1031, Liquidate, or HELOC My investment property?

Question

Hey BP! First post on here!  Quick blurb about myself: I am active duty military, and starting to invest in real estate.  I own 3 SFR, 2 of which are +cashflow longterm rentals.  I like buy and hold of SFR and looking to get into Multi-family buildings.  Also going to be working on BRRRR this coming year as well.

I decided to post on here to see if i can get some educated opinions on my current situation, and maybe spark some ideas.

One of my rentals, i have had for 3 years or so and has appreciated greatly.  However the cashflow is bearly positive and im not recieving the ROI i would like.  So I was thinking of ways i could make more money of the equity i built and came up with a few strategies.

1st idea i had was to 1031 into a multifamily building. I have about 100k in equity and would be a nice large down payment on a pretty good building.  This would most likely end up giving me that cashflow/ROI im looking for.

2nd idea was to sell the property, pay the taxes, and use whatever i have left over to help fund my BRRRR startup.

3rd idea was to take a HELOC out and use that to start BRRRRing.  Although im not too familiar with how HELOCS work, and how it works when i finiance the property to pay back my HELOC as well.

Yeah, i know, getting into multifamily buildings is mostly passive, and BRRRR is most definetnly not.  Although on oppisite sides of the spectrum, i think both seam pretty awesome, and im open to doing both.

Please let me know if you have an ideas!  All and any are welcome, and much appreciated!

Thanks for reading,

-Nate Prince

Joshua McMillion · Answer

@Nathaniel Prince

Love seeing military members, especially active duty, post on BiggerPockets! Is this property you want to sell a VA loan. If so, that changes things up because 1031 is not required for up to 15 years. If not, I recommend selling the property with a 1031 and using that to fund your next Multi-family building.

I am never a big fan of using debt unless you need to. You are in a position where you can place a large down payment on an MF or even acquired several SFH's with equity you already have. If you use the HELOC, make sure you have a team in place and quickly REFI if you go with a BRRRR.

Sincerely,

Josh

Axel Meierhoefer · Answer

@Nathaniel Prince I would start with what @Carl Millsap posted.

What's your goal?

Do you want to create cash flow to reach what I call the "TFP"? That the point in time where you no longer have to exchange your time for money because your passive income covers or exceeds all your expenses? If that's the case, you should follow a strategy that gets you to your TFP sooner rather than later. The term I try to get people to use for that approach is "Performance"

If you rather aim for appreciation of the properties in your portfolio, your purchases and sales would be different.

It might sound pedantic, but being clear about terminology has helped me make sure I can determine what my next steps should be (or if people ask for my help, to make sure we speak about the same things).

With that in mind, I don't understand why you say that you did not get the ROI you were expecting? I don't know about your property but just as an example:

If you bought for $300K with $100K down payment (33%) and you made $100K appreciation in 3 years, you got 100% return on your investment(ROI) not even counting tax benefits and assuming $0 cash flow. If you put less than 33% down or had at least a little cash flow, you have even more than 100% ROI.

I would say that's awesome.

Naturally, you never know if past experiences will be the same in the future.

If I had/owned that property I would get a HELOC or all-in-one loan. You can probably only get 80% of the equity but if you had $100k appreciation and probably your downpayment + some principal, you might have closer to $125K equity, which should give you about $100K in your HELOC or AIO-loan.

With that money, you can buy 5 well-performing properties @ $100K each from a turnkey provider and use the positive cash flow to pay back the HELOC/AIO-loan.

If circumstances ever require, you can use the cash-flow money for expenses and you still have your original appreciating asset + 5 more assets. If you are lucky, they don't just perform well, they might also appreciate on their own, even though it will probably be at a lesser rate than your core-property.

In the current environment, it is a very smart strategy using low-interest rates as leverage. I am retired Air Force myself and building a passive income stream for the time after your service ended is a great approach I wish I would have known about when I was still on active duty.

