A victim of my own success

5 Replies

So, not many years ago I decided that I was going to break the corporate bonds. I wasn't going to be a slave to "the man" my entire life. I wanted to generate enough passive income to be free once and for all. I discovered bigger pockets, bought some books and I began buying rentals.

Without providing a long drawn out explanation of my positions, just know that I have three 4 unit buildings now, a total of 12 units, all excellent deals, all cash flowing. I get to keep a little over 50% of rental income each month after mortgages, bills and repairs. I can survive on my own without a job now if I want but I'm certainly not going to be living high on the hog if I do.  

So now I'm ready to make the next step. I want to grow beyond covering all my bills and having a little spending money. I want to push it to rich af levels.  The problem that I'm running into is I don't know which direction to go.

Scenario #1:

I recently found a deal for a 22 unit building that I'd have more than 25% down for if I did a 1031 exchange with two of my current buildings. This would take me from 12 units to 26. 

The problems with this plan are 

1. I've never done a 1031 exchange so I have no idea how to 

2. I don't know if I'd even qualify for a loan 

3. I'm not sure the building will still be for sale long enough for me to sell these two buildings 

Scenario #2

I keep saving until I have enough for another downpayment on another four family and continue to rinse and repeat this for years. The issue I run into here are limits on how many mortgages I can have in my name from various banks.  

Scenario #3

????  I'm open for suggestions 

It seems like the more successful I become with rentals the harder it gets to buy them each time. It seems like I'm reaching a point where if I don't just have enough cash to buy the building outright, it's not going to happen. 

So my question is, has anyone else experienced this? I can't be the only person having initial capital issues.   

@Anthony R. these are good problems to have! I really enjoyed reading your story! If you research 1031 exchange there's a guy from Florida, Dave Foster, who comments all the time and is very knowledgeable (I can't tag him because we aren't colleagues but hopefully he chimes in). I would reach out to him. From what I've read you can do reverse 1031's, you can put that 22 unit under contract and put a contingency in there that you need to sell  your units, you can pull a line of credit on your current portfolio...I think you have a lot of options. As far as qualifying for a loan you probably should hop on the phone and start calling lenders....local credit unions, commercial lenders, etc. 

With scenario 2 you can do a cash out refi on your current units and take that money to acquire more units...ideally utilizing the BRRRR strategy so you can keep growing faster and faster. The limit with mortgages is small issue. There are many ways around this. Do you have a wife who can qualify for loans too? You could do twenty between the two of you. Eventually you will need to utilize commercial lenders. I've read of a lot of people on here refinancing their whole portfolio into one loan to free up their 10 convential loans. Obviously the convential fannie/freddy loans are the best interest rates and terms but commercial rates aren't terrible....especially when compared to historic rates. I have a guy who said their long term rates start at 6%, not sure on length of time and balloon payments etc.

Scenario 3....you could tap into some of your equity on your current portfolio and your primary residence if you have one and start doing BRRRR's and flips to generate more capital and more buying power.

@Ryan E. Thanks for the response! I'm familiar with putting contingencies on contracts, I have no idea why it didn't occur to me to make the 1031 a contingency, that's pretty brilliant. That would definitely work if the seller goes for it. 

I house hacked my first two buildings first with a VA loan then with an FHA loan. I refinanced the FHA loan into a conventional loan to drop the PMI a couple years ago. Building 3 is a conventional loan, I earned the 25% down for it with bitcoin :-D So I'm all about doing what I can to make this happen.

@Anthony R. thanks! I’d love to be where you are. I found BP a couple of years ago and am on my way! I hope the apt deal works out for you! 

@Dave Foster is the 1031 guy and may be able to provide some insight here on steps necessary / difficulty level to 1031 from 2 4-unit buildings to 1 22 unit building.

@Anthony R. , Thanks @Ryan E. and @Michael Bishop for the kind shout out.  My ears were burning!

Anthony what you've got here is a pretty classic scenario for a "consolidation exchange".  In other words you're going from two smaller assets to one larger asset.  This is done many times to take advantage of the economies of scale in owning larger assets.  

The key is to think of this as really two exchanges (unless you sell both buildings as a portfolio - then it could still be one exchange) and using the proceeds to purchase part of a larger asset with the proceeds.  

I doubt if financing is going to be an issue.  Lenders love the locked up aspect of 1031 exchange proceeds as long as the rest of the picture looks good.

The two things you'll want to watch out for are:

1. timing.  Since you may be combining two exchanges you'll have to pay close attention to the identification windows to make sure your identifications are valid.  In essence the most important dates are going to be the dates of the sale that happens first since those are the dates that will expire first.

2. Reinvestment - In order to completely defer all tax you need to purchase at least as much as your net sale.  So if each of your smaller buildings were $400K then in order to use both and fully defer all tax you'll need to purchase a building for at least $800K to absorb both of the sales.

The 1031 process is a little detailed but that is what your QI is there for.  And they're certainly not expensive at all generally.  Well worth looking at if getting rid of those two properties is on your horizon.

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