1031 Exchange Stories / Strategies

9 Replies

Any 1031 exchange success stories in today's markets?  If so, what strategy did you use to best safeguard your profits considering the small time frame (45 days to identify a property)?

I've read things like look at multiple markets, or include a 1031 contingency whens selling. I get the multiple markets as a cooler market would potentially be easier to find a better deal in, but the contingency on the sellers side doesn't make sense to me. If i'm selling with a 1031 contingency, what kind of buyer would perform inspection and appraisal, while there is a 1031 contingency and potentially lose that money. If they don't perform them, and are just waiting, then they are not really in contract due to their own contingency(inspection, appraisal). 

Any thoughts welcome

If you're going to 1031, definitely try to list multiple properties in your exchange as backups. I work in the DST space (Delaware Statutory Trust) which are passive real estate investments and we often use these to list as backups on the exchange just in case. I've seen a lot of folks struggle to find replacement property or close in the 45 day window this year. But you have to be an accredited investor to access these.

From a risk perspective, I'd definitley try to diversify geogrpahically and by property type.  Look for markets and property types that might fare better in a real estate correction.  But frankly, you can sometimes hedge yourself the best by simply not overpaying for something. Start with the end in mind, think the through the worst case scenario, and then make a plan for that. 

I don't have a lot of experience with folks using contingencies outside of seeing some of my clients' deals fall through because of them.  I'm sure there will be some folks who jump in here with experience on dealing with contingencies. 


Good luck!

@Joshua Wright can you elaborate on the DST. Did a bit of research and it looks like a trust you can essentially invest your tax deffered profit into. Can you get your money out of there at any point and invest in real estate, or will you have to pay the tax?

@Edit B. You raise a very interesting question. Right now the fear of the limitations of a 1031 exchange is much greater than the reality. Our clients haven't had any problems finding replacement properties that fit their needs. From highly appreciated CA, HI and WA properties into multiple turn keys in the midwest to a large sale of oil interests (yes that counts as real estate) into a fractional TIC with a national corporate tenant.

Lots of folks wanting to go from SF to MF.  I'd say that's 100% of the 5 failed 1031 exchanges our clients have had to date - not finding the MF they want.  So in certain markets and sectors there is some risk, but it's a huge brisk 1031 field out there.  Many long term investors are starting to defensively position themselves by selling off sometimes dozens of their longer term holds in a year and placing them where they feel they'll be less exposed.

So what's a 1031 investor to do in a heated mature sellers market, when finding good replacement properties is hard and no seller wants to give you a contingency to sell your old property???  Exactly what you suggest.  Use your power as a seller to demand a sale date contingent on your finding suitable replacement properties.  A lot of buyers don't mind extended closing dates as that just means they're locking in a price but not having to pay for a bit.  That's free appreciation!  

But I'm sensing that you may be taking a contingent closing a little farther than the norm or what buyers would be comfortable with.  As I mentioned before it's really not all that hard to find good replacements depending on your type and parameters.  And what might be challenging to do in 45 days following a sale is going to be infinitely easier if you can use your seller power to get 60-90 additional days prior to close when you're sure of your sale but not closed yet.  So that is a great strategy.

But I doubt if there are many buyers who would buy in this market with no fixed date.  That leaves way too much to chance.  They don't know you or how serious you are to sell.  It could feel to them like just another person talking about selling but not able to pull the trigger.  You're absolutely right - a buyer's going to be reluctant to move the sale forward with any financing or appraisal or inspection work unless they're sure of close - even if delayed.

So while a sale contingent on the seller finding suitable replacements is a great idea.  I think you'll have difficulty getting it agreed to by buyers unless there is a date certain that they can rely on.  So shop hard and fast.  the worst case of a failed  exchange isn't any worse than the consequences of not attempting an exchange.

@Edit B. Sure. Here's how a DST works... A real estate sponsor goes out and purchases institutional real estate (everything from NNN like a Walgreens for example...to Multi-Family, Industrial, etc) and puts it in a DST. Then they sell beneficial interests in these Trusts to investors. These Trusts are 1031 exchange eligible and can be used for exchange or as a backup on an exchange. These Trusts are pass through entities and completely hands off. Income and deprecation are passed through to the owner. You have to be an accredited investor to utilize them however ($1m of net worth excluding your primary residence or $200k/$300k income as Individual/Married for last two years and expectation of same in the current year). They typically have a life of 7-8 years (from purchase to sale). I've seen them go much faster, but I would plan on at least that. Once the property in the DST is sold, you're free to 1031 exchange out to any property you want (self-managed or DST).

Like any real estate, they have pros and cons. Pros would be low minimums (typically $100k), you can diversify geographically and by property type, you can access property you wouldn't be able to do on your own, you can diversify amongst a portfolio of DSTs, you can close on these very quickly (typically 48 hours give or take), and they can work great for backups on an exchange or for boot if you're replacement property doesn't cover the entire exchange.  

