Lots of equity in rental property: a good problem to have

[Zoot Allures]

About five years ago, I became an accidental landlord when I moved out of my house and opted to rent it for a while instead of selling it. That was a good move, as I'm in Portland, and the market has become insanely hot here. It's a modest little 1940s bungalow and needs some TLC, but I now have about $200k equity in it nevertheless. I owe $120k on it, could probably sell it for $320k.

I was living in an apartment for a while but bought another small house a year ago, close to my office. I'm currently fixing it up, and that place, too, has already appreciated quite a bit.

I had been satisfied just holding my rental property and making a few hundred in cash flow every month, but seeing the gains in the market has forced me to try to apply more of an investor mindset to that property. The possibilities I've been mulling over include:

• 1031 exchange for a bigger/better/different rental property in a market that's not quite as hot but expected to grow; for example, one of the small towns in the Columbia Gorge, which has the advantage of being a place I might want to live in several years when I'm closer to FI
• Move back into my rental for two years and then sell, avoiding capital gains tax and just dumping all of the profit into my stash (I like the simplicity of this)
• Move back into my rental (I do love the neighborhood) and sell/rent out my current home instead
• Leave my rental as is, and squeeze as much as I can out of it with a line of credit and use that money to invest in something

Obviously this comes down to personal goals and preferences, so I'm not asking for advice per se, but I'd love to hear about others' thoughts/experiences, particularly if you have a similar "problem" and/or are familiar with the market in PDX. I've thought a lot about investing out of state, but am not sure it's for me.

[johnclauson]

Definitely comes down to personal preference. A few questions that might help with your decision-making process:
1. What do the rental economics look like on your current home? Better or worse than the bungalow?
2. Refinance your bungalow - can pull that money out tax free. What is your current interest rate? Prepayment penalties? Will it still be a cashflowing rental if you refinanced?

[cchrissyy]

are you married? if not, it sounds like your equity has already grown beyond what you can sell at for a tax-free gain by moving back in.  I have this "problem" too and the solution is a 1031 or just keep it and rent it out until I die and my heirs can sell it with the cost basis stepped up to that date.

[Zoot Allures]

Definitely comes down to personal preference. A few questions that might help with your decision-making process:
1. What do the rental economics look like on your current home? Better or worse than the bungalow?
2. Refinance your bungalow - can pull that money out tax free. What is your current interest rate? Prepayment penalties? Will it still be a cashflowing rental if you refinanced?

Thanks, John.

1. My current home would be a stronger rental, I think, in terms of greater cash flow, location, and viability as an airbnb/short-term rental if I wanted to go that route.
2. Yes, a cash-out refi of the rental is another option, though it's locked in at 3.875% with 15 years left and I'd love to keep paying it down. But certainly an option if there were another investment opportunity that made sense.

are you married? if not, it sounds like your equity has already grown beyond what you can sell at for a tax-free gain by moving back in.  I have this "problem" too and the solution is a 1031 or just keep it and rent it out until I die and my heirs can sell it with the cost basis stepped up to that date.

Single. Up to $250K in profit can be sheltered from tax, right? I'm not quite there yet. I had thought I would hold the property for a long time, but the sudden reality of the larger-than-expected equity (which I could easily turn into a big chunk of cash) has the potential of giving a nice jolt to my ER timeline.