Buying & Selling Real Estate Discussion

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Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
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Should I use a 1031 to get into MF?

Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
Posted Jun 3 2022, 11:36

Hey everyone,

I own a couple of properties in the Phoenix, AZ area and I am thinking about selling one of them and using a 1031 to get into some mid-large multifamily in Western NY where I own a couple of properties as well. My ROI is pretty good on the unit but since the value has skyrocketed in the past 2 years my ROE is looking pretty rough. Property is cash flowing nicely and I have good tenants in place but with my equity in the house I could be buying some 8+ unit MF.

Thoughts?

Upstate New York, New York

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Dustin P.
  • Realtor
  • Scottsdale, AZ
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Dustin P.
  • Realtor
  • Scottsdale, AZ
Replied Jun 3 2022, 13:03

If you have a few deals in mind I think you should go for it. I've been looking at similar options on a few I have where my ROE is looking low as well

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Timothy Borg
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Timothy Borg
Replied Jun 8 2022, 12:38

I am in the same boat.  I have a ton of equity and I have been thinking of selling one and buying something bigger out of state.  For me, it is super hard to pull that trigger.

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Evan Polaski
  • Cincinnati, OH
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Evan Polaski
  • Cincinnati, OH
Replied Jun 8 2022, 13:16

@Caleb Rowe, as you likely know, the biggest risk with a 1031 is the reinvestment risk.  You have to feel very confident in your pipeline to have viable assets named within the 45 day and closed within the 180 day windows.  And, if your seller catches wind that you are 1031 buyer, there is always the opportunity that they can leverage that in any negotiations, since you are racing the clock.

Overall, it is a very powerful tool, but not without risk, particularly in this heated market where deals are already very pricey.

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Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
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Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
Replied Jun 8 2022, 13:34
Quote from @Timothy Borg:

I am in the same boat.  I have a ton of equity and I have been thinking of selling one and buying something bigger out of state.  For me, it is super hard to pull that trigger.

Yeah, it's really hard to pull the trigger on a unit that has appreciated as quickly as the Phoenix market has over the past two years! 

Trying to do the hypothetical math on my cashflow vs appreciation. Tricky math in the best of times

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Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
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Caleb Rowe
  • Rental Property Investor
  • Litchfield Park, AZ
Replied Jun 8 2022, 13:35
Quote from @Evan Polaski:

@Caleb Rowe, as you likely know, the biggest risk with a 1031 is the reinvestment risk.  You have to feel very confident in your pipeline to have viable assets named within the 45 day and closed within the 180 day windows.  And, if your seller catches wind that you are 1031 buyer, there is always the opportunity that they can leverage that in any negotiations, since you are racing the clock.

Overall, it is a very powerful tool, but not without risk, particularly in this heated market where deals are already very pricey.

That's a really good perspective I hadn't really considered. Thank you for the insight!

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Bill Brandt#3 Home Owner Association (HOA) Issues & Problems Contributor
  • Investor
  • Las Vegas, NV
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Bill Brandt#3 Home Owner Association (HOA) Issues & Problems Contributor
  • Investor
  • Las Vegas, NV
Replied Jun 8 2022, 13:50

So the plan is to get rid of properties that appreciate too fast and buy in a slower market with less appreciation so the numbers look better? Appreciation is real income and tax free, I don’t see the upside of selling to buy in a worse market. 

I guess if you really felt the need to reduce your returns you could do a cash out refi and use that money to buy the MFR. That would lower your income but the ROE would look better.

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Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
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Dave Foster#1 1031 Exchanges Contributor
  • Qualified Intermediary for 1031 Exchanges
  • St. Petersburg, FL
Replied Jun 8 2022, 13:53

@Caleb Rowe, I'll put you and @Evan Polaski's mind at ease on this one.  All. parties do have to be notified when one is doing a 1031 exchange.  But there is no specific requirement on when that happens.  So, most of our clients will let the 1031 stay anonymous and simply make the contract assignable.  This prevents anyone trying to take advantage of you for your 1031 status.  We then provide all the necessary documents as part of the closing.

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Colton Hahn
  • Specialist
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Colton Hahn
  • Specialist
Replied Jun 9 2022, 06:06

1031 is an intensely powerful tool to utilize, what I hear from our clients attempting to 1031 is that they were not detailed in their approach, panicked and got into a mediocre deal. Proceed carefully, thoughtfully and have your ducks in a row is the best advice I can give to avoid that pitfall of maneuvering into a subpar property. 

Good luck!

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Mackenzie Grate
  • Real Estate Agent
  • Ulster County, NY
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Mackenzie Grate
  • Real Estate Agent
  • Ulster County, NY
Replied Jun 10 2022, 07:35

In my experience, 1031 exchanges have been winning out bids in this market because they are viewed by seller's a quicker (although they are not always) and as a motivated buyer who must close. So if switching to a MF is more in line with your goals (higher cash flow, growing your portfolio more in NYS, etc.) then I would say go for it. Just make sure it is aligned with your end vision and goals for what you want allocation wise in your investment porfolio.

Good luck! Excited to hear what you decide!