Advice on next business move?

Question

I currently own 4 properties. 2 single family houses and 2 duplexes. All of them cash flow positive. The first Property I ever bought was a little 2 bedroom property in a nice area. It is paid off and has never seen a vacant month in 4 years. The problem with it is the rent I am not sure if it is worth it to keep the money locked up in it. I get $750 a month in rent but after tax and insurance I probably only make about $625 a month. Is it worth it to keep 100k locked up in a property that only makes like 7500 a year? 7.5% return on my money doesn't get me excited and that's if the entire year goes by without having to spend a dime on repairs (doubtful). My problem is, since 2 of my properties are paid off and the one that we live in we Rent on short term rental and make about 25k a year on top of the mortgage, we have made our business our full time job. This is fine and dandy until we tell our mortgage broker that we are self employed...what a nightmare.

Should we look into a 1031 exchange on a commercial loan for our under performing property? We aren't able to do a cash out refi yet until we can show 2 years of Airbnb income on taxes (that will happen this coming September) should we just continue to save up money and pay off debt (our car loan) until we can qualify for a new loan and just continue to rent out the underperforming Property? What do you all think?

Account Closed · Answer

Hi James.  I think you asked for some opinions ... I would say if you have $100,000 of cash in that property and are making 7.5%, that is actually not that bad if it is also appreciating in value (which in the end will add to your total return).

In the meantime, look for what you want to 1031 exchange INTO and wait until you find something you like.  Then at that time, list it for sale  - rented - and you may find another investor would like the steady history on it and buy it with your tenant in it.

You can go up to 200% of it's value - then on the debt (which you said you had none) - you can go up but not down so you could probably very easily add some debt.  You could buy two properties at $100,000 with some debt on each.  You have a few options ..... give me a call if you want to run through some scenarios on how the 1031 will work with each idea.

Dave Foster · Answer

@James Defazio, There is no maximum amount you can purchase with a 1031 (within the limits of your financing capability of course).  If you want to sell one and buy two you can also allocate the net proceeds in whatever way you want to accomplish that.  You can split it evenly, put all cash into one and maximum finance the other etc etc.

The 200% refers to the identification process and composition of your potential property list.

James Defazio · Answer

thank you for the replies everyone! Karen, I will definitely keep those options in mind and i have been actively searching for something to 1031 up into for some time now. Unfortunately I am limiting myself to my local area where I can manage the property myself. Plus I know the local markets I have lived in and know the areas to buy and the areas to stay away from so I am quite nervous to 1031 into something far away where I can't manage It and have no idea what Kind of area it is in. I have thought about leveraging into 2 properties with a loan On both properties but don't think I am able to qualify for a traditional mortgages yet which is why I was thinking commercial loan.

Dave Foster · Answer

@James Defazio, Great synopsis of like kind.  One thing to add, there is no requirement that both properties be "solely" for investment.  On split use properties like an owner occupied duplex, the % used for investment still qualifies although the entire property is not solely investment.  Farms and office condos etc same thing.

The other part of non exclusive use is that nothing prohibits occasional use of a 1031 property for personal use such as a vacation rental condo.  There are specific IRS guidelines that deal with allowable use in order to qualify for certain deductions and credits.  However, a vacation rental that you use a little for personal use would certainly still qualify.

Bill Exeter · Answer

Hi @James Defazio,

You are correct.  You would satisfy the "Qualified Use" requirement as long as your relinquished and replacement properties are held for rental, investment or business use.  You should be in good shape.  The "Like-Kind" requirement refers to selling real estate and then buying real estate, which you would be doing, so you are in good shape there too.

James Defazio · Answer

hey Jason, thanks for the response. After looking into it and talking to some intermediaries on here it is my understanding (please someone correct me if I'm wrong) that as long as neither Property is owner occupied and both are being used solely as investment properties, they are like kinded investments and able to do a 1031 exchange. I have not located a property I would like to exchange it for yet so unless that happens it won't get very far at all :)

Jason Hirko · Answer

@James Defazio I don't know the answer to this, but you should try and figure out if you could do a 1031 on a SFR into a commercial property, before you go too far. I don't know if that is 'like-kind' enough

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