type lending to maximize cashflow for 1031 replacement properties

Investor · Salem, OR · Member since 2017 · 24 posts · 3 votes

Late spring or early summer this year I'm looking to offload a residential property in the 800 - 900K range, which should throw off approximately 200k in cash. For conversation's sake, I believe the 1031 will be roughly 800k+ in replacement properties with aprox 200k down in cash, and the properties plan to be held for a minimum of 2 years. I'm struggling to make those numbers work. What type of lending product would be best to maximize cashflow? Thank you in advance.

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Pierre Guirguis

Lender · Marlboro, NJ · Member since 2025 · 243 posts · 149 votes

6mo

If I'm understanding correctly, at around 75% LTV on an $800k replacement, it's tough to create strong cash flow in today's rate environment regardless of product. Most 1031 buyers end up in DSCR because it's flexible and income-based, but the rate is usually a bit higher, so it doesn't fix the problem on its own.

Where this usually gets solved is either adjusting leverage, being very selective on rent-to-price, or buying something with clear upside you can execute on after closing. A lot of 1031 buyers end up forcing deals just to satisfy the exchange timeline, and that’s where the numbers break. If you haven’t already, it’s worth modeling a couple different structures before you lock into a purchase. Small changes in leverage or rents can materially change how this performs.

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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
6mo
Hey Scott,
What part of the deal are you having difficulty making the numbers work? What interest rate are you using to cover the difference in the exchange?
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- Scott Smith
  OP
  Investor · Salem, OR · Member since 2017 · 24 posts · 3 votes
  6mo
  
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Pierre Guirguis
Lender · Marlboro, NJ · Member since 2025 · 243 posts · 149 votes
6mo
If I'm understanding correctly, at around 75% LTV on an $800k replacement, it's tough to create strong cash flow in today's rate environment regardless of product. Most 1031 buyers end up in DSCR because it's flexible and income-based, but the rate is usually a bit higher, so it doesn't fix the problem on its own.

Where this usually gets solved is either adjusting leverage, being very selective on rent-to-price, or buying something with clear upside you can execute on after closing. A lot of 1031 buyers end up forcing deals just to satisfy the exchange timeline, and that’s where the numbers break. If you haven’t already, it’s worth modeling a couple different structures before you lock into a purchase. Small changes in leverage or rents can materially change how this performs.

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Scott Smith
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Investor · Salem, OR · Member since 2017 · 24 posts · 3 votes
6mo
Pierre - Spot on, excellent response. Yes, through different models I can make the numbers work, barely. One model that seems to work is buying multiple entry level properties in the 225k to 250k range in the area I'm targeting. However that can make the lending side of things tricky. Any suggestions on lending that maximizes cashflow in the short term?
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- Pierre Guirguis
  Lender · Marlboro, NJ · Member since 2025 · 243 posts · 149 votes
  6mo
  Quote from @Scott Smith:
  
  Pierre - Spot on, excellent response. Yes, through different models I can make the numbers work, barely. One model that seems to work is buying multiple entry level properties in the 225k to 250k range in the area I'm targeting. However that can make the lending side of things tricky. Any suggestions on lending that maximizes cashflow in the short term?
  
  That's exactly where most people end up landing, the smaller deals tend to pencil better, but the financing side can get a little fragmented. If you're going that route, DSCR is usually the most practical because it lets you move quicker and focus on the income, especially if you're picking up a few in a similar range.
  
  That said, if cash flow is the priority, the biggest lever isn’t really the loan type, it’s how you structure the portfolio. Sometimes bundling a couple properties together or refinancing them once stabilized can improve leverage and terms versus doing everything one-off.
  
  Short term, it’s usually about getting in clean and keeping flexibility. Long term, that’s where you optimize the debt. At that price point, the deals themselves are doing most of the work, the financing just needs to not get in the way.
  
  Happy to sanity check how you’re thinking about structuring those if helpful!
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- Scott Smith
  OP
  Investor · Salem, OR · Member since 2017 · 24 posts · 3 votes
  6mo
  Quote from @Pierre Guirguis:
  
  That's exactly where most people end up landing, the smaller deals tend to pencil better, but the financing side can get a little fragmented. If you're going that route, DSCR is usually the most practical because it lets you move quicker and focus on the income, especially if you're picking up a few in a similar range.
  
  That said, if cash flow is the priority, the biggest lever isn’t really the loan type, it’s how you structure the portfolio. Sometimes bundling a couple properties together or refinancing them once stabilized can improve leverage and terms versus doing everything one-off.
  
  Short term, it’s usually about getting in clean and keeping flexibility. Long term, that’s where you optimize the debt. At that price point, the deals themselves are doing most of the work, the financing just needs to not get in the way.
  
  Happy to sanity check how you’re thinking about structuring those if helpful!
  Very interesting, thank you so much. Cash flow is only my priority in the sense I'm using it as a measuring stick to determine if the scenario is even viable. Exactly to your point, I would plan to cleanup/restructure things at a later date. I appreciate your input here.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
6mo
@Scott Smith, A diversification 1031 exchange is exactly what you've landed on. A diversification exchange is when you sell a larger investment property and reinvest in multiple smaller investment properties in a 1031 exchange.

You can allocate your proceeds anyway you want. The way some investors will structure this is to purchase one property cash and finance the second; this way, you defer all of the tax, and minimize risk by having one debt-free property. You can also leverage your equity in that replacement property by doing an immediate cash-out refi if you want. That gives you access to 75% of your equity in the replacement property tax-free to put down on another property if you want. If you can make the timing and underwriting work, you can leverage the $200K into multiple properties and add to your cash flow.

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