1031 Situation - Can it be Done?

Question

Is it possible to:

-Identify 5 properties.  (Using 200% rule.)

-Use almost all proceeds to close first 4 properties in cash.  Then about 2-3 weeks after closing finance property leaving 20% of cash in that deal.

-Then use cash and remainder of 1031 proceeds to purchase and close on 5th property with financing.

In the end would purchase 5 properties utilizing all 1031 money and replacement debt to newly acquired properties would have combined FMV greater than relinquished property.

Thanks so much.

Dave Foster · Answer

@Michael Anspach, The issues you're going to have all center on the refi after the purchase of the first properties for cash.  As long as you have that locked up you're good to go.  The 1031 is agnostic to debt.  And purchasing the 5th property using refinance cash from one of the first 4 is no different than any other debt.  And it looks like your refi would be used as a down payment on the last property.  That could get very tricky with a lender as the new refi change all your ratios etc.

But you may want to look at LTVs and finance costs between new financing and refi.  I'd compare paying cash for the first ones and refinancing vs simply allocated a portion of your 1031 proceeds on each property as new loans.

The strategy you're circling around is a sound one - it's all about concentrating debt and equity in separate locations in a diversification exchange.  And that's a great idea.  But if you refinance the cash properties simply to pay cash for us as down payment for your last 1301 acquisition I'm not sure you're advancing the ball all that much.

There's more questions to ask and answer but conceptually from the 1031 perspective it's fine.

Johnny Borrelli · Answer

@Michael Anspach there is a much simpler, easier way to do this.  Inbox me or email me when you have some time to chat.

Michael Anspach · Answer

Thank you @Dave Foster.  Only reason question is being asked is due to a pre-existing seller timeframe required to close the first 4 deals that does not work with any lender's timelines.