I own two rental properties which I purchased about 3 years ago for $135k each. It's a hot market, and they are now worth about $400k each if sold as a pair, perhaps $440k if sold as single family homes.

I hold a fixed rate mortgage on both of them, and NOI is about breakeven. That is, net profit is around $24k per year, whereas debt servicing is also around $24k per year.

If I sell, I can do a 1031 exchange and perhaps buy a multi-family rental property and own it outright, yielding around $10k per year net profit (after estimated expenses and vacancy). That's quite an improvement over my current "just breaking even" situation.

Alternatively, I can refinance to a 3- or 5- year ARM, or one of the Option ARM / Cash Flow ARM products, which would create a great deal more cash flow for me to use elsewhere.

Or I can just sit tight and hope the appreciation continues. After all, I'm covering costs.

I'm finding it difficult to figure out the best path forward. Any thoughts on the matter?

Sorry about the typo.

They are worth about $400k *total* if sold as a pair, and perhaps $440k *total* if sold individually, as two single family homes.

Just ballparking some figures here.......
270K (135K x 2) on a 3/1 ARM (You'd be looking at about 5%), you be looking at aroung 16K a year debt servicing, which may give you more cash flow.
Before you sell property that is obviously appreciating, and at a very good rate, I would suggest running the numbers to see what you can get those notes down to. If you're looking for cash, you can always use the equity for your down payment (or to buy free and clear) any additional property.....Give me a call if you want me to run some rates and payment options for you. Good Luck!

How can I use the equity as a down payment or to buy another property free and clear? I would think that this means taking out a new loan for each of my two existing rental properties, where the amount borrowed is greater than what I currently owe. This would leave money left over, but would it not also likely result in negative cashflow on those two rentals?

Maybe I'm missing something.

I wish my investment property was appreciating at that rate. I looks like you would benefit from holding on to them. To get more cash flow, refinance them on an interest first loan. Be careful of the option arms, They can change quickly. every month or every six month. With our market you can never be to careful. Take a look at your mortgage statement, it is just amazing how much of your money actually goes to the principal. On the interest first loan, the payment is less, therefore you keep more of the profit from the renters payment and the property is going to keep gaining equity every year. If you are concerned with lowering the principal of the mortgage, send 1 payment directly to the principal a year. Huge difference. Feel free to contact me if you have any questions. I only cover Texas, but questions are always free. Have a great day.
Patsy