Best way to use built up equity?

[Brett Jurgens]

I have a rental in Denver that I've owned since 2013. Quite a bit of equity built up. Good rent, good longer-term tenant. 

Should I 1031 or is there a better strategy to keep it and borrow against the equity for another rental?

Thanks!

[Jay Hurst]

Quote from @Brett Jurgens:

I have a rental in Denver that I've owned since 2013. Quite a bit of equity built up. Good rent, good longer-term tenant. 

Should I 1031 or is there a better strategy to keep it and borrow against the equity for another rental?

Thanks!

 @Brett Jurgens  What is your current financing terms on the existing loan?  That will help you with your question. 

[Brett Jurgens]

@Jay Hurst

Thanks for responding

3.75%, 30yr fixed

[Stephen Morales]

Given your mortgage situation I would opt for taking out a HELOC. Keep your current tenant in place. Use the HELOC funds for another investment strategy such as funding fix and flip projects. I have a buddy who did it with his 1rst rental earlier this year. He's had two successful flips so far and after this third one he's looking to pay off the HELOC and roll the profits into his future flips.

[John Morgan]

I'm a fan of using equity to scale up. I've bought 14 houses with no out of pocket $ from built up equity. I'd rather put that equity to use and make much more cash flow over time. Plus I'd rather have more appreciating cash flowing houses that tenants are paying off for me vs a few with a ton of equity doing nothing for me. I've done a 1031 exchange into a nicer SFR, then a cash out refi on the new house later on to grab some of that equity. Play with numbers and today interest rates to see if it makes sense for you since you're locked in with a good low rate. I've got 6 rentals with a lot of equity built up right now I'm considering doing something with even though my interest rates on those are all at 2.75%. But if the numbers work for me, why not!

[Jake Baker]

@Brett Jurgens

The "2 out of the last 5-year rule" in real estate allows homeowners to exclude up to $250,000 ($500,000 for married couples) of capital gains from the sale of their primary residence if they lived in the home for at least two out of the five years before the sale. This exemption can be used every two years.

A great wealth-building strategy is to House Hack every two years, live in each house for at least two years, and then sell older House Hacks before the 5-year mark.

[Jackson Hanssen]

@Brett Jurgens

I'm in agreement with @Stephen Morales. If you like the property and have that amazing rate, just heloc out enough equity for the down payment on your next purchase and start hunting for deals.

[Jake Andronico]

@Brett Jurgens

Congrats!! Great spot to be in. 

Pros and cons to every option. 

High borrowing costs right now, so have to look at what you're able to produce vs the borrowing cost. 

1031ing can be a super powerful strategy, but there are time constraints involved. You'll also want to make sure that you replace the value of the DEBT on the asset you're replacing it with. 

@Dave Foster is a great 1031 exchange resource. 

Regardless, I wish you the best of luck! 

[Dave Foster]

@Jake Andronico, thanks for that kind shout out.  @Brett Jurgens, I usually tell folks they need to have a reason to sell and do a 1031.    There needs to be a "why'.  And if there is a "why" then the 1031 is what you want to use to get into a new property and defer all tax.  

What's your why?

Deferred capital expense looming? under performing rent? declining neighborhood?  decreasing appreciation?  Are you moving?  Trapped equity???

I sense that your real dilemma is the trapped equity.  That's a reason to either sell and 1031 (releasing 100% of the equity) or to refinance the property and pull equity out.  The problems with pulling equity out are that..

1. You will only get 75-80% of the equity out.

2. The refi or additional debt of any kind will impact the current performance of your property 

I'm never a great fan of selling a good producing property - unless I am certain I can improve the overall performance of my portfolio.  Then I would decide to sell and 1031.

[Wale Lawal]

@Brett Jurgens

@Brett JurgensDenver property owners can reinvest without selling by borrowing against equity or selling with a 1031 exchange. Borrowing against equity offers benefits like appreciation and tax advantages, while selling with a 1031 exchange allows deferral of capital gains taxes and reinvestment into new rental properties. The choice depends on cash flow, diversification, or continued growth.

Good Luck!

[Trevor Finn]

@Brett Jurgens,

With strong equity and a good tenant, you have a few options:

• Cash-Out Refinance: Offers lower, fixed rates for stable monthly payments and lets you keep the property while using equity to invest in another rental.
• HELOC: Provides flexible access to cash, though with typically higher, variable rates that can fluctuate over time.
• 1031 Exchange: If you're open to selling, a 1031 exchange could defer taxes and allow you to trade up to a higher-value property or diversify into a different market.

Each option has pros, so it really depends on whether you want to hold onto the current property or leverage its value for something new. Interested in what you decide!

[Sarah Brown]

I would opt for a HELOC. They are one of my favorite tools. You have a payment once you borrow against it, but not before. The payments tend to be lower than a standard cash out refi, so if you end up in a tight cash spot, you have the flexibility to pay less for a bit until you get your bearings again.

[Stacy Raskin]

I have clients who pull out their equity with a HELOC or a new refinance to use as down payments for new investment properties. It's worth looking at a blended rate calculator before you make a final decision of the type of loan as it will show the new "blended rate" of your HELOC and first mortgage if you go that route. HELOC rates are generally higher so sometimes it can make sense to do a refinance of the first if the overall payment will be lower. As far as refinancing, you can either do a conventional loan where they use your debt to income / DTI to qualify or you can use a DSCR loan which structures the loan off of the rent versus income ratio.

