From residential to commercial

[Gy Hwang]

I have several residential rental properties and I want to switch to commercial real estate investing using a 1031 exchange. However, I'm concerned about the time it will take to sell my residential properties before the 180-day deadline to identify a replacement property. What is the best way to approach this?

[Dave Foster]

@Gy Hwang, Sorry but I'm going to make this worse :) - The deadline for identification of your new properties is 45 days from the date of your sale.  You have 180 days to close.  But your potential replacements have to be identified by day 45.

The switch from residential to commercial is fine.  And I get it that it may take several or all of your residential properties to purchase one larger commercial project.  Here's some ways you can do it.

1. Sell your current rentals as a portfolio.  this would give you just one closing date and timline to navigate.

2. Sell your current rentals individually.  But negotiate the contracts to cluster the closing dates.  When your first one goes into contract do it with as extended a closing as possible.  then try to make all of your closings bunch as close to that first closing date as possible.  

3. Find your replacement property and get it under a contract with an extended closing date.  Even before you're residential properies have all closed.  It is generally easier to get an extended closing for a commercial purchase.  And the normal timelines in a commercial purchase are lengthier as well.

4. A reverse exchange could work but will be expensive and you'll have to have the funds to purchase the commercial property or a portfolio lender who doesn't mind lending money to the 1031 QI entity secured by you.