Cash vs LOC acquisition strategies

4 Replies

I am fairly new to Real Estate investing. When our daughter started college instead of renting, we found a good deal on a condo and decided to purchase it. We rented out the second bedroom and it worked perfectly while she was in college. Once the condo was paid off we took out a line of credit secured by the condo. We used this line of credit to buy several single family homes in need of help. We also used the LOC for the rehab, and then finished the BRRRR strategy.

Because of HOA fees, we are going to sell the condo. My initial thought was that we would use a 1031 exchange and buy a like property. I had a thought however, about instead of putting the cash into another property.... using it as a seed money. This way we could pay cash for the purchase and rehab, then finance. My thought is that this will give us an advantage with REOs and making deals happen quickly. This could also serve as an additional safety margin if ever needed. I realize there are obvious tax implications. Thoughts?

@Joe Surber How much is your sale proceeds going to be? If it is a small amount, the implications will be little. I would 1031 into another multifamily property and grow your wealth. You could then use the rental income as seed money.

@Joe Surber , Congrats on getting one through college. 

The process you describe actually can be done still using the tax deferral. It's a process called a reverse exchange. And in your case a reverse improvement exchange. The statutory order of a 1031 exchange is that you cannot take title to the new property until you close the sale of your old property. And you cannot 1031 into improvements on property you already own.

A reverse exchange allows you to control and improve a property before you take title.  Your old property would sell and the proceeds go into your exchange account.  Then you would find your new property and your qualified intermediary actually uses your exchange proceeds to take title to the new property in a 3rd party entity called the exchange accommodating title holder (EAT).  And more proceeds  are used to improve the property (you're doing the improving).  

Once the improvements are done (and within the 180 day exchange period) you take title to the new property which is now worht the value of acquisition plus improvements.  And as soon as you take title you can then refinance and go to the next property.

Reverse exchanges are more complicated and expensive.  But if you're looking to do significant improvements and want to use your exchange as seed money this would still keep everything tax deferred.

Another option would be to do a regular 1031 exchange but use the proceeds to buy two or more value add properties.  You'll need to find the money for improvements from another source but this would save you the extra expense of a 1031 and leave you with properties lined up to improve.