1031 exchange and commercial loan

5 Replies

Our tenants will be moving out in a few months which prompted us to think about what we wanted to do with our rental property. It's only been rented out for 2 years and it's gained quite a bit of equity (approximately $400k).

We have 2 options in mind. One is to find new tenants and keep renting it out. The other is to 1031 exchanging it into a commercial apartment complex in a less hot market. The idea of 1031 exchange is appealing because it'll likely help us scale up our portfolio. My main concern is how we're going to qualify for a commercial loan since we have a relatively high debt to income ratio since we have mortgages on a couple other properties already. I understand that it usually requires a 30-35-% down which we can do after we sell the current property.

Thanks for your feedback. 

@Kin Leung -

Go talk to a lender and explain to him/her your situation until you find someone that would be willing to entertain your request contingent upon you receiving the equity from the sale of your current rental. While debt to income is obviously a key factor in approving a loan, I'm assuming you'll choose a property that improves your debt to income ration (because it should be making you money, correct?)

1)For the 1031 to work you will have to make sure your title company is aware that you are going that route PRIOR to getting to close.

2) You will receive NO cash from the sale. The net funds have to be stay with the 1031 Exchange agent and applied in WHOLE toward your next purchase. This really isn't an issue so long as you can find a property in the alotted time frame (45 days to identify as many properties as you may be interested in and 180 days to close on one of selected properties).

Good Luck, sir!

Thanks for your feedback. I'll look into speaking with a lender. In the meantime, I've heard that with commercial lending, lenders tend to care less about one's personal debt to income, at least compared to residential real estate. Any truth in that?? 

I wouldn't say they don't care. They take the whole picture into account. However, it's not as scrutinized as residential lending because it's not as heavily regulated. For example a lot of residential mortgage loans have DTI limits of 43% , in the commercial side of your DTI is 60% but you have left over margins of 15,000/mo. After all debts are paid, does it matter?

@Kin Leung Commercial lending puts a large emphasis on Net Worth and Liquidity.  Most commercial loans for multifamily properties in the $1mm-$5mm range will require a net worth requirement, in total for the ownership group, equal to or greater than the loan amount.  Feel free to PM me on any other commercial multifamily financing questions.

@Kin Leung , A good lender will be able to proforma your loan and as long as the actuals stay true you should be fine.  The lender needs to know your intent to sell and how that will affect your balance sheet once property is sold, debt is paid off and remaining equity is with your 1031 intermediary.

Lenders like 1031 investors because down payments are secure inside the 1031 and sourcing and verification of funds is easily done.

Get your model numbers together from your realtor and go talk to a banker or two

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