More info on DSCR loans: DSCR loans won't use your income to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further. 

[Sarah Brown]

I would opt for a HELOC before sellling a good investment.

[River Sava]

Hey Brett -

If you're happy with your rental in Denver and it's generating solid cash flow, a 1031 exchange could help you defer taxes if you want to reinvest in another property. 

However, if you're more focused on the equity for additional investments without selling, borrowing against the equity could be a great strategy. A cash out refi might be a quicker way to pull out funds for your next rental, and you'll still hold onto the property long term. It really depends on your long-term goals. if you're looking to grow your portfolio without selling, leveraging the equity could be a win. 

[Angelica Crawford]

Quote from @Jake Andronico:

@Brett Jurgens

Congrats!! Great spot to be in. 

Pros and cons to every option. 

High borrowing costs right now, so have to look at what you're able to produce vs the borrowing cost. 

1031ing can be a super powerful strategy, but there are time constraints involved. You'll also want to make sure that you replace the value of the DEBT on the asset you're replacing it with. 

@Dave Foster is a great 1031 exchange resource. 

Regardless, I wish you the best of luck! 

Question, Jake - “Want to make sure that you replace the value of the DEBT on the asset you’re replacing it with” - What calculation do you use for this?? I am in the same boat as Brett (low 2.875 rate and lots of equity)!

[Jake Andronico]

@Angelica Crawford

If you sell a property for $500K, you need to buy a property for $500K to fully defer taxes in a 1031 exchange (there is slight nuance, and ALWAYS double check with a CPA). 

I'm not a CPA, this is just my understanding :) 

[Jake Andronico]

@Angelica Crawford

Here's a very helpful article about replacing the value of the debt: https://www.ipx1031.com/replacing-debt-in-a-1031-exchange/

[Angelica Crawford]

Quote from @Jake Andronico:

@Angelica Crawford

Here's a very helpful article about replacing the value of the debt: https://www.ipx1031.com/replacing-debt-in-a-1031-exchange/

 Jake, thank you so much! I will take a look :)

[Matt J.]

Quote from @Brett Jurgens:

@Jay Hurst

Thanks for responding

3.75%, 30yr fixed

Like others have said, with that interest rate your best bet is probably to do a home equity line of credit (HELOC) to put towards an investment that you can quickly recoup your initial investment on. Like a flip, or a value add rental property purchase (like a BRRRR). 

[Ashish Acharya]

@Brett Jurgens To leverage your Denver rental's equity, consider a HELOC or cash-out refinance to access funds while keeping the property and rental income. This allows you to invest in another property while maintaining the asset.

Alternatively, a 1031 exchange lets you defer capital gains taxes by reinvesting in higher-yielding or diversified properties. 1031 has limitations. Choose a HELOC if the property is appreciating and cash flow remains strong, or a 1031 if you want to diversify or upgrade assets.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Johnny Lynum]

You’ve got a couple of good options here. Great question and great responses! Here's my take:

A 1031 exchange is solid if you want to trade up to a higher-value property and keep deferring taxes. It’s a good move if you’re ready to scale up or diversify your portfolio.

On the flip side, borrowing against the equity (like a HELOC or cash-out refi) can keep that property working for you while giving you funds to get another rental. It's a great way to expand without letting go of a good-performing asset. Just watch your debt-to-income ratio to make sure it stays manageable.

Both are solid—it depends on your goals. Want to grow fast? 1031. Want to build without selling? Tap that equity. 

[Trevor Finn]

Hey @Brett Jurgens,

Great position to be in! 

A 1031 exchange could help you diversify into higher cash-flowing properties or a market with stronger appreciation potential. However, keeping the property and borrowing against the equity (via a cash-out refi or HELOC) allows you to maintain your tenant and rental income while leveraging the equity to expand.

Key considerations:

• 1031 Exchange: Great for avoiding capital gains taxes, but make sure the new property offers better returns or diversification to justify selling.
• Borrowing Against Equity: Keep the steady Denver appreciation and tenant while using the funds to acquire another property. Just ensure the new loan doesn’t overextend your cash flow.

The best move depends on your long-term goals—cash flow vs. equity growth vs. diversification. If Denver’s appreciation is still strong, borrowing might keep you growing while holding onto a great asset! Best of luck with your decision!

[Bryan Stengel]

Hi Brett, I would opt to utilize a HELOC. The great thing about a HELOC that you are not making interest payments until you take the money out. You may safely wait for the best deal to come your way. I'm not a big fan of HELOC toward a down payment unless the numbers make sense and vacancy rate is low. You don't want to put yourself in a position where you are paying down two forms of debt for one property unless that property consistently cash flows to meet those numbers and has a low vacancy. Unless you make a significant down payment with that HELOC and your monthly payments are relatively low. I have to agree that a 1031 exchange may not be the best strategy. You'd rather get a whole new depreciating asset that resets at the 26 year term. When you do a 1031 exchange, the next property you buy continues down the same depreciating term. Let's say you had the previous property for 6 years and were depreciating each year to get the tax benefits. With the new property that you acquired through the 1031 exchange, you could only depreciate 20 years worth of the property. I would definitely take out the equity of your home through other means and keep the solid rental.