Sell, cash out refi, or use HELOC?

Question

Hi all.  I'm new to BP but love all the logical advice that sounds crazy to the common person.

Here's my situation:

I have a 4 plex (in CA) that I paid $700K for a few years ago (25% down) and I now owe $485K.  Its now worth about $1.4M.  Cashflow is variable between $1-3K/mo depending on repairs (avg over last 4 years is $1600/mo) and there will  likely be plumbing and roof issues that may eat into my cash flow soon.  I would like to sell and use the money to invest out of state.

What would you choose between these 3 scenarios:

1.  Sell, walk away with $850K and do a 1031 exchange with lower cost states with multiple SVH or MFH.  I'm kind of worried we may not have enough time to complete the purchases in 6 months or be able to identify the right amount of properties in 45 days and will have to take the 30% hit in taxes!

2. Cash out refinance.  Pull out 4-500K and use that money (tax free?) and invest out of state.  Cashflow drops to significantly to $0-1.5K/mo but still own the property.  I originally invested $175K so I'd get my invested many back.

3. Use at HELOC($250K available) on the property to invest out of state, likely do a BRRRR.

Any helpful advice would be much appreciated!

Anthony Barbato · Answer

A syndication is where passive investors pool their money to purchase a large asset.

You have the tax benefits of owning real estate, and it's passive so you don't have to worry about managing it. Syndications typically provide a monthly dividend from the cash flow of the property. 4% to 8% interest is typical, so a $500k investment at 8% interest yields $40k in dividends annually.

Once the property sells and the syndication is finished, you also get a share of the equity from the sale. Then, you can do a 1031 exchange into the next property.

@sinavy sao

Dave Foster · Answer

@Sinavy Sao. There is no wiggle room on the 45 day period.  But there are some ways to mitigate.

1. The statutory order of the 1031 is that you must close your sale before closing your purchase.  But you can go into contract for your purchase at any time.  It's very common for a client to have their new property under contract before their old property closes.

2. You can use contingencies on both sides to give you room.  In a sellers market it can be tough to get a seller to give you a contingency to sell your 1031 property.  But in a sellers market you're also a seller.  So it would be easier to sell your old property with a floating closing date contingent on finding a good replacement.

3. Place a back up property on your list just in case.  It could be  friends property that isn't for sale but could be.  It could be an institutional property like a DST which sell out a little more slowly.

4. Lastly always keep in mind that there's no penalty for starting and not completing a 1031 exchange.  The price of the exchange gives you the ability to shop for 45 more days.  If you don't find something you like in a month and a half then don't turn in a list.  On day 46 your exchange dies and you'll then pay your tax when you file your next tax return.  But there's no penalties and interest - just the tax.  Cheap price to  get a new deal.

Sinavy Sao · Answer

@Dave Foster

1031 sounds great but the timing makes me nervous. I don’t want to just buy a property just to save on taxes but over pay as well as rush to pick them.

Is there any wiggle room around the 45 day rule in designating properties?

Sinavy Sao · Answer

@Trent Chance

I’m not to familiar with syndications yet but will look into it. Anyone care to give a quick summary of how it works?

Tony Lin · Answer

You're definitely on the right track planning to make your equity work for you. With that amount you could easily get into a small apartment by doing a 1031 exchange. Searching/acquiring the right apartment will take time so keep that in mind.

I think it's a good time to take your winnings in CA and start looking out of state. We're already starting to see a softness in Cali with Chinese investors scaling back on the purchases. With the recent CA rent advocacy it's only a matter of time these regulations extend beyond apartments. You can find much better investments out of state.

Sinavy Sao · Answer

After weighing the options, I’ve decided to go with 2 of the 3 options; sell and reinvest the profits into property out of state as well as use the existing HELOC to start making offers in the mean time.

Why wait if I already have the HELOC to make cash offers? My only regret is not finding out about BP and BRRRR sooner.

A 1031 is still on the table. Just weighing the option of taking the hit on taxes. Can anyone verify that it’s about a 30% long term capital gains tax on the profit in CA?

Anthony Barbato · Answer

@Sinavy Sao

1. You have the tax benefits like depreciation and write offs in a syndication yes

2. Look at their team and track record

Sinavy Sao · Answer

@Anthony Barbato

So with a syndication, since you technically own the property you would get the same tax benefits including ride offs/depreciation?

The next question is how do you trust someone to invest your money for you?

Trent Chance · Answer

Disclaimer:  I'm not an expert on what I'm about to say but...

There may be scenarios where taking the tax hit works out to your benefit as well.

For example selling and putting half of your sell into a 1031 towards a property and other half into a large apartment syndication where could recapture depreciation of the asset.

Daniel Z Fang · Answer

Timing on 1031 seems stressful. I’d do a cashout refi but make sure you can cover costs with existing cash flow and then take that extra capital and put it to good use elsewhere.

Sell, cash out refi, or use HELOC?

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