Originally posted by @Tracey Corea:
My current tenant is buying a home and vacating in 3 weeks. I'm weighing whether to sell and 1031 exchange into a different market, or stay the course and get a HELOC in place as soon as we turn it over (in preparation of buying more). I'm going back and forth and would love some of the seasoned investors to weigh in.
- -Purchased in 2015. We fully renovated. All in for $160k. CMV $300k
- -Location- Las Vegas NV
- -4 bed, 2 bath. We could add another bathroom to make a master suite and add a 5th bedroom if market appreciation was expected, but don't think now is the right time for that.
- -We are in our 50's. We were heavily invested in the early 2000's (10+ properties-small MF and SFR's). We went through the 2008 crash and those scars and lessons learned have stuck with us. It made us extremely conservative with RE, though I wouldn't call us risk-adverse in our other investments. We currently have alternative investments and money in the stock market. So, with future RE investments preservation of capital is important factor. I thought this info might be helpful in understanding our mindset, especially for the seasoned investors on BP.
Keep or Sell? The arguments going on in my head...
- Keep: We own the property outright. I sleep better without the bank involved.
- Sell: Using NO leverage at a time when rates are historically low. We should be expanding our holdings and taking advantage of OPM.
- Sell: We believe Las Vegas will take a bigger hit than many other markets
- Keep: We already have capital to put to work, so we can ride this out.
- Sell: If we can put that capital to use in a more stable market or in a MF or a syndication deal, it could provide more safety, upside potential and passivity
- Sell: More cash to get into bigger deals
- Keep: Selling fees, tax consequence if we don’t find a replacement property in a 1031.
- Sell: We can 1031 exchange to avoid the tax consequences. But, we would only have 45 days to identify a new property. We think that puts us very early in the cycle for purchasing distressed properties.
- Keep: I hate to sell an income source
- Sell: “Buy and hold” is not always the best choice. There is nothing wrong with taking profits and redeploying it elsewhere. Do you want $1400 mo. in rent or $300k in cash
- Question: Can we turn that $300k into twice the rental income in a different market?
- Keep: Being an out of state landlord can be a PIA. We have more control in self managing in our own city
- Sell: We did it in the past and can do it again, from a much wiser position. We dealt with a death in one unit (hazmat is messy and expensive), a house fire, a criminal POA management team on a 4-plex development (legal fees are expensive), a swat team raid leading to a tenant getting thrown in jail for mail fraud, evictions and all the usual landlord issues. We had to fire numerous bad PM's as we learned the ropes, but we survived and we learned the value of good property management!
- Sell: We can get into a syndication or partnership deal and take self managing off our plate entirely
- Keep: There will likely be more renters in the next few years. We’ve had 3 great tenants in this property, which has made for easy passive income over the last 5 years.
- Sell: The policies rights now make finding a highly qualified tenant crucial. Permanent job loss in Vegas is very real and stimulus can’t go on indefinitely.
- Keep: Get a HELOC to buy when the deal is right and hold onto this property.
- Sell: Tight lending guidelines right now. Banks aren’t readily offering cash out refi’s. We are in the middle of a remodel on our primary and need to turn over rental in a few weeks, so we are at least a month away from applying. We don’t know what banks will be offering then.
- Sell: Banks can freeze HELOCS without notice. We dealt with that in the 2008 crash. Makes me wonder if we should we pull the cash out of the HELOC we currently have on our primary.
What would you advise in our situation?
There is a lot to unload there, but I'll give it a shot. You write: "Keep: We own the property outright. I sleep better without the bank involved." and "So, with future RE investments preservation of capital is important factor."
We are entering a risky period for investing in real estate. Played the right way it's a wealth builder but it won't be for the faint of heart for the next couple of years. Sleeping well at night is a very big deal. I'd take this one into serious consideration.
That being said, since I buy properties "off market" taking over the mortgage, it is far less risky for me to pick up properties that people are wanting to sell even if they don't have much equity, since no real estate agent is involved and there are no RE fees. I then cash flow the properties, typically about $500 each.
Right now banks are limiting HELOCs so you first have to call around and see if you can find a bank doing them and what their criteria is. HELOCs were shut down by banks in the last downturn without notifying people. Whatever amount was already borrowed was the cap. I'd borrow the money now and keep it in reserves if you go that route. Having a little bit of interest to pay is insignificant if it allows you to take advantage of a great deal.
Personal belief is that the stock market is riding a train with no conductor and with the bridge out around the corner. Surprises are ahead.
1031 exchanges are a little tricky. I'd direct that one to @Dave Foster https://www.biggerpockets.com/... who has written extensively on the subject.
