Re: Refinance Vs. 1031 Exchange Question - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on August 12, 2003 at 08:00:59:
Daniel---------
Nice to talk to you.
These are just tools. You decide which tool is appropriate for you with each individual property.
I think that Ken(SC) gave you a good response. Do you want to keep the existing property or do you want to change? You might change, for instance if you changed your inivestment strategy. Many people switch from residential investing to commercial properties when they get older–less management, more experience with real estate. This is a time to consider exchanging.
Refinancing lets you hold a property and acquire one or more new ones. Exchanging requires you to give up a property and use the sales proceeds to acquire one or more new ones.
Usually when refinancing you cannot swing all of your equity into new purchases, at least with institutional loans. So, if you are attempting to build up more wealth faster, it may be a little slower than an exchange. This assumes that you sell the old property yourself, not using a real estate broker. Even using a broker, you might find that you can swing more money into the new purchase with an exchange, if you can get the commission low.
These two techniques allow you to increase your leverage after you have owned for a while and your equity is getting rather large. There is a third technique to releverage: buy new properties with little or no money down. This increases the leverage of your overall portfolio. It does so without requiring refinancing of existing properties, thus perhaps being less risky.
As Ken points out, your overall cash flow can increase when you buy more properties with a refinance. Thus, this may not be quite a risky as doing an exchange, especially if you can avoid being personally liable on the loan of the new property.
If you can buy a new property highly leveraged without personal liability on the loan, you could abandon it to foreclosure or deed it to the lender in lieu of foreclosure should you suffer hard times. Hopefully, you would not lose the less leveraged properties.
When you acquire only one property through an exchange, you have releveraged up and thus may have more risk than when you owned a property with a higher equity to value ratio. Of course, something similar obtains when you refinance and buy and buy more properties. However, when you own more than one property and hit hard times, you might be able to sell one property and hold the other. With a single property acquired through an exchange you have the choices: try to hold it, sell it altogether, or, perhaps, sell it and exchange part of the purchase price into a differnt property. This gives you a partial tax-free exchange, perfectly legal.
Thanks for asking a question that I think is interesting.
Good InvestingRon Starr