FI Roadmap: Cash Out Refi vs. Cash Flow

[Richard Andrade]

Hi! I apologize, I have to think the scenario I'm asking about has been covered before, but haven't been able to find a discussion directly on-point to what I am going to describe. I'll try to keep it simple.

We have accumulated about $2m in leveraged real estate investment assets (residential rentals). Let's assume in 10 years, via accelerated debt payments, we completely pay off all of the mortgages and, ignoring appreciation, leaves us with $2m in assets. At that point, we'd like to quit our day jobs and "retire" but still retain ownership of the assets. The properties are owned by our LLC.

Assuming nothing changes from the current tax perspective, what is the "smartest" tax-efficient method of getting this equity out of our investments:

1) Cash out refi $1.6m (80% LTV of all the assets) and invest that money in a more liquid (albeit lower return) investment vehicle? How would this lump distribution from the LCC to us of refinance proceeds be taxed?

2) Just live off of net cash flow that the paid off properties are generating each month? Let's say that they are generating $15k each month, net of all expenses. Again, these would be distributions from the LLC.

I'm guessing #1 circumvents the LLC from realizing taxable revenue (as loan proceeds aren't revenue), but in #2 the LLC would be recognizing taxable revenue.

Sorry! Hard to get my head around but we've been arguing about the pros/cons of each. What would you do and why?