Hold or Sell???

[Katrina Schmid]

Hello everyone!

I would love some advice on a situation we have with our first ever REI. We have a SFR in Lakewood Co that we were able to rent out last year and our current tenants have informed us they will be moving out at the end of the month. We have been trying to find replacement tenants but aren't trusting any of the prospects. One thing we are considering is getting rid of the property all together because according to sites like zillow and realtor the property has appreciated so much (as much as 100K) in the 6 years we have owned here- mainly because of the light rail opening and Denver's crazy market. We would then use the 1031 exchange and invest in another property.

The house needs some expensive updates, fixing the negative sloping and making some improvements on the inside of the house as well.  If we hold on to the property we could use next month (August) to make necessary repairs but these repairs would eat into our cash flow.  Another issue we have is because of Denver's crazy market - being new at this I'm worried that we won't be able to find another rental within the 45 days if we do use the 1031 exchange.  Is it better than to not utilize this tax break?

Any advice is welcome!!  Thanks for your help!!

[Jennifer Beadles]

I have 14 units, 5 single family homes, a triplex and 3 duplexes. My multi family units give me much more cash flow than the single family, though I like having a mixed portfolio if I wanted to liquidate at a higher retail price. 

The advice I give to clients in your situation (your question comes up a lot) is to first see what opportunities are available for purchasing additional properties (preferably multi family for higher cash flow), and crunch the numbers on the current property to see if there are any ways to maximize that property. Could you keep it and get a line of credit on the equity to use that as a down payment on another? This way you don't have to worry about the 1031 or paying tax on the sale. You do gain an additional payment, but a 4-5% line of credit interest rate is cheaper than paying capital gains, plus its a write off. 

Even though prices may seem higher right now, rents are at an all time high and interest rates for non-owner occupants are at an all time low, so in my opinion it's an amazing time to invest in more rentals if you can. 

If the current property does not cash flow much at all, then I'd suggest doing your research on whats available and doing the 1031. Keep in mind, you have 45 days to identify several properties and 180 days to close.