Been a member for years and have been quiet until lately... have acquired a few properties along the way but now I have a scenario I'm not sure how to handle and would also ask my cpa about this.
One of my tenants have interest in purchasing one of my properties in the Bay Area, CA. I'd like to run this by you before I make any decisions.
Based on these Reasons might be good to do a 1031 exchange
1) wife is planning to retire sometime soon to be able to visit family that are out of state like Arianne Lemire(podcast), so we'd like to increase cashflow in the short term.
2) heard the podcast session with Katy Fettke about idea of exchanging appreciated Cali properties with better cash flowing properties, make sense to me.
3) I really like to move up to investing in 5 or more multifamily because we can force appreciate but I don't have much time, I'm currently expanding my digital marketing/AdWords management business, so I'm falling back to possibly acquiring turnkey properties.
So I read online that it is possible to do a 1031 exchange from 1 property to multiple similar properties with the rules
1) 3 property limit
2) 200% value limit
3) identified within 45 days
4) a few more rules that I'll go over with my CPA
Observations about my current situation:
1. I have 3/2 condo
2. bought the prop at $153k - 6 years ago.
3. is now worth between $320k(not so comparable recent sale of 2/2 in the same community) and $385k(redfin estimate) - my unit is specially nice in the community since it is a ground floor unit with one really huge patio probably equivalent to 2 bedrooms inside the unit.
4. I can exchange this to 3 cash flowing properties else where and could 2x or 3x my cashflow - current adjusted cashflow is about $1172 (adjusted because I do the management myself as I'm near by and refactored in a 9% property management)
5. if I can exchange it to a 4plex that'll be ideal.
6. another reasons I'm open to selling is that the HOA for this property have been increasing but currently still reasonable, might not be in 2 to 3 years that would lower the appreciation rate.
7. another reason is that the highest price this condo has ever reached in the boom years was $410k(June 3, 2005 sale)
8. if I acquire turnkey properties in different areas, it would spread my risks.
My questions are:
1. can I add money if I don't have enough to acquire the 3 turnkey properties? probably yes.
2. since I've possibly identified my buyer can I negotiate a lower commission with a real estate agent or not have one? I have very limited knowledge in buying and selling. pros and cons to look out for?
3. Do you have a suggested way on how I should negotiate with the tenant? they've been living there almost 1.5 years or almost 2 years.. I'd of course want to get the best price as possible? although, I'm ok if they don't want to buy since I can do cash out refi and acquire turnkey properties.
4. Which professionals are absolutely needed in this transaction? qualified intermediary, escrow agent or title company?
5. Are there turnkey operators doing 4plexes?
6. I have a bunch of questions but I've forgotten them.. anything else I need to consider?
Hi @Harris L. ,
Yes, you can always add additional cash (equity) into a replacement property acquisition as part of your 1031 Exchange transaction. There is no limit on trading up in value and/or adding additional cash to your 1031 Exchange.
We always recommend using an escrow company to ensure that everything is documented property under California laws and regulations. You will also need to provide the buyer with title insurance. You can certainly negotiate with the Realtor since you have already have the buyer in hand. The Realtor can help you make sure that all disclosures and required documents are completed as required. You should have your accountant review the transaction to ensure that you understand any income tax consequences as surprises are never fun. You would also need a Qualified Intermediary to administer your tax-deferred exchange transaction.
In Northern CA, title and escrow are under the same company so yes you will want to use a title/escrow company. The standard for who pays for this as well as county/city transfer taxes varies on the city the property is in. In regards to commissions, they are always negotiable. Being an agent myself, I'd obviously recommend agent representation to make sure that you don't miss anything in the transaction. They will act as an intermediary between you and your buyers.
@Ariel Vincent - thanks and yes that's my thoughts too with my agent, I'm probably going to have him do this when the time comes, too many things to consider.