Cash-Out Refinance vs. 1031 Exchange: Which Is Right for You?

By Kandie Frederick

Growing up on the central coast, Kandie is a third generation family in the North County and a second generation family in real estate. Joining Country Real Estate in 2000, and graduating from Cal Poly in San Luis Obispo, she brings a background of Agricultural Business to combine with her knowledge of the local real estate market. Working with her family and their decades of local real estate development, she is deeply connected to the roots of our community and its growth.
“This area continues to grow as people discover what a great travel destination it is, and what a great wine region it has become. Eventually, they realize what a great place it is to live and work as well. Adapting to the needs of our clients in a changing environment is always a priority. We remain the longest standing brokerage in a community we are deeply invested in. Our longevity is attributed to our innate ability to understand the North County: its people, its properties, and its culture.” -Kandie

Are you debating between a cash-out refinance and a 1031 exchange for your investment property? With the evolving real estate market, making informed investment decisions is crucial. If you own a rental property, chances are, you have some equity you could be utilizing. To do that, would a cash-out refinance or a 1031 exchange be a better option? My answer is that it depends on Your specific situation. Today, I’ll share three tips to help you decide which strategy aligns with your financial goals. We’ll cover what each option involves and the pros and cons.

1. Understanding Cash-Out Refinancing. Alright, first up is cash-out refinancing. Imagine you have some equity in your property—that amount is the difference between what your home is Worth and what you Owe on your mortgage. With a cash-out refinance, you can replace your existing mortgage with a new, larger one. The extra cash? It’s yours to use however you like! …often, this is used for paying off debt, making a large home improvement, or investing elsewhere. But here’s the catch: you’ll have a higher loan amount and, consequently, higher monthly payments. So, it’s important to ask yourself if you can comfortably handle those increased payments and if accessing that cash fits into your overall investment strategy.

2. Understanding a 1031 Exchange. Next up, we have the 1031 exchange. This one’s a favorite among real estate investors looking to grow their portfolios. A 1031 exchange allows you to swap one investment property for another of like-kind without paying capital gains taxes immediately. What does that mean for you? You can reinvest the entire equity from your current property into a new one, potentially boosting your investment portfolio without losing a chunk to taxes. Sounds awesome, right? But remember, there are strict IRS rules and timelines. Plus, unlike a cash-out refinance, this option doesn’t provide immediate cash in your pocket. Instead, it allows your investment to grow tax-deferred, which can be a game-changer for your long-term strategy.

3. Which Option Aligns with Your Goals? So, how do you choose between the two? It all boils down to your financial needs and goals. If you need immediate cash and are okay with higher mortgage payments, a cash-out refinance might be the way to go. On the other hand, if you’re looking to defer taxes and continue building your real estate investments, a 1031 exchange could be your best bet. When deciding, consider factors like tax implications, cash flow needs, and long-term investment plans. Your CPA is a great resource for tax advice.

If you’re unsure which strategy is best for you, please call or email me. I have great resources that can help you fully understand your options. Let’s find the best fit for Your investment goals. I look forward to hearing from you.