Starting with capital (1031) what would you do?

Question

If you had approx 2.4M what stategy would you do? Keep in mind I am brand new at this. I do have to do a 1031 exchange to avoid capital gains. My goal is to generate income since I am closing my business which is my 9-5. What would you buy? Multi family? Single family? I want to stay in LA/OC county. So out of state is not an option for me yet. Maybe after I get my feet wet.

Leslie Pappas · Answer

Hi Lesley, if you’re an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about when you perform your 1031 exchange. Investors may develop their own personal portfolio of institutional properties across the country. The potential to both diversify broadly and own "hands-off" institutional real estate can be very powerful, and many of our investors have done just that. You can buy into institutional grade $50-125M projects with as little as $100,000. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse.

https://www.biggerpockets.com/member-blogs/7993/73151-what-a...

Sean Ross · Answer

@Lesley Stoll I want to piggyback on what @Jaron Walling mentioned about 1031s not being as easy as some preach.  This is very true, and even more true in today's market where financing costs are higher but prices haven't adjusted fully to compensate this.

Remember that in any 1031 exchange:

- what property(ies) you buy have to be worth at least as much as what you've sold (net of closing costs but not net of mortgage)          - all of your equity ($2.4M) needs to go as down payment on what property(ies) you buy

1031s are not good at deleveraging.  It's possible to deleverage in an exchange, but only if you accept some tax hit (partial exchange) or bring outside cash to the table, which can hurt your ROE.

All that said, depending on how low your adjusted tax basis is, having a taxable sale would be extremely costly.  You want to investigate the full range of possible 1031 options (residential, commercial, syndicated, active, passive, oil/gas/solar, etc.) if you're hunting for income.  Remember that you can diversify and reinvest into multiple properties/sectors.  You can reinvest into sponsored investments or funds that don't require you to go out and personally borrow money at today's rates.

As a 1031 accommodator, I'm clearly a fan of exchanging.  But it's only right if you find the right landing spot(s).

Bill B. · Answer

Are you selling for $2.4 or netting $2.4 after paying off a mortgage? (You have to spend at least as much as you sell for regardless of the mortgage. So this determines if you’re putting down $2.4 on a more expensive building or simply looking as close to $2.4 as possible.). How bad are the capital gains taxes? (I ask as you could probably generate $120-$150k/year in cash from a guaranteed bank CD. I don’t know that you’ll find any real estate in your price range generating that much cash flow.)

As I’m sure you’re aware residential going to be iffy/risky with new tenant protections and landlord restrictions passed monthly. Maybe a triple net lease if the taxes are unbearable?

Alex Olson · Answer

@Lesley Stoll If you want to be an active investor there are a lot of resources. It is a challenge but a fun one that myseslf and millions of others enjoy. Would look at out of state markets like KC. I can help you with your 1031 exchange if you want to consider the KC market.

Jaron Walling · Answer

Live below your needs on the interest generated from $2.4M in the stock market. Completing a 1031 exchange (regardless of property type) is not as easy as some preach. Finding opportunities that generate the returns you want (like @Bill Brandt said) is difficult. Without experience and advanced planning it could be a net negative, PM nightmare, or combination of challenges.

What's wrong with a HELOC?

Learn more about REI, understand the market around you, then buy deals that match the strategies you want to pursue.

Bill B. · Answer

So how much is the mortgage? The selling price is what you’d have to buy. (Say you are selling a $4 million property to net $2.4m. You’d have to buy at least a $4m property and put down at least $2.4m to avoid all taxes.) So you’d have to want and qualify for a new $1.6m mortgage.

Make sure you don’t put yourself in a position to lose the $2.4m if it’s part of your future plans.

Lesley Stoll · Answer

@Bill Brandt netting after paying off mortgage.

Starting with capital (1031) what would you do?

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