What are my options?

Question

I have 2 investment properties and 1 owner occupied residence that I live in.  I have one investment property that has more equity and appreciation than the other.  I would like to buy more properties, however, with the market similar to 2005, I'm not sure of what would be beneficial to me. One of my properties has appreciated from $119K to $168K and I owe about $75K on it, with a low interest loan.  My other property has appreciated less, $143- $162K, and I still owe $111K with a higher interest loan.  Not sure of what I should do, should I consider a HELOC, do a 1031 exchange on one of the investment property's, refinance the higher interest with the less equity property?  Any advice is appreciated.

Joannie Torio · Answer

Thank you Leslie!

Leslie Pappas · Answer

Hi Joannie, if you’re an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about if you decide to perform a 1031 exchange. DSTs can possibly give you the benefit of diversification with properties with multiple markets.

You can read more about DSTs in this blog I wrote,

https://www.biggerpockets.com/blogs/7993/48972-set-your-financial-life-free---with-dst-investments

Dave Foster · Answer

@Joannie Torio, The 1031 exchange is at it's  most powerful when you are looking to change geography, or price point or real estate type.  It gives you the ability to move your property from an area that is underperforming or peaking and place it where the appreciation/cashflow is just starting to improve.  This could be a good answer for you given your thoughts on wanting to move out of the area because of lagging appreciation.

The toughest thing to do with a 1031 is to sell a property in a hot market and try to find a similar type/size/location property within the tight time constraints of the 1031.  But if you're moving into emerging areas it can be much less of a problem.

In terms of execution the 1031 exchange is no different than what you do now - Market, sell, search, and buy new property.  You use all your same professionals and the process is identical with the exception of the addition of your qualified intermediary who coordinates the exchange with your regular professionals.  Done correctly the 1031 portion of your transactions is seamless and invisible.  Your QI handles the details and keeps you right where you need to be in terms of requirements and timelines.

Bill Exeter · Answer

Hi @Joannie Torio,

The biggest challenge when structuring a 1031 Exchange transaction is the requirement to identify potential replacement property with in the 45 calendar day identification period. You have exactly 45 calendar days from the date that the sale of your Relinquished Property closes in which to identify potential replacement property. The rest of the process is relatively straightforward.

The key to a successful 1031 Exchange transaction is first understanding the entire 1031 Exchange process and then planning your transaction.

Patrick Liska · Answer

Joannie,

Sounds to me like you have made that decision in your head already, then i say go ahead and sell it. if your mind is not in the place and feel it's too much for you to manage at a distance then don't stress over the property sell it, and yes you can do a 1031 exchange and it may be worth starting to look for a replacement while you list the house. I have not done any 1031 exchanges, i have bought and sold a few houses but did not hold them long enough to be able to do a 1031 exchange. I am sure if you do a search here on BP on that subject you will find a ton of information here because that is a subject that is talked about all the time.

Joannie Torio · Answer

Would doing a 1031 exchange be a good thing to do on the second property?  I am thinking of getting out of the area because it is so far from me, the market also appreciated much less than my first property.  I know I could refinance, it could make my cash flow better than what it is.  My thought is if I get out of the area before the market changes, then I'm ok with offloading that property because it may lose equity once the market adjusts and I'd be back to square one with less equity. I've never done a 1031 exchange, would you know if it is a harder process?

Matt Madalis · Answer

Cash-out refinance may be a good option assuming 1) Your properties still make you money once financed at the higher LTV and 2)  Whatever you buy with the "cash-out" cash flows enough to make it worth your while (i.e. not relying on appreciation to make you money).  Depending on your rates vs the market, there may be benefit to refinance even if you don't pull out cash.

It all depends on your goals and how you want to turn your appreciation into additional properties (or not).

Patrick Liska · Answer

Your first one would give you about 69k to use, and the second one will give you about 38k figuring a 75% LTV. how much lower of a rate can you get for the 2nd one then it currently is ? , if you can save substantially on that, and refinance the mortgage with cash out, yet still profit from the property, that could be the way to go. you will need to run the numbers with different loan options and the interest rates you can get while making sure you can still profit from the properties you have.