and couldn't sell them. Neither one cash flow and I feed them every month. Of course, at tax time, after depreciation and the losses, I do get the benefit from Uncle Sam.

I no longer live in the area and the two properties I purchased this past year are in my new home town…not a booming market, but a growing, rural economy, with housing price escalating quickly with local factories and processing plants expanding; although this might be short-lived as we know rural areas can do..

What I’m considering is selling the two Phoenix properties, either on a 1031 exchange or via a Deferred Sales Trust arrangement and putting the proceeds into a few smaller houses closer to my current area.

So, the facts:

• -Both homes are still under the value I paid for them
• -Both homes have negative cash flow, cap rates hovering around 2 – 2.5%
• -I’ve taken significant heloc or refinance out of each to buy other properties, but have in the ballpark of $120 - 140K equity/profit after selling (both)
• -I never plan on much appreciation, but the Phoenix housing market should be adding 4% annual today.

I keep telling myself that it makes sense to sell these, get out from under the large debt and negative cash flow and put the funds into multiple smaller places that will cash flow, but may not appreciate as much.

But then I turn the table and say “but what if the Phoenix market does rebound at 4% plus per year”

Talking in circles…any words of advice? Or how could I effectively do a comparison?

I greatly appreciate your time and and words of advise.

Thanks, Dan

[Mike Dymski]

People place more value on things they own than on ones they don't own.  It's called the endowment effect.  It causes us to do thing like hang on to old clothes that we never wear, store stuff that we never use, and to hang onto to former residences.

If you would not buy it at today's prices and have an alternative investment opportunity, sell or exchange it while the market is hot and interest rates are still reasonable.