1031 Exchange- SF condo to multi family

7 Replies

Hi, my wife and I have listed and are in the process of selling our 2 Bed / 2.5 BA condo in San Francisco's SOMA / South Beach / Mission Bay area. We are interested in executing a 1031 exchange into a higher cash on cash return profile multi family property to diversify our geographical exposure and income streams beyond our W-2s. We are interested in out of state properties as well as CA (although my sense is CA cap rates are relatively unattractive and we would prefer to shift away from appreciation as share of total yield). If anyone has any local advice on finding such deals in Utah, Indiana, Nevada, Washington, Idaho, Wisconsin, Florida, Arizona, Texas other than searching Loopnet I would be very interested in your feedback. Thank you kindly for your time and consideration.

@Dave Foster can help explain all that's needed, know you'll need a QI before you finish that sale to do a 1031....

@Matt K. , Thanks for the shout out.  @Brian Isleib , if you're planning on using the sales proceeds to purchase new investment real estate than you definitely want to explore a 1031 exchange which will allow you to defer payment of the tax normally associated with the gain and depreciation recapture an instead use that deferred tax to purchase new investment real estate.

Hi @Brian Isleib - what type of return are you ideally looking for?  Budget?  Connections with those on the ground once you've identified a few target markets are very important.  

@Brian Isleib You mentioned Loopnet, so are you only looking for larger MF? Or are you open to any MF 2+ units? As @Jonna Weber mentioned, you need to try to have some specifics of what you really are looking for. My area has 4 plexes between $200k-300k, small 8 units for under $200k or large MF for $3M+ but it all depends on your budget and criteria for property condition and what type of tenants you want to attract. Feel free to PM me if you would like more info about Eastern Idaho.

Thanks for all your responses and advice. To your point, let me provide some specifics: 

*Listed condo at $1.35mm and we expect it to sell at this list price or higher. We owe $459k in principal on the property and expect to pay 5% in real estate agent costs to close. We have owned the property since 2008 and will get hit with some depreciation recapture but specific still TBD. Our cap rate on this property at today's market valuation is as one would imagine shockingly low and insufficient to meaningful change our lifestyle. The purpose is to find something that actually can generate meaningful cash flow as a hedge against any future changes in our W-2 income.

*We are interested in $1.2mm up to $1.6mm range ideally. While we realize 1031 exchange requires the property to be of greater value (selling price + $1) we don't mind paying a small amount of tax on any "boot" representing the delta between a hypothetical $1.2mm deal and the selling price to avoid overextending our debt position heading into a potential downcycle. We are open to any multi family property or set of properties that generates gross cap rates at a minimum of 6% and would prefer newer construction (and hence fewer immediate maintenance needs) and solid tenant quality (i.e. neither luxury rentals nor Section 8 folks but rather solid folks who have jobs) in exchange for a lower immediate cap rate. 

Thanks again to you all!

Let’s see, you made a sh!t ton of money on your soma condo via appreciation, and now you want to trade that in for fly over state RE with low/no appreciation potential, and a ‘potential’ for some cash flow, if you can manage an out of state prop without getting ripped off, plus avoid a crap location (which you won’t know until you own there, because out of state vendors just love Bay Area exchange money)? Personally I don’t recommend that road. 

Why not refi the condo, or put a fat heloc on it, and use that to buy something in the Bay Area, where 1- you stand to get real appreciation on, and 2- an area you personally know something about. 

It’s hard to get wealthy from $100-200 a door out of state cheapie. OTOH most Bay Area investors are pretty well off. Quality of property/tenant base and appreciation should be your key drivers imo. 

@Brian Isleib  A good solution for you would be to use a Monetized Installment Sale instead of a 1031 exchange. This would allow you to defer the taxes on the sale of your condo. In a monetized installment sale you defer the taxes by selling on an installment contract (seller financing) through an intermediary. The monetization loan lets you walk away from the closing with cash that can be used for any purpose. You don't HAVE to get back into real estate right now. This addresses your concern about the market.

Lots of CA sellers are deferring their capital gains using this planning approach.

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