Should We Sell or Hold Off?

[Jessica Griffith]

First post here! We own two properties:

-Our primary residence: $345K left on mortgage (about 28 years remaining since we refi'd 2019). Current rate is 3.875%
-Rental home: $225K left on mortgage (26 years remaining since we refi'd four years ago to cash out for down payment for primary home). Current rate is 5.25% (yes, high!). We charge rent at $2,150 per month and mortgage payment is $1560. Other fees come to about $150 so we are around $440 net each month.

Questions: We've gone back and forth between wanting to keep the rental and sell it. We have steady tenants, no real issues but at some point we will need to replace AC unit and make repairs as the years go on. The market is so high right now and we could potentially gross around $300K if we sell. Realtor fees would come out of that and I am worried about capital gains (we moved out of that home in May 2017). 

Even with those fees coming out, it is still a decent amount of money. There is nothing available right now that would make sense for a 1031 exchange so I am not sure yet what we would do with that money other than hold on to it while we look for other investments (not real estate).

Another option: Refi our primary residence (either a 30-year with a lower rate/lower monthly payment OR a 20-year that is not much more than what we pay now bc the rates are much lower) and do a cash-out refi on the rental. We could use that money to make extra payments on our primary residence to pay it off way sooner. 

I'm not going to lie, I stink at this stuff. I am good at research, poor on decision making. I TRULY appreciate any feedback. Thank you!

[Dave Foster]

@Jessica Griffith, I Like what @Brandon Rush is saying.  You've got to change the matrices for decision making.  The 1031 is not the reason,  It is only the vehicle change.  So what are the drivers of change for you.  I heard at least two - 

1. Capital expense exposure and 2. finance costs.  The 1031 can help you with both of those by letting you buy more stable real estate and save a bunch in interest charges with a new loan.

The problem people have is when they compare only the acquisition price of the real estate with a 1031 exchange.  If you're in a sellers market it always feels like your paying too much.  But you're also selling for too much.  In a buyers market when bargains abound it's hard to wrap your mind around the discount you'll need to give to get your property sold.

That's why sale and purchase price should be secondary in your decision making (although, if you're a diligent investor you can always find margin between your buys and sells.).

Dig into your pain points screaming for change and see what meets those.  It might be a sale and pay the tax to get out of real estate.  It might be a refi.  It might be a 1031 to stay in real estate but defer the tax and improve your situation.

Since you're considering both properties here's a little thought:  why not sell the rental and 1031 into a really nice investment property that you may want to live in one day.  You'll defer all tax and get rid of the high interest loan and cap ex exposure.  Then in a year or two sell your current primary and take all of that money tax free!!  Move into the former investment property.  Changing the use does not create a taxable event.  But in one fell swoop you kept all of your profit tax deferred or tax free.  And the tax free portion you can use to invest in any other sector inside or outside real estate.

And the biggest bonus - you won't get to ever get all of the gain tax free.  But converting a rental to your primary will let you get a proration of the gain tax free when you later sell that property.