Should I sell my current rentals and invest elsewhere?

Question

￼My current residential rentals have increased a lot in value. If I bought a similar property in my area for today’s price, it would never pass the 1% rule. So I’m wondering if I should sell some or all of these, do a 1031 exchange and invest in a different area where the price and rent are more in line with the 1% rule. I’d appreciate any advice! Thanks.

Bill B. · Answer

Is there another area near you that you know as well as you’re current location or an oos location where you absolutely trust the team that would run it for you that has a much better return? If not, no, not ever, forgetting the 10% costs of swapping properties, you have built in advantages to a neighborhood and property you live near and know already.

Dave Foster · Answer

@Jai Reddy, not so much. There was a national group (not the FEA) that specialized in simultaneous swaps which is more of an archaic art form of the 1031. I can't even remember what they were called. But they became a buggy whip factory when the new regs came out in the 90s. They had regional meet ups to share and market their properties and put these wonderfully complicated but fun daisy chains of exchanges.

And of course there's a few companies out there that have a stable of properties (particularly the fractional DSTs etc) that have properties you can actually look at.

But the current 1031 regs really make this unnecessary. Any property in any market nationwide can be used for your 1031. So rather than having to find 1031 potentials you find the area and sector that is most attractive to you and then find the acquisition potentials in that sector and location that work best for you. Your criteria are what would be the best investment property to purchase. And you don't worry about will it work for 1031 because it will.

Dave Foster · Answer

@Jai Reddy, There is that. However, you do not have to reveal the existence of a 1031 during negotiations. All parties have to be notified of the 1031. But there is no prescription of when. So we counsel our clients to simply make their purchase contracts assignable. And then we wait to notify all until final settlement statement is prepared.

If the 1031 buyer is within their 45 day identification period the can always choose another property. If they're past their 45 days but have more properties on their list they can select one of those. Other than that there is no extension available.

Jai Reddy · Answer

@Dave Foster

Thank you for an encouraging reply. Since the purchase of the like-kind property is time-constrained (180 days or whatever), it appears the 1031 Buyer is at a disadvantage and Seller to 1031 Buyer can use Seller’s time constraint by not agreeing to any legitimate concession in price should something be discovered during Due Diligence period. In such cases, does 1031 Buyer get an extension to pivot to another property?

Jai Reddy · Answer

@Dave Foster Is there a marketplace for 1031 Exchangers to see each other's properties, to mutually aid in the identification of properties to purchase?

Dave Foster · Answer

@Evangeline O'Dowd, Great points made by @Bill Brandt. it's due diligence time now. The 1031 exchange will certainly let you change not only geography but also class of real estate and numbers of properties. So there's a bunch of ways to improve your properties. The trick will be identifying when and where before you sell your old properties.

You can also use a blended approach that can add some defense to your situation. Identify a property or two that have the least debt and gain. Sell those and absorb the tax hit. 1031 exchange the rest of the properties you want to move. Use the cash from your non-1031 sales to reduce debt on the replacement side. At the end of this you'd have a better placed portfolio ready to grow and produce NOI. And it would have lower debt to protect you in case of a downturn.

Should I sell my current rentals and invest elsewhere?

Should I sell my current rentals and invest elsewhere?

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