HELOC, Cash Out Refi, or 1031?

Question

Hi everyone,

Finally getting around to my new member introduction and have a quick question for the members.

I bought my primary residence off market last August (condo in a highrise) for 128k. Comps are selling for 160k-165k and around 175k with an updated kitchen. Ideally I'd like to put a renter in it - as it is it would net around $200-$250 per month but closer to $400 if/when I spend a few grand on basic renovations (counter top, knock down small section of wall in kitchen, re-tile bathroom. The area of town is seeing a TON of development (two 15-20 story office buildings two blocks away, 30 story residential upscale highrise with the cheapest units selling over 1mill, new four star hotel breaking ground in six months right next door and lots of highend dining and retail moving into the area. Future appreciation is what is making my decision difficult.

My questions are:

1. What is the best way to access this equity to begin funding more investment properties, given my situation?

2. I'm planning on spending around $3k on basic renovations. I'd probably put it on a credit card then use an option below to pay it off. Should I just eat the renovation costs, have the renter pay it off, or is cashout refi my only option there?

3. With a 1031 Exchange can you put 75% into properties and 25%(taxed) into other things or does 100% of the equity have to be rolled into real estate?

My goal is to acquire two properties in the next six months. In 3-4 years I would love to hold 5-10 cashflowing properties while using the BRRRR method to build a larger portfolio.

1. HELOC

- Pros: No tax burden, liquidity, low rates, CASH FLOW from renter, ability to access equity for investing, could hold property to enjoy the major long term appreciation from the development happening in the area

- Cons: This is my primary residence so I would have to figure out a living situation

2. Cash out refi

- Pros: Cash, could split funds into a second property and live in an apartment - but have two rentals

- Tax burden, living situation, fees associated with refi

3. 1031 Exchange

- Pros: No immediate tax burden, access to all equity, could roll into a duplex, small commercial, etc

- Cons: Paying realtors, closing costs (many in my building have seller pay closing), etc

What sounds like the best option for my goals?

Thanks everyone!

EDIT: Worth mentioning this property is financed at 3.6% with a 3.5% down payment and bought for 128k with around 5k down and 2k for closing.

Dave Foster · Answer

@Brian Christel, If you want to defer all tax in a 1031 exchange you must purchase at least as much as your net sale and use all of the proceeds from the sale in the next purchase.  You can purchase less than what you sold and you can take cash out as you anticipate.  It is called boot.  And it is taxable but does not affect the rest of your exchange.

Add one con to the 1031 side of things.  In order to be eligible for 1031 the property must be investment property that you had the intent of holding for productive use.  So it would not qualify now as it is not investment it is primary residence.  If you want to put a renter in it that converts it to investment.  But you would have to hold it as a rental for a while in order to demonstrate that your intent was to hold and not primarily for resale.  There's no statutory holding period but most folks feel good at a year.

If that's the case then you may want to consider another option - stay in that property for one more year and then sell when you can take the first $250K/$500K in profit tax free as a qualifying sale of your primary residence.

Redgy Saint-Germain · Answer

@Brian Christel

I don't think you have enough equity for a " cash out refinance" . With a conservative 75% ARV the bank would only finance 131.25K that would not only increase your mortgage payment also decrease your cashflow.

I would personally go with the HELOC, you can get more money out and pay only when you use it.

Good luck

Garrath Robinson · Answer

@Brian Christel So it sounds like we are in a similar situation. I will give you a breakdown of what I am doing and hopefully that helps you a bit.

I received my house through a quit-claim deed: House has been paid off since the 80's. I refer to my purchasing price as to what I had to pay to get one family member to sign the deed = $10,000.

So:

Purchas price: $10,000

Bank Appriasal: 75,300

ARV based on comps: $140k (this is about $10k lower, i just like to be safe with my numbers)

Reno budget: $30k

All in w/repairs: $40k (this includes $5k for overruns)

I have decided to fund this renovation with a HELOC for several reasons.

1. I will still have about $20k in available equity after the remodel that i can use as down payments on another property or to use as cash for a reno, 2. allows me to purchase that 2nd rental much more quickly, 3. I'm not paying interest on money i still have access to. The goal of the BRRRR method is that if you put that $20k cash into the property, you want top be able to AT LEAST recover that cash on the re-appraisal after repairs.

2. I would really focus on what your strategy is for your first 5-10 properties and would use one strategy until you have become comfortable enough to try other means of financing.

Also, what metrics will you evaluate your BRRRR properties on?

ROI, COC, CAP, 1%, 2%, etc?

Garrath Robinson · Answer

@Brian Christel If it comes down to cash out refi or heloc, I would personally take the heloc route just for the simple fact I do not want to pay interest on improvements I haven't made yet. It all depends on what your objectives are.

Brian Christel · Answer

Wow it sounds like you're situation is working out very well. We'll definitely have to stay in touch to see how both of our strategies play out.

I'm focusing mainly on COC and NOI>CAP as it's a fairly simple metric. I would love to evaluate under the 2% rule but it seems those deals are found far less frequently in today's market.

Brian Christel · Answer

@Garrath Robinson @ Redgy Saint-Germain @ Dave FosterI really appreciate the valuable insight!

Bought: $129K

Interest Rate: 3.6%

Down Payment:~$5k

Current (based off comps): ~$165k

ARV: possibly $180k

Given that it's my primary residence would it make sense to:

Renovate, HELOC, put a renter in it, then 1031 it into two other properties after the renter has been in it for a year? (Dave I may is this what you meant by "most folks feel good at a year"?)

I would love to use the BRRRR method to acquire more properties so ideally I could use my HELOC, in combination with hard money or private money to fund a BRRRR project then refi into a traditional mortgage/investment structured loan, pull out some equity and repeat.

Garrath Robinson · Answer

@Brian Christel As a newbie investor myself, I would start off with the Heloc. It is the most straight forward, easy-to-understand option that you are trying to decide from. Best to keep it as simple as possible, build your confidence from there and then move into using other finance avenues.

HELOC, Cash Out Refi, or 1031?

Most Popular Reply