Which is the better strategy when dealing with my rental homes?

I currently have two rental houses. House 1 is worth $40,000, has no mortgage, and is breaking even each month due to repairs and maintenance. House 2 is worth $180,000, has a $205,000 mortgage, and is -$800 per month.
My question is, which option is better: should I sell house 1, take the money and sell house 2, then wait a year and start over by rebuilding my portfolio of rental houses? Or should I sell house 1, take the money and invest it in a better, more productive, rental unit? I could also use the cash flow off of the new unit to pay into house 2.

Investing, Asset Allocation, Real Estate
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May 2017
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I do not know your age although I have had many clients approaching retirement sell their rental properties because of the experiences you mentioned, as well as not wanting to deal with the three Ts: Tenants, Toilets, and Trash.

If you are looking for an alternative that would save on taxes, I would recommend a 1031 Exchange. Sell both properties then do a 1031 Exchange. The purchase or sale of a beneficial interest in a Delaware Statutory Trust qualifies for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code ("1031 Exchange").  Investors can sell their existing investment property and 1031 Exchange into a beneficial interest in one or more Delaware Statutory Trusts. They can also sell their beneficial interest in a Delaware Statutory Trust and 1031 Exchange into another DST or into other property selected through the assistance of their financial advisor.

The following sequence represents the order of steps in a typical 1031 exchange:

  1. An investor decides to sell investment property and do a 1031 exchange. He contacts a qualified intermediary (QI) and they enter into an agreement.
  2. The investment property is placed on the market.
  3. An offer to purchase the investment property is accepted and signed by the QI.
  4. Escrow for the sale is opened, and a preliminary title report is produced.
  5. The QI sends required exchange documents to the escrow closer for signing at property closing.
  6. Escrow closes.
  7. Within the first 45 days after the close of escrow on the sale of the relinquished property, the investor identifies replacement properties as required by law. This is known as the "Identification Period".
  8. Within 180 days after the close of escrow on the sale of the relinquished property, the investor closes on one of the replacement properties which he has identified. This is called the "Exchange Period". This completes the exchange. No cash – or ‘’boot’’, as it is known – is taken by the exchanger.

The target market for 1031 exchange ownership are taxpayers with a net worth in excess of $1,000,000 who are seeking a monthly cash flow without the headaches of being a landlord. You may also upgrade your real estate to say ownership of a class A office building and receive a monthly check from the DST sponsor. Picking the right property and sponsor with a good track record will afford you better success than you have had and take away all the headaches.

April 2017
April 2017