Can't get cash-out refi on condo, other options?

Question

I have a condo in Reno, NV that I paid cash for in 2010 (before I knew about real estate strategies, etc.) which has more than doubled in value. I want to pull that equity out to put into play a BRRR strategy where I currently live in Richmond, VA.

After 6 weeks of underwriting, the bank turned down my first mortgage because the Condo Questionnaire showed that the complex had too high of percentage of rentals for Fannie/Freddie to back the loan, thus, the company won't loan money.

So, undeterred, I'm looking at other options:

1) Sell it. Plain and simple. Do I really want a condo that has strict HOA, can't have equity pulled out via financing? But it cash flows $300/month after all expenses. What about capital gains? On the other hand, Reno is a hot market and I might be able to get more than the appraised value.

2) Sell it, but carry the note. I could possible sell it and carry the note, but I wouldn't get more than 20% of the cash as down payment. Could I maybe sell it requiring 50% down (the appraisal came in at $60k)  and carry the rest as a note? Do people actually purchase investment properties with those terms?

3) Hold it and keep the cash flow coming, and try to find people with money to invest in deals when I have no proven track record of making this strategy work? Hard money is soooo expensive.

4) Alternative options?

Advice is appreciated.

Dave Foster · Answer

@Matthew Maggy, You're going to find that a 1031 exchange is probably going to cost you less than $1,000 or less than 10% of what you'd have to pay in tax.  Certainly you have to be a disciplined shopper because from the day you close your sale you have 45 days to identify your potential replacements and 180 total to close.  But compare that to writing a check for taxes.

The best thing you could do to ease the time constraints is to start shopping as soon as you know you're going to sell. It's even OK to go under contract for your new properties before you close the sale of your old property.  All that is critical from a timing perspective is that you close your sale before you close your purchase and then pay attention to the 45/180 day regs.

Addressing your BRRR strategy.  One thing you could do is to close your replacement or one of your replacements with the minimum down or with an owner carry.  Then put the maximum down on the least expensive replacement.  This will give you the maximum equity in one property.  As soon as you close it you can tap a line of credit, 2nd, or refi to pull cash out for repairs to the other one.

To complete a successful 1031 you have to use a qualified intermediary.  But they should be able to steer you through the regulatory minefield and help you craft the best strategy for your unique situation.

Matthew Maggy · Answer

Thanks Brad! I'm definitely leaning heavily toward selling. When I look at my monthly expenses, I'm bringing in $700/month rent, but $212 of that is eaten up by HOA, which, while providing exterior repairs, is a bit more than I would budget for exterior CapEx.

It had occurred to me that the expense of a 1031 might not be worth not paying the gains. My main concern is the limited time and inflexibility, because I'd like to use some to pay cash for a property out here, and then use some of that money to to repairs for the BRRR thing.

I planned on talking to my accountant about the 1031 exchange to mull over the options.

Long Term Capital gains is like 18% though? That's almost a 5th of the proceeds. That's $12k.

Brad M. · Answer

Thanks to @Dave Foster for weighing in with his experience. I'm familiar with the timing regulations of a 1031, but didn't realize that it could still be such a good strategy for a smaller investment.

Dave Foster · Answer

@Matthew Maggy, Good plan in the making.  Or you could even use all cash and buy one with your 1031 and then access a refinance to buy and rehab a second one.  You've got a lot of options.  You just want to make sure that you're staying within the 1031 regs.

1031 exchanges fall under a federal IRS statute that most states follow.  So there is no state by state licensing.  We or any QI with a national presence could work with you successfully.

Matthew Maggy · Answer

@Dave Foster Thanks for the advice.

One thing I was considering was putting the minimum down on a turnkey type property where I can match the $ amt cash flow, but as a higher rate of return than the condo, and put a larger down payment on a fixer upper, or pay cash for it with what remains. the condo would only sell for about $60k, so I would be sort of limited to the quality of properties that I could get.

Are you guys licensed to do this in Virignia, or is it better to work with someone local? How does that work with selling in one state and buying in another?

Brad M. · Answer

@Matthew Maggy - I second @Adrian Stamer in one scenario. 1031 so you can defer the capital gains. You can put that money to use much better in Richmond. I see pluses to selling using a 1031. You get out of a distant market into something local, you defer taxes, you likely increase your returns. If you haven't done a 1031 there is a learning curve, but certainly nothing insurmountable.

Another thought : Just pay the capital gains and move on. Others with more 1031 experience can weigh in, but in my mind it the small amount you are talking about here may not be worth the trouble and expense of doing a 1031. Even paying capital gains, I have to think you can put the money to better use closer to home and make that back through better returns in a short period of time.

Either way, I'd sell.

Matthew Maggy · Answer

Okay. Thank you for the advice. With the perspective of that percentage return, and not being able to pull the equity out, it makes sense to sell it and turn that into 2 or 3 properties locally.

Adrian Stamer · Answer

1031 one into something new and local that you want, as the poster above said you have too much dead equity in the property and it's really dragging your returns down

Greg Scott · Answer

Based on your $300/mo cash flow on $60K equity, you are only earning 6%.  So, doing nothing is not a terrible option, but not a great one

If you look at what you have, if you take out a 50% loan, I estimate your cash flow would shrink to $200/mo. So, if you buy an identical condo with 50% down, you would now cash flow $400/mo.  This would be an 8% return and $100/mo more than you had.  You can probably find a bank that will give you a portfolio loan (in-house loan), typically at higher interest than freddie/fannie.

My experience has been that condos do not cash flow as well as houses, all else equal.  I have been getting $300/mo cash flow (net of everything) from single family houses.   If you sold the condo and bought two houses that would give you $600/mo or 12% return.

Can't get cash-out refi on condo, other options?

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