Last point: I suggest taking advantage of your financing benefit as a military member. While I would love to see you follow the suggestions above, I would also look for a triplex or 4-plex and buy it for yourself using your zero-down VA loan.

If you stay where you are for 2 years or more and then PCS, you can get a new VA loan in the new assignment location and if the military requires you to move sooner you automatically get your eligibility back in the new location. I believe it's part of the military clause. Same as when your tenant is military or joins the military, you can't mandate them to stay.

I called it my "Hensel & Gretel- Strategy" when I was still on active duty. I left a house I bought with zero-down VA loans in each assignment base, rented it out after I left, and had a small portfolio that I consolidated into a real cash-flow portfolio when I retired. The locations were not always the best performing, but with none of my own money to lose and all the time in the world, ultimately the houses either appreciated or the rent was good and sometimes even both.

Sorry, I typed too much already. If you like to talk about it, let me know in PM and we can set up a call.

Dave Foster · Answer

@Nathaniel Prince, I'd eliminate #2 option.  Just because it's not needed.  You could also sell that property and use the proceeds to buy one or more Brrrr properties.  The really neat thing about this model is you keep the tax deferral and get to grow your portfolio and use the refi's of the portfolio to purchase new Brrr properties.  This approach is the snowball rolling down hill for your portfolio.

But like you said it is much more labor intensive than a MF investment.

So let the market speak since you're open to both.  And invest in whichever pops up during your exchange period as the best replacement.  But in either case use the 1031.  Because using the deferred tax for you benefit is the compounding effect that will really springboard your career as a REI.

Sean Ross · Answer

@Nathaniel Prince welcome to BP and thanks for the question.   Can I recap quickly what I've heard and then try to apply that logic to your scenario?You've Said

• The current asset does not generate the ROI you like
• You want to purchase new assets and possibly multiple new assets (initiate BRRRR)
• You want to diversify into new asset classes (multifamily)
• Tax efficiency is one important variable (you are considering a 1031)
• Appreciation is great but you really want cash flow

Applying to the Three Options

• If you 1031 into multifamily, I think you're hitting lots of birds with one stone.  It's tax efficient, it could diversify your portfolio, it could get you out of a low-ROI asset and into something with better metrics, and it gives you lots of options with leverage on next property(ies). 
• The second option, as @Dave Foster said, doesn't make much sense. It looks like an inefficient version of the first option. Based on the criteria you gave, I think you can safely eliminate this. 
• The HELOC gets a boost for not being tax-inefficient, but it leaves you with the low-ROI asset that you're already displeased with.

It's possible we don't have enough information to say this definitively, but based on what you gave us I think #1 is the way to go.

Clear?

Carl Millsap · Answer

@Nathaniel Prince What is your goal? "Begin with the end in mind" - Stephen Covey

Any of the strategies you mentioned will work; if I'm in your shoes my goal is to scale and get cashflow, so here is what I recommend.

1. Sell the barely cash flowing but quickly appreciating house. Do a 1031 into a value add cash flowing multifamily.

2. Since you're still in the military:

a. BRRR your next home- might as well let uncle sam contribute to your retirement via the housing allowance.

b. Buy a small multi-family 2-4 units with a VA loan, live in one unit rent the other 1-3 units out. Not sure if you can use the 1031 funds to buy the multifamily if its also going to be your primary residence, but its worth looking into.

3. There is a  group of veterans who meet once a week to talk about multifamily investments i.e. raising capital, purchase etc. on Meet-up.com called Last line of Defense Real Estate Group

https://www.meetup.com/last-li...

4. You want to minimize your taxes so you can reinvest and grow your portfolio, the 1031 is a good tool. If you BRRR your home that's another tool to minimize taxes since you can keep the profit tax free. I'm not a tax professional so ensure you consult your advisors.

I'm a vet who transitioned from SFR to multifamily, trust me there is nothing passive about multifamily but it's well worth the investment. Stay the course....

1031, Liquidate, or HELOC My investment property?

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