Why You May Want to Choose Kansas City for Your 1031 Exchange

Have property values in your city skyrocketed? If you’re an out-of-state or first-time investor looking for a new growing market for 1031 exchange investments, you may want to take a gander at metropolitan areas like Kansas City.

Time Magazine named Kansas City one of the top 10 housing markets in the U.S. as its commercial and residential real estate investment market is one of the largest and fast-growing in Missouri and the greater Kansas City area.

If you’re diving into the investment real estate pool, take a swim in Kansas City. Earn passive income, build up your portfolio, and gain substantial wealth using a 1031 exchange in the Midwest.

What is a 1031 exchange?

1031 exchange is known by multiple names: Tax-deferred exchange, like-kind exchange, starker exchange, and real estate exchange. Investors use this strategy to defer capital gains taxes on the sale of a property. This method allows you to keep more capital to purchase a like-property.

Basically, by using the 1031 exchange method, you’re able to swap one property for another like property and defer all capital gains taxes. There are four main types of 1031 Exchange to be aware of.

4 types of 1031 exchanges

Delayed exchange — When you close on the sale of your original property before purchasing your replacement property.
Reverse exchange — When you buy your like-property before selling your original property.
Construction/improvement exchange — When you use the cash you saved from deferring taxes to renovate your replacement property.
Simultaneous exchange — When your 1031 property exchange occurs simultaneously. Essentially, the sale of your property and the purchase of a new like-property close on the same date.

Why the Kansas City market?

Sometimes spotting a growing market isn’t cut and dry. Keeping your finger on the market’s pulse is one of the best ways to recognize hot spots. Kansas City has been listed as one of the top housing markets of 2022. Here are the four main reasons Kansas City is a blazing market for investors using a 1031 exchange.

Property availability

Real estate all over the U.S. has been set ablaze. Prices have soared, and properties are scarce, leaving many buyers stressed. As of January 2022, there was a total inventory of 2,859 properties in Kansas City.

Though the market is competitive, there are still plenty of affordable properties. Plus, you have more buying power when using the 1031 exchange method, setting you apart from other contenders. You can also use the “seller’s market” to your favor, making it easier to sell within the 180-day exchange rule.

Pricing

Kansas City is growing at a rapid pace. With that growth comes a demand for rental units. The flocks of people moving to the area need a place to live, and not all of them are ready to buy.

While home values in KC are rising, they remain affordable. As of 2021, the median property value has been around $204,922(MO) and $127,353 (KS), and property appreciation rates continue to be some of the highest in America. Rent, on the other hand, is increasing at a steady pace. Currently, the average median rent falls around $1482 a month (MO) and $1,392 a month (KS).

Desirability

With prices in larger cities skyrocketing, Midwest cities are looking pretty appealing. Even though housing costs continue to increase, Kansas City is still 15% more affordable than the national average. Because of this, the population has grown by at least 0.73% annually.

Kansas City is culturally rich, with plenty of outdoor recreational areas, entertainment, retail amenities, and a thriving job market. Despite its suburbia reputation, Kansas City has a lot to offer young professionals who crave the perks of a larger city but want more square footage.

Ease of renting

With mounting rent increases, rental units are flying off the market with eager tenants looking for long-term lease agreements. A large portion of KC’s population is single, educated, young professionals in the early stages of their careers. According to Neighborhood Scout, around half (47.74%) of the people living in KC are renters.

WalletHub ranked Kansas City as one of the top 100 markets for renters. The difficulty of renting out a property will vary per situation, but in a market this hot, if priced competitively, the odds are in your favor.

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A look at the best areas in Kansas City for investment properties

As an agent in Kansas City, I stay open-minded regarding zip codes. Some areas may appear “bad” but may make absolute sense for what you want to achieve.

There are many factors to consider when choosing an investment property. However, a best practice to avoid high maintenance costs is to pass on properties in high crime areas and lower socioeconomic brackets (unless it’s an up-and-coming area). If you’re looking to invest in the greater Kansas City area, here are a few neighborhoods to keep an eye on.

1. Independence, MO

This area is close to the city and chock-full of beautiful outdoor spaces and historical landmarks. The cost of living is low, with plenty of amenities for young adults and families.

Population: 123,011
Crime index: 4/100
Avg. household income: $111,628
Median rent: $1,354
Median property value: $150,651
Avg. annual appreciation: 5.46%

2. Lee’s Summit, MO

Lee Summit is an excellent area for families due to low crime rates, good schools, and a sense of community. It has been voted one of the ‘most livable’ cities in the U.S.

Population: 101,108
Crime index: 25/100
Avg. household income: $170,168
Median rent: $1,743
Median property value: $326,446
Avg. annual appreciation: 5.59%

3. Blue Springs, MO

This KC suburb has convenient amenities, highly ranked schools, and beautiful recreation areas and parks. Families and young professionals who want to live away from the city’s noise but still be a short drive away will be attracted to this neighborhood.

Population: 58,603
Crime index: 21/100
Avg. household income: $131,816
Median rent: $1,539
Median property value: $241,206
Avg. annual appreciation: 5.61%

4. Raytown, MO

The proximity to major shopping centers, baseball stadiums, and other great entertainment amenities makes this area ideal for young adults and families.

Population: 30,012
Crime index: 5/100
Avg. household income: $110,304
Median rent: $1,329
Median property value: $145,819
Avg. annual appreciation: 5.58%

5. Kansas City, KS

Kansas City, Kansas offers diverse culture, an affordable cost of living, and plenty of job opportunities. People of any age will enjoy the local BBQ, unique eateries, and amenities in Kansas City, Kansas.

Population: 156,607
Crime index: 4/100
Avg. household income: $87,780
Median rent: $1,392
Median property value: $127,353
Avg. annual appreciation:6.33 %

6. Gladstone, MO

This densely suburban area offers lush parks, quiet neighborhoods, and a short drive to downtown KC and the airport. Perfect for young professionals and families.

Population: 27,063
Crime index: 15/100
Avg. household income: $125,404
Median rent: $1,364
Median property value: $196,569
Avg. annual appreciation: 5.45%

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Building your A-team

1031 exchange transactions can be complex and tend to be fast-moving. To ensure the most bang for your buck you’ll want to have an experienced team behind you. Here are the four essential professionals you want on your team.

Real estate advisor

An experienced CRE advisor will assist you with selling your property, identifying your like-property, and guiding you through the whole process. There are strict rules when engaging in a 1031 exchange. Your broker will keep you on track, alert you of important deadlines, and be a trusted consultant.

Qualified intermediary (QI)

It is critical that you find a trustworthy 1031-experienced QI. This person will be holding the funds from your sale and driving the exchange purchase forward.

CRE attorney

Having a lawyer on your team will ensure all legalities run smoothly. They will be a valuable asset to help navigate grey areas and avoid trouble.

Tax specialist

You’ll want a knowledgeable, certified public accountant (CPA) or 1031 exchange tax specialist to assist you throughout the selling and buying process. Having a CPA on your team will allow you to preserve more of your capital when tax season comes around.

Final thoughts on Kansas City’s market

Kansas City’s real estate market is one of the hottest in the Midwest right now. All things are looking up, from being an attractive renters’ market to one of the country’s best housing markets. Plus, if you’re looking for a powerful tool to maximize your investments (and profits), 1031 exchange is a solid option. Combine a sizzling market and the 1031 exchange method, and you’ll be raking in the money.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.