Sell, Hold, or 1031

[Michael Lyons]

My question is in regard to the 1031 exchange. I'll have 2 properties in this theory that i'll lay out. I am new to REI, so i'm not sure if this is even possible. If there's something i'm missing here please let me know, but i'm pretty sure i included all relevant information. Any and all comments or suggestions are appreciated.

Property #1:

•This was my primary residence for 5 years. It is now a rental

•cash-flowing $325/month

•it has 100k+ in equity at the moment and will have general not forced appreciation over the next 3 years, i am not putting anything else into it

•the mortgage is being aggressively paid down by tenant because it’s a 15yr mortgage

• i CAN utilize Homeowner’s Sale Exemption if sold sometime in the next 3 years.

•looking at a 39% return if sold in 3 years, using a safe projected sale estimate.

Property #2:

•Strictly a rental

•cash-flowing $335/month

•conventional 30yr amortization

•will be putting 60k+ into it over the next few years, which will moderately increase cash-flow, but will dramatically increase the equity.

•looking at a 15% return if sold whenever the work is done, using a safe projected sale estimate.

So my question is, should i:

1) sell Property #1 in the next 3 years to take advantage of Homeowner’s Sale Exemption

2) keep both and either cash-out refi or HELOC both (once i have more equity in Property #2) to obtain more properties

3) sell both at the same time via 1031 exchange to upgrade to a more cash-flowing multi-unit

option 3 is my main question, is that even possible? can you sell 2 seperate investment properties via 1031 to upgrade to another (obviously more expensive) investment?

[Kevin Sobilo]

@Michael Lyons, first off I would not count on price appreciation over the next 3 years for property #1. We have a very unusual set of circumstances affecting the market right now and its unclear exactly how things will unfold the next few years. Even under normal circumstances its difficult to predict.

If property #1 isn't something you want to keep long term, I would definitely sell and take advantage of not having to pay taxes on the proceeds because it was your primary residence. I myself plan to do that later this year.

As for option #3, it isn't even an issue because property #1 isn't an investment property it wouldn't need a 1031 exchange to sell and reinvest the money! You can sell property #1 and then decide if and when you want to reinvest that money. 

You can do a 1031 exchange on property #2 and add proceeds from the sale of #1 to buy a more expensive property. I see no issue with that.

I will give you another thought though. Its a great time to sell but a HARD time to find great deals on investment properties. You have a good cash flowing property with property #2, why give up on it?!?

You could do your value add improvements on property #2 and do a cash out refi on it before interest rates go back up! You pay no income tax that way. Then sell property #1 and sock away ALL of that $$$ until you find a good deal. That gives you the benefit of TIME. If you do a 1031 exchange you HAVE to buy something in a relatively short time and finding deals is HARD right now. Plus you keep that good cash flowing property!