Have you started investing in real estate and aren’t sure how to take the next step to grow your portfolio? If so, you’re going to want to read my tips on how to use 1031 Exchanges and Cash-Out Refis to Explode Your Wealth.
Now that you’ve taken the first step and started investing in real estate, the next step is to learn the basics of 1031 Exchanges and Cash-Out Refinances so you can use these tools to explode your wealth. By using each of these where appropriate, you’ll be able to grow your real estate portfolio and passive income stream, without paying any taxes. The key is to take advantage of each in the right situation.
Cash-Out Refis are used when you own a property that has appreciated in value, and therefore so has your equity. Under current tax guidelines you’re allowed to do a cash out refi and do whatever you’d like with the proceeds, tax free. So, you can take the money and use it to purchase another property, thereby increasing the size of your portfolio and your passive income stream. You’ll go from owning 1 property to 2, and having two income streams instead of one.
Like Cash Out Refi’s, you’re going to consider doing a 1031 Exchange once your property has appreciated in value and your equity has increased. 1031 Exchanges allow you to sell a property and defer taxes until sometime in the future. You can then use those funds that would have gone towards taxes to purchase another larger property that generates an even larger cash flow stream than the one you sold. You can do this over and over throughout your investing career, and I have clients who have been doing this for 30 years or more. Remember, there are time constraints placed on 1031 Exchanges that you must meet, and you should discuss these with your accountant and real estate professional.
Cash-Out Refis are best used in situations where the property you own is one you’d like to keep. Maybe it’s in a good location, has a solid tenant base, or has excellent prospects for future appreciation. 1031 Exchange’s on the other hand, are best used when you’re ready to sell a property and move on. This typically occurs for any number of reasons: you’ve exhausted your depreciation, the building is older and has higher maintenance costs, the area is declining or the tenant base is troublesome, meaning it’s difficult to collect the rent on time each month.
Make sure you analyze your real estate holdings at least once per year to figure out if its time to do a Cash Out Refi or 1031 Exchange. The key to exploding your wealth and climbing the Property Ladder is to keep your equity moving and continually increasing your real estate holdings and the size of your passive income stream. Remember; before you make any financial moves you should always consult your Accountant or Tax Professional to fully understand the implications of what you’re planning.
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