1031 Exchange: Residential to Multi-Family

Member since 2019 · 1 post · 0 votes

Has anyone purchased a single-family home with the intent of exchanging it into a multi-family property to avoid the higher down payment on the multifamily?

How did this work? How do you research the market for 1031 exchanges within your area?

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@John Rhodes, It's done all the time and can be a great way to get your foot in the door and ratchet up your portfolio - a perfect 1031 application. But don't think of the 1031 exchange as the driver. Any kind of investment real estate can be exchanged for any other kind of investment real estate. So focus on purchasing the best SF investment property you can find. Use if for investment for a year or so and then sell it and find the best MF property you can find. The 1031 will fit into any property . you choose. So focus on the performance of the properties.

You do have to use a qualified intermediary to document the exchange and hold the proceeds. But they will work with the transactions of any properties you and your real estate professionals select. There are some timing and valuation regulations that they will guide you through. But again it's secondary to finding the right properties. The 1031 starts with your sale and ends with the purchase of the new property.

Buying and selling the best real estate is where you make the money. The 1031 exchange is the process that lets you keep more of the money (the deferred taxes) working for you rather than paying the tax.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@John Rhodes, It's done all the time and can be a great way to get your foot in the door and ratchet up your portfolio - a perfect 1031 application. But don't think of the 1031 exchange as the driver. Any kind of investment real estate can be exchanged for any other kind of investment real estate. So focus on purchasing the best SF investment property you can find. Use if for investment for a year or so and then sell it and find the best MF property you can find. The 1031 will fit into any property . you choose. So focus on the performance of the properties.
You do have to use a qualified intermediary to document the exchange and hold the proceeds. But they will work with the transactions of any properties you and your real estate professionals select. There are some timing and valuation regulations that they will guide you through. But again it's secondary to finding the right properties. The 1031 starts with your sale and ends with the purchase of the new property.
Buying and selling the best real estate is where you make the money. The 1031 exchange is the process that lets you keep more of the money (the deferred taxes) working for you rather than paying the tax.
The 1031 Investor5137 Reviews
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Matthew Terry
Rental Property Investor · Mesa, AZ · Member since 2019 · 138 posts · 144 votes
6y
Originally posted by @John Rhodes:
Has anyone purchased a single-family home with the intent of exchanging it into a multi-family property to avoid the higher down payment on the multifamily?
How did this work? How do you research the market for 1031 exchanges within your area?

Hey John, I have an SFH now that has appreciated quite a bit and I was interested in 1031 as well.
Can you elaborate on what you mean by not having to pay a high downpayment for multi-family? Do lenders see a 1031 exchange as less risk and will allow a 20% down payment instead of 25 or 30%?
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6y
@Matthew Terry, I think what @John Rhodes is alluding to is the reinvestment requirements of a 1031. You must use all of the proceeds from your sale in the purchase of your replacement property. But if you are selling a property with significant equity that would represent a much larger down payment on one smaller SFH as opposed to it being a smaller % of the purchase of a larger MF property. Banks will not change their underwriting because you are in a 1031. If they approve your loan you have to bring the down payment or you don't get the loan. So they don't care if you have cash in the bank or cash in an exchange account.
A couple of examples that accomplish what John is talking about.
1. Purchase a much larger asseet. If you sold a free and clear property for $250K and wanted to purchase a SF for $500K that would make your down payment 50%. However, you could use those proceeds to purchase a $1 mil property and now the down payment is 25%.
2. Diversification - If you wanted to stay with SFH you could sell that same $250K property and use the proceeds on down payments on multiple SFH properties. Sell the one and buy 5 $200K SFHs. the cash from the exchange would represent a down payment of 25%.
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