How to turn equity into cashflow.

Question

Howdy BP community. I had my first house hack go very well in a class A neighborhood. Since then I’ve moved out rented it out and working on a live and flip for  my second property (sf) so I can have a house of my own with my girlfriend and make some more capital from it. I have about $500k in stocks and about $600k in equity in my single family house that I rent out. I’m very grateful and lucky my investments have built so much equity and capital but I would like to move it into monthly cashflow so I can work away from a w-2. My area (Anacortes Wa) doesn’t seem like a good market for multi family. What are the next steps you all would recommend to transfer equity into monthly income. Also if you can be specific for finance options. My guess is to 1031 into an 8 unit. Thanks for all the help and guidance.

Julie Marquez · Answer

@Hardy Davis Hi from Anacortes! It is hard to find mutlifamily in town, are you looking in other areas of Skagit? Are there ways you can capitalize on your current properties, like add an attached or detached ADU to bring in more rental income?

Gino Barbaro · Answer

@Hardy Davis

I would find a market where there is more cash flow, and possibly find a partner in that market who can be the boots on the ground. If you're looking outside your market.

If your market is more of an appreciation market, you can do the same with an 8 unit. Buy it, fix it up, and build up equity to reposition into a bigger asset.

With the profit from the house hack, you do have certain tax exemption. You may not have to 1031.

I would start looking for partners and different markets to invest in. My NY market did not cash flow, so I transitioned into a market that did.

Gino

Dave Foster · Answer

@Hardy Davis. What you are referring to is what we call a diversification exchange, where you sell a single property to purchase multiple smaller properties. That's works perfectly fine as long as you meet the reinvestment requirements and use all of the proceeds.

When referring to (Like kind) it focuses on the use of the property and not so much the type of real estate. So you could sell a strip mall and purchase a couple SFHs if you wanted.

You may allocate the proceeds any way you want as long as you purchase at least as much as your net sale and use all of the net proceeds to defer all the capital gains tax.

One option would be to sell your property and purchase one property outright, then use the proceeds as a down payment on another property. This would give you some more protection from market volatility of having loans. And you could later cash out refi and use that as a downpayment on another property.

Hardy Davis · Answer

@Dave Foster thanks for the reply great information. For the 1031 can I put it into multiple cheaper properties. I.e. if it’s 500k of gains on a 1.0M property for simplicity sake. Can I 1031 exchange into  5 100k down payments for 5 properties that are of like kind but lower value than original property? I assume all would have to abide by the timeline restrictions if I am able to do that? Thanks for the help!

Dave Foster · Answer

@Hardy Davis  As long as you've lived in the property for two out of the previous five years, you could qualify for the 121 exclusion. In your case you could take the first 25% of the gain up to $250k tax free with the 121 exclusion, and qualify for a 1031 exchange since it is also used for investment use. I you don't qualify for the 121 exclusion you can still do a 1031 exchange and defer all the capital gains tax.

This would allow you to reinvest into a larger property such as a duplex, or even multiple properties in areas with a larger growth and cash flow potential. This is a great way to grow your RE portfolio and Start building the cash flow you want for retirement.

Mike Dymski · Answer

Keep doing what you are doing and in 10-15 years (your retirement timeline) you'll have a ton of equity built up to turn into whatever cash flowing investment you want at that time (real estate or otherwise).  At that point, many investors just keep their paid off properties and live off the cash flow (mostly risk free).

Hardy Davis · Answer

Don,

great point. I’m in a great appreciation market but no cashflow. I would like to be on about a 10-15 year out from retiring so equity is probably the goal. What does that look like when im ready to cash out equity? In my head it’s a 1031 into a nice safe property with a hefty down payment. Lower risk but more consistent cash.

Hardy Davis · Answer

Ya good point. I don’t think I qualify for the 121 exclusion since it’s been house hacked and I actually made 75% of the house a rental property and filed taxes using deductions and depreciation.  It was my primary residence for the past 4 years. Does it still qualify for the exclusion?

Thanks for the help!

Andrew Freed · Answer

@Hardy Davis - All good questions! If you lived in your primary residence for the last 2 years of 5 years, you're eligible to sell it and pay no taxes on the first $250K for a single person or $500K for a married couple. A 1031 defers paying taxes but a primary residence sale removes the tax liability from selling up to a certain dollar threshold altogether.

Personally, if possible, I would take the tax free money and transition that into a commercial multifamily property (5+ unit property) rather than 1031. You won't be against a time clock to find a property which is the case with a 1031. You also are gaining tax free funds vs. simply deferring the tax liabilty down the road until you sell the new 1031 property you purchased. Just something to consider. Either way, you are going down the right track. Good luck on transition your equity into cashflowing commercial multifamily.

How to turn equity into cashflow.

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