Sell my investment property Or Refinance/HELOC?

Question

Hey guys.

I own several rental properties in three different states. And Im considering to sell one of my properties in Phoenix, AZ. I have been renting it out for six years now, and the current rent is $1500/month. The house is fully paid for, and don't have a mortgage. I bought it for $110K initially, and I could probably sell it for $220K.

I'm now thinking of keeping it as a long term rental instead, To Avoid Paying Capital Gains.

If I do keep it, I've thought about doing a cash-out refinance to get some of the equity (can get about $150/160K) and to buy two more rental properties in NC and rent them out for $1000/month each property.

So, better to sell now and pay taxes ? or do refinance/HELOC?

Also, which bank you recommend to do refinance for an investment property?

In my case, refinance will be better than HELOC?

Any thoughts would be appreciated.

Dave Foster · Answer

@Ofer Attia, I agree with @Yonah Weiss.  1500/mo on a paid off 220K asset isn't too awful shabby.  But if you do refi that will knock that number down quite a bit.  If your NC numbers are solid I'd think about going the 1031 route.  Instead of taking a marginally decent rental and killing it with debt, Sell it and 1031 into three NC properties.  Going that route you don't drown your current rental.  And you get access to 100% of the equity to move forward so you can pick up three instead of two replacements.

If you like it for reasons other than just avoiding cap gains taxes then keep a close eye on your NOI after the new debt service

Yonah Weiss · Answer

@Ofer Attia congrats on your success with the rentals, sounds like you have great cash-flow without debt service, and it has appreciated very well. Whether you refinance or use a HELOC, you will be taking on debt, so just make sure the cash flow from the rentals will be greater than the current cash-flow without debt.

Alternatively you can do a 1031 exchange, to sell the property without incurring any capital gains tax. This gives you much greater buying power, and increased potential cash-flow.

Ofer Attia · Answer

Thank you @Yonah Weiss and @Dave FosterIf ill do refinance the cash flow from the rentals will be greater

$1500 rent vs $670 (Principle and Interest Payment only).

If I sell the property for $220K , ill need to put $10K renovation + $10K(Commission)

What is your experience with  the 1031 exchange? can I exchange one property with three?

With these numbers will it better to sell?

Dave Foster · Answer

@Ofer Attia, 1031s are where I live.  The scenario of selling one and using the proceeds as down payments on multiples is a classic 1031 strategy called a diversification exchange.  We do hundreds of these a year.  It lets you buy lesser priced properties that will give you a better ROI.  It also lets you take 100% of equity and deploy it rather than having to leave some in a now under performing original property.  If you like the idea of leverage then put the leverage into new purchases where you can generally get a lower down payment.

I'd be inclined to hold onto the original property only if it was a great performer (or had something else going for it).  What you're describing would be an ROI of around 3% once you place debt on the property.  That's not so hot.

Sell my investment property Or Refinance/HELOC?

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