Cons would be that they're completely passive. Some investors are fine with this, but if you want to maintain control, this isn't the vehicle for you. You're allowing the real estate sponsor to make the decisions for the property. They can also have a lot of cost in them, particularly in upfront commissions going in. My firm is structured as a registered investment adviser and I have been too able to have these up-front costs waived and credited back to the client. And of course, there is risk to your principal like any real estate investment.

To answer your question - they typically do not have any liquidity in them. However, I've been doing some due diligence on a DST provider that might provide a liquidity option.

With DSTs, the real estate sponsor, property type, costs, tenants, and leases are very important (which is my job as an adviser to do this due diligence for my client). Honestly, they don't fit everybody, but can work great in a lot of situations.  You need use them as a planning tool.

Hope that helps.  Message me if you want to chat more on these.  Happy to help.

I went from CA to KC... Changed last second because I was afraid to go out of state initially. I found property on market and it worked out, but what a ride.

I wasn't in control of the sale the triggered the 1031 and I didn't even know about it before. If I had to redo I'd find my makret now and get some off market stuff. Even if I paid market or close to it I'd be ok with that because of the tax deferral and the fact that I wouldn't have to be tossing out offers and pray they get accepted. I'd also network and get refferals from people that can perform, I went into my first deal blind and it took a lot of effort. I've since built up a team that operates at my level and it's been MUCH MUCH eaiser...

Originally posted by @Matt K. :

I went from CA to KC... Changed last second because I was afraid to go out of state initially. I found property on market and it worked out, but what a ride.

I wasn't in control of the sale the triggered the 1031 and I didn't even know about it before. If I had to redo I'd find my makret now and get some off market stuff. Even if I paid market or close to it I'd be ok with that because of the tax deferral and the fact that I wouldn't have to be tossing out offers and pray they get accepted. I'd also network and get refferals from people that can perform, I went into my first deal blind and it took a lot of effort. I've since built up a team that operates at my level and it's been MUCH MUCH eaiser...

Matt, pretty exactly what I'm trying to avoid. And I likely would have made that same mistake if it wasn't for doing some research now and getting feedback from people like you. Can you elaborate on what you mean by building a team that operates at your level, and how you achieved that? 


Originally posted by @Joshua Wright :

@Edit B. Sure. Here's how a DST works... A real estate sponsor goes out and purchases institutional real estate (everything from NNN like a Walgreens for example...to Multi-Family, Industrial, etc) and puts it in a DST. Then they sell beneficial interests in these Trusts to investors. These Trusts are 1031 exchange eligible and can be used for exchange or as a backup on an exchange. These Trusts are pass through entities and completely hands off. Income and deprecation are passed through to the owner. You have to be an accredited investor to utilize them however ($1m of net worth excluding your primary residence or $200k/$300k income as Individual/Married for last two years and expectation of same in the current year). They typically have a life of 7-8 years (from purchase to sale). I've seen them go much faster, but I would plan on at least that. Once the property in the DST is sold, you're free to 1031 exchange out to any property you want (self-managed or DST).

Like any real estate, they have pros and cons. Pros would be low minimums (typically $100k), you can diversify geographically and by property type, you can access property you wouldn't be able to do on your own, you can diversify amongst a portfolio of DSTs, you can close on these very quickly (typically 48 hours give or take), and they can work great for backups on an exchange or for boot if you're replacement property doesn't cover the entire exchange.  

Cons would be that they're completely passive. Some investors are fine with this, but if you want to maintain control, this isn't the vehicle for you. You're allowing the real estate sponsor to make the decisions for the property. They can also have a lot of cost in them, particularly in upfront commissions going in. My firm is structured as a registered investment adviser and I have been too able to have these up-front costs waived and credited back to the client. And of course, there is risk to your principal like any real estate investment.

To answer your question - they typically do not have any liquidity in them. However, I've been doing some due diligence on a DST provider that might provide a liquidity option.

With DSTs, the real estate sponsor, property type, costs, tenants, and leases are very important (which is my job as an adviser to do this due diligence for my client). Honestly, they don't fit everybody, but can work great in a lot of situations.  You need use them as a planning tool.

Hope that helps.  Message me if you want to chat more on these.  Happy to help.

Very insightful. I don't think I'd want something that passive but I'll keep that in mind.

Another con is that there are a lot of fees associated with them...and rightfully so as a lot of these DST's need to utilize bridge loans while waiting for investors to buy into the trusts. Investors need to pay for this type of convenience.

As someone who lives in CA, these might still make sense for me because there is absolutely no property in my area that is worth purchasing. But at the same time, the expected cash flows from these DST's are a bit low....so although I'd be preserving a substantial amount of capital, my cash flow would still be lower than if I were to take the tax hit and invest the money elsewhere. DST's, at least the ones I've seen on crowdfunding websites, seem to only pay around 5-7%. Or maybe I'm not looking in the right place?? If anyone know of DST's that generally yield higher, I'd sure appreciate a heads up!