Buy multiple SFR or MFR with a 1031 Exchange

Livermore, CA · Member since 2016 · 72 posts · 11 votes

Hi,

I am looking to sell one of my property's and use the 200k in equity to do a 1031 exchange. I am contemplating if I shoudl use that money to buy multiple SFR or 1 MFR. I am thinking the best approch is to use the 200k as a down payment and finance the rest.

I am looking at markets such as Indianapolis, IN, Kansas City. MO, and possibly St Louis, MO.

Does anybody have any thoughs or experience in those marketsl. Has anyone does this before that can help me figure out some of the details.

Thank you in advance and Happy investing!

Israel Robles

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Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

@Israel R., Logistically speaking you'll be better off buying fewer properties with your 1031. That eases the stress of the time limits and let's you select properties that truly fit your criteria. In addition it let's you then take all the time you want to look for other acquisitions.

The way you can do this is because the IRS is requirement to fully defer all tax is that you purchase at least as much as your net sale and you use all of your proceeds in the next purchase or purchases. So you can allocate your proceeds any way you choose as long as you use them all and purchase at least as much as you sell.

We don't know what your selling price is but for example assume your selling for $500K So buy two properties to complete your exchange. Purchase a $100K property for cash and use the remaining $100K as down payment for a property worth $400K. You've completely deferred all tax. You've actually mitigated a lot of risk by having an all cash property on the sidelines. You've increased your ROI by having a highly leveraged property. And you can now refi at will and use the cash as a down payment on more properties as you find them without the stress of the 1031 clock.

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Garrett Hogan
Developer · Boston, MA · Member since 2014 · 88 posts · 56 votes
8y
Israel, my advice would be to buy a multifamily with the most amount of units you can afford for the money you have pending the due diligence checks out obviously. Buying multiple single family rentals are hard to manage, whereas with a larger multifamily, you only have 1 building in 1 location to manage. Also, when a single family property is not rented, the cashflow is 0. If you have multiple units you will still have cashflow, albeit lower than normal.
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Garrett Hogan
Developer · Boston, MA · Member since 2014 · 88 posts · 56 votes
8y
oh and talk to @ryandossey about Indianopolis. Thats his market and he buys a ton of rental properties there
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Logan AllecBusiness Member
Accountant · Los Angeles, CA · Member since 2014 · 1k+ posts · 980 votes
8y
@Israel R. Is the property you're thinking of selling in California? If you're 1031ing California property into non-California property you need to watch out for the California clawback. The gist of it is when you sell your out-of-state replacement property (assuming it's in a taxable transaction) you have to pay California tax on the gains generated on the California property and of course (depending on the state) pay tax on the same gains to the other state. You have to file FTB Form 3840 every year to track it. Lots of folks miss this. However there may be an opportunity to utilize tax credits to if not eliminate then mitigate some of the double taxation. Good luck!
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Israel R., Logistically speaking you'll be better off buying fewer properties with your 1031. That eases the stress of the time limits and let's you select properties that truly fit your criteria. In addition it let's you then take all the time you want to look for other acquisitions.
The way you can do this is because the IRS is requirement to fully defer all tax is that you purchase at least as much as your net sale and you use all of your proceeds in the next purchase or purchases. So you can allocate your proceeds any way you choose as long as you use them all and purchase at least as much as you sell.
We don't know what your selling price is but for example assume your selling for $500K So buy two properties to complete your exchange. Purchase a $100K property for cash and use the remaining $100K as down payment for a property worth $400K. You've completely deferred all tax. You've actually mitigated a lot of risk by having an all cash property on the sidelines. You've increased your ROI by having a highly leveraged property. And you can now refi at will and use the cash as a down payment on more properties as you find them without the stress of the 1031 clock.
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Israel R.
OP
Livermore, CA · Member since 2016 · 72 posts · 11 votes
8y
@Garrett Hogan I am staring to lean more to MFR for that reason as well. I could focus my time and energy in less properties in order to find better performing ones.
@Logan Allec Yes, the property is in California. I have never heard of that. I was not planning on selling the property, but keep doing a 1031 exchanges in upgrading to other properties.
@Dave Foster I agree with you the less the properties the less the headaches as well as focus on MFR that preform better than SFR. I haven't heard of that strategy to buy a property cash to minimize the risk. I have always thought the least you can pay on each property the more you can maximize your buying power.
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
8y
@Israel R., That's true. But the timing requirements of the 1031 exchange are tight enough that sometimes buying a property for cash to satisfy the requirements is a good plan. Because you can immediately refi that whenever you want to buy your next property.
So if you are someone who loves maximum leverage you can still do that but without the restrictions of the 1031.
If you are someone who wants to be more risk averse you split your properties between those with minimal leverage and those with maximum leverage and then enjoy a blended rate that is in between the two.
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