Should I Use My Equity To Buy Another Property

Question

Hi All: I'm a 55 year old newbie to real estate investing. I've had a triplex for many years and doesn't really cashflow well. Since I've had it for 15 years (only 9 years left on the mortgage), I have 200k worth of equity. Should I sell the property take the 200K and reinvest into a better deal with more cashflow? Should use all the money and put most of it down to get great cashflow or split the money into several properties?

I currently have no income since I'm a restaurant owner (:() and have taken the forebearance options on the property to help out. Credit score is decent at 708. I'm a buy and hold guy, would do a BRRR. Not into flips.

Any help on this matter would be appreaciated!!  Thanks in advance everyone!!

Account Closed · Answer

@Mario Arnone

So, you have minimal cashflow but would like more debt. Are you going to be able to bang out some major cashflow on the next one or is it going to be similar to the current one? Don’t put yourself in a position where you’ve got crappy cashflow, little equity, and little / no cash reserves. Doubling something crappy = 2x as crappy.

Dave Foster · Answer

@Mario Arnone, I'm with Account Closed on this one.  This is a tough situation for you and the easiest answer might not be the best answer for long term benefit.  You really can't sell without a 1031 or you'll get killed with taxes.  But getting financing on a new purchase that would have leverage enough to generate good cash flow is going to be tough with income the way it is.

A refi of a not great cash flow property is just going to drive that property deeper.

And the hybrid approach of doing a refi to get cash out and then selling and 1031 into a new property should be a non starter for you.  First of all it puts you at odds with the IRS that does not like to see refinances right before a sale and refi.  There have been numerous cases where the refinance right before a sale has been deemed to be accessing profit and the exchange denied.  Second is has the effect described above.  Living expenses are good to have but if it over leverages your new property then you're going to have sub par performance of the new property possibly as bad as the old property.  And that's a lot of transaction fees for not too much good effect.

You can do a refinance after the purchase but you're doubling up on loan fees just to get at that capital.  I think you might be better served to save those fees and use the lower debt to provide more income.

A refinance could be justified if you can keep your current property afloat and provide some living expenses.  But watch the burn rate of your refinance.

What might actually do the trick for you would be to invest in a 1031 compatible syndication.  The requirement to satisfy 1031 is that you take title to actual real estate and not a membership interest in a partnership.  So the usual syndication won't work as Account Closed said.  But a delaware statutory trust is a 1031 compliant vehicle that would do a couple things for you.  First it would allow you to sell that property and put the cash into a cash flow product producing 5-7% cash on cash with no management on your part net of expenses.  Second it would take your debt without needing to qualify and turn it into non-recourse debt.  Which would eliminate that loan from your personal balance sheet.

That double whammy of increased cash flow and reduced debt might just put you over the top to qualify to buy another modest good cash flowing property in a better area for cash flow.

Steve Vaughan · Answer

The market is strong for sellers but transaction costs are high the normal list it way.  I am selling and buying (exchanging) a larger ($1M) asset now. I don't think I'd do it the normal way. $60k x2 is a lot of naps. Getting a $60k x2 buy side discount also helped.

So basically if you're losing a ton in transaction costs and not buying below market value, I'd just refi.

Michael Robbins · Answer

If you invest in improvements to your current triplex can you get higher rent?  I would look into doing that.

Eric Bilderback · Answer

@Mario Arnone

Mario I’m sorry to hear about the restaurant god how the hell do you prepare for something like this!  I agree whole heartedly with @Steve Vaughan point.  That being said if it doesn’t cashflow real well maybe you should go ahead and sell it.  Find a better one maybe even a little bigger.  I would also look into partnering that could help with financing if your restaurant is tanking which was Nicole’s point.

Keep on keeping on buddy!

Toni Baca · Answer

Hi Mario,

I'm hopeful your restaurant will re-cooperate in the coming years. These are definitely unprecedented times..

With that being said, selling a property sounds to be of beneficial interest to you! One thing to keep in mind if you do sell, since you held the property for 15 years you probably have a pretty high recaptured depreciation and capital gains tax. You could do a 1031 exchange and buy a new property (with hopefully better cash flow) and defer your taxes.

Since you have such high equity in the property, you can take out a new lien on the property before selling or after closing on your purchase to get tax free cash from your exchange! (Basically refinancing) My company calls this an Equity Equalization Loan, but essentially its a second unrecorded mortgage on your property that would be paid off at closing, and the pay off amount would be transferred to you tax free.

Just a thought :) let me know if you have any questions about this process! And best of luck to you!

Mario Arnone · Answer

Thanks everyone for your help! Looks like first step is to try and refi, if not selling is next.

Mario Arnone · Answer

Thanks Steve!

Jodi Henley · Answer

I would refi it and buy another !!

Account Closed · Answer

@Toni Baca mentioned a very important item to know - your property depreciation recapture is a large piece to take in to account.  Your actual gain is not simply what you can sell it for minus how much you got it at... far from it, due to renting it out that long.  If you want to continue to do cash-flowing properties, USUALLY, you really should consider a 1031 exchange to defer your capital gains and depreciation recapture taxes, and have more to invest with.  However, after researching them myself, they have a lot of special items to follow to get it done properly.

Someone else mentioned syndications, which I like, but USUALLY you will need to pay out taxes.  Check with a CPA, but I’m pretty sure if you check the IRS sites, your depreciation and capital gains taxes will be at 0% if you have under ~$39k in income.  This could be a very big tax savings to you to get your capital out tax free.  Again, check with a CPA - that’s a big deal.

Best of luck.

Should I Use My Equity To Buy Another Property

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