Best practices for timing a 1031 in a hot market

19 Replies

I have equity in a San Diego property I’d like to leverage in a 1031 exchange to a multi-family in Nashville.

I have not yet found the right deal on the multi-family in Nashville. If I find the deal then try to set the house up for sale I am pretty much guaranteed to lose the deal. Though Nashville is a very hot market, and it might take me a while to find the right deal on a multi-family. If I sell first I might end up without a deal to transfer into. It seems like there is no good way to set the exchange up in a stable manner. Is there something I am not understanding about how this exchange is structured? Or are there accepted contingencies I can put in place? 

Any insight would be most welcome! 

Try to find a deal in Nashville that will cooperate with your 1031 exchange, someone who can wait a little while for your San Diego property to sell (probably not something that's on the MLS). When you find that target, turn around and get your San Diego property sold and then close the 1031. Make sure you get the timing right.

Find the Nashville deal and make it contingent upon your San Diego property selling. It would take some finagling but with a properly motivated seller it could work. You'll be negotiating with another investor so at least they should understand what you're trying to do. 

Thanks @Peter M. , @Brendon Woirhaye

That makes sense. Though to be realistic, in a market where investors are in a feeding frenzy over the deal types I'm looking for, what are the chances someone will actually agree to sign a contingency?

It depends on the seller's motivation.  If they are looking for a 1031 too, the contingency or delay may work to their advantage too.  If they are looking to cash out, a difference of a couple months may not be material.

I live in Nashville. It's pretty crazy here. You should ask to join the Facebook group REIN (Real Estate Investors of Nashville). Everyone is there. Once your in the group you can post a question and people will perk up. Keep in mind, everyone wants to win. 

Should be a picture of a kitchen

I can say with certainty no one in Nashville is going to go for an offer with a 1031 exchange clause. It just is to crazy here. I guess someone may if you are over paying for the place... I sold a house in December in 37208 and I had multiple cash offers in several days.  I was in contract with someone who after the inspection period wanted 3k in repairs. I said no went to the back up full price cash offer and closed in a week. There isn't much room in this market for negotiation. I thought about attempting a 1031 exchange with the proceeds from that sale, but didn't. It took me 4 months to find a property to buy and I had to go out to Murfreesboro. Looking back I guess I could have waited to sell until I found a property to exchange with. Honestly, I was shocked how quickly it sold. I also had a loss from a property I sold in Knoxville earlier in  2017 so I was hoping to sell in the same calender year. Good Luck.

Thanks for the Facebook tip.

@Ben McCall , @Carrie Carlton , I’m hoping to use the 1031 to finance a multi-family commercial at around 1-1.2M. 

Are those markets just as hot? 

I am not going to pretend to be an expert in that arena. I own small multifamilies  (4 and under). I have perused Loop net from time to time and it seems like small pickens. 

Nashville, as others have said is a very hot market - and yes for $1-1.2mm multi-family too. Probably one of the hottest in the country.

You can do a reverse 1031 Exchange if you have the capital. 

If you go the traditional 1031 route - build relationships and start getting deals sent to you, then, when you feel ready, list your property and really start hounding for your purchase. If your SD property gets under contract, just push the closing date back as far as possible. If you haven't found something before closing, then try to push it back another few weeks. Once it closes you have 45 days to identify 3 properties. 

Thanks @Todd Dexheimer , that's great advise. 

Once my marketing and networking start showing fruit in Nashville, I'll set the trigger for San Diego. 

Ideally, I'll try and line up multiple potential deals in Nashville, so If I fall out of one I'll have backups as SD closes. 

I'm able to push things to 1.7-2.0mil with some additional personal risk, does that clear up the waters a little, or is it "chump change" at this point and not worth the risk? 

@Dori Arazi , No, you get the pain points of a 1031 pretty well.  And 45 days isn't a lot - although honestly these days real estate has become a commodity and I'm observing that the 45 days is more of a psychological than a structural hindrance for a motivated investor. 

As @Todd Dexheimer said a reverse exchange can be used.  But I wouldn't give up on the contingency route too quickly.  It never hurts to ask.  And while I do get that we're in a sellers market so sellers are less enthusiastic about accepting contingencies, don't forget that you're a seller too. 

So selling and requiring a contingency with a floating closing date for you to find your replacement is not a bad thing to explore at all.  Most buyers are perfectly fine to lock in their price get to wait for your 1031 - it's free appreciation to them.

Your best bet is to do a Monetized Installment Sale. This is a way to structure the sale so that you can get cash at closing and defer the taxes for 30 years. You can take your time and find your next investment. And the best thing is that you'll start the new investment with a fresh depreciation schedule. 

@Dori Arazi

Just dropped you a PM on a potential deal that might work at that price range. 

The 45 day clock to identify your Nashville properties doesn't start until you close on your SD property sale. I'd start looking in Nashville while you put your SD property on the market. You can easily drag the closing out 45 days, so even if your SD property goes under contract immediately, you'll have 90 days to identify your three candidates in Nashville.

@Dori Arazi Everything is way overpriced to be honest. What @Carrie Carlton said. Growth is good. Bursting is not. We're bursting. I'm just getting ready/educated for when it slows down.

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