MLOs who only think about acquisition financing are missing significant business from investors who eventually need to exit, restructure, or recapitalize their portfolios. The investor who built a 10-property DSCR portfolio 5 years ago may be ready to cash out, consolidate, or use a 1031 exchange to upgrade to a larger asset. These transactions require mortgage origination, and the MLO who has maintained the relationship is first in line.
Outright Sale
A straight sale of an investment property triggers capital gains tax on the appreciation and depreciation recapture. For properties held more than one year, long-term capital gains rates apply: 0%, 15%, or 20% depending on the investor's taxable income, plus a 3.8% net investment income tax for high earners. Depreciation recapture is taxed at a maximum of 25%. For investors with significant appreciation, the tax bill can be the primary decision driver.
1031 Exchange
A 1031 exchange defers capital gains tax by rolling proceeds from one investment property into a like-kind replacement property. The investor must identify the replacement property within 45 days of closing the relinquished property and close on the replacement within 180 days. 1031 exchanges require a qualified intermediary to hold the proceeds between transactions. The replacement property must be of equal or greater value. MLOs have a role here: the replacement property often needs financing, and a DSCR or conventional investment loan is frequently part of the 1031 close.
DSCR Cash-Out Refinance as a Partial Exit
- ✦A cash-out DSCR refinance allows the investor to extract equity without triggering a taxable event; the proceeds are not income, they are debt
- ✦Most DSCR lenders allow cash-out to 70% to 75% LTV on seasoned investment properties; some go to 80% on strong DSCR files
- ✦This strategy is sometimes called 'BRRRR exit' in investor circles; it recycles equity into the next acquisition without a sale
- ✦The trade-off: the higher loan balance increases the monthly expense load, potentially reducing DSCR on the property
Aria at vicariointel.com can help you map out DSCR cash-out options, 1031 exchange financing timelines, and how to structure replacement property loans for investors in the middle of a like-kind exchange.
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