$55K in 1031 - DST vs. Turnkey | Analysis & Discussion
Most Popular Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes@Andrey Y., congrats on the successful investment. I'm staring down the same hole--I have a couple of houses that I bought in the early 2000s and refinanced not long before the 2005 market peak. Got way more out of them than I had into them, then had to suffer through negative equity for about 6 or 7 years. Now I can sell them but with depreciation and the refinances I'll net just enough to pay my taxes. So I have essentially two choices--hold them for another ten years and let the debt amortize down more, or sell them and add outside cash to a 1031 to buy something else. But what else? Beats me...now that I buy mostly 150+ unit buildings, buying houses in my personal portfolio is about as exciting as a prostate exam. One thing is for sure, I have no plans to buy a DST nor a TK, so I guess that leaves me with option 2, sell, add some cash, and buy a 10-unit or something. I'm just not anxious to endure the exercise.
I wish I could guide you on what to do here--seems like Door #1 and Door #2 is a choice between two not-so-great alternatives. Maybe Door #3 for you is to 1031 into a 4-plex or some other small income property and hire a property management company??
21 Replies
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Around December of 2018 / January of 2019, I got a new tenant. Let me add that I was always self managing my rental portfolio in HI. This tenant was placed either by my boots on the ground or parents, I forgot.
Throughout the rest of 2019, it was clear that these particular tenants were getting further and further behind on rent, and were going to be in trouble. They paid late every single month, and their church paid at least 3 of the months in 2019 by October.
I knew that this wasn't going to end well. Basically I wasn't on the island and I had sporadic help. By early November, I was on the phone with several attorneys about what I should do and how to proceed with eviction. These tenants did not respond to ~80% of our communication, and the rest they maybe responded to 1-2 weeks later.
Long story short, I got partial rent for October and no rent for December. The tenants vacated the property on Dec 24th, one day before Christmas Day.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
I was managing my rentals in Hawaii from abroad for many years now, with few hiccups except for this. I have also started investing heavily in private placement syndications since around 2017 which have been great investments. No management headache AT ALL and a small time to vet the sponsor up front.
I paid a contractor around $2000 to touch up a few things and paint the entire place. I was ready to sell. I believe this was early 70s construction, and most of the unit was in original condition. I had already made several multiples of my initial DP in PROFIT (not to be confused with "cash flow"), so it was time to exit.
We listed the property around Feb. 2020, and two weeks later we were in escrow. Whew! We closed escrow around April.
I decided to do a 1031 exchange. Since I have done two cash out refinances, most of the profit was already realized tax-free. Therefore, the from the ~$52K in proceeds from the sale, roughly ALL of it would have gone to pay Hawaii state and Federal capital gains tax. So doing a 1031 was a no-brainer.
Now, it was and is time for me to decide what to do with the proceeds.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Lets talk about the only time I lost money on a real estate deal. I know, I know @Jay Hinrichs - if I lost money only once, I haven't been doing it long enough..! ;)
https://www.biggerpockets.com/forums/311/topics/656274-growth-equity-group-how-170-investors-were-scammed
The details are in the link above. I will spare the details. Growth Equity Group is a predatory company (now dissolved but practicing the same thing under other names), who have been involved in many lawsuits. I have talked to more than 4 people on the phone who have lost six figures individually by getting involved with GEG. The details are in my OP in the above link.The only other time I purchased a "Turnkey" property, was a property in Little Rock, which I still own and my feeling on it is; "Meh.." That sums it up, I again paid about $10-15K above market value, but I am very happy with the management team on board. This property throws off ~$300 in "cash flow", property half of which will be left over after future CapEx.
I started to research about Delaware Statutory Trusts (DSTs). This would be my only option for the 1031 proceeds if I wanted a "hands-off" passive investment, as opposed to buying a property that I would be actively involved in, even if I hired a PM.
For the last 6 weeks since my property sold, I was SET that I would invest in one or two deals in a DST and be done with it. Lately.. I was starting to have 2nd thoughts.
The first 1031 exchange deadline is to IDENTIFY the property or properties to exchange into. This is normally 45 calendar days from the day you sell your RE.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Good news! The deadline to identify a new property for the 1031 was extended to July 15th! In light of the Covid-16 concerns. I guess them seem to like this date :P
You need to use at least the same amount of equity AND at least the same amount of debt for the new real estate you will 1031 into. I was around a 77% LTV because of the very recent refinance.
The way the DST option was presented to me:
- Half of the 1031 proceeds would have to go into a high debt DST, which is relatively uncommon. Most DSTs are around 60-65% LTV at the most. This was a international insurance company office deal. It would throw off exactly $0 in income and all the generated cash would be used to aggressively pay off the principal on the loan. I wouldn't expect more than a 5-6% IRR long term on this.
- The other half of the DST would go into a asset class of my choice. The ones that were presented were:
- Student housing - Umm.. this is a "no!" given the current situation - Self storage (couple options) - Dialysis centers (couple sets of dialysis centers)
I would estimate that this half of the investment would generate a 8-11% IRR long term. Not too excited but the DST investment is totally passive.
The alternative would be to purchase a Turnkey asset (1 or 2 properties). As passive as "actively investing in real estate" gets, I presume. I told myself around 2018 that I would never purchase another rental again! I was convinced it would all be syndications from here on out..
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
The two companies I am considering for purchasing a Turnkey property (both are big names in the industry)
- JWB
- Mid South Home Buyers
JWB would likely be one $200K or two $140K properties in Jacksonville. Mid South would be two properties in Memphis, TN. If we are looking at $65K properties, that around 3 of them that can be purchased! (hmm..)
I am hoping to get some feedback on how I should consider investing the proceeds of the 1031 exchange. Options being either the DST route or the Turnkey route.
@Brian Burke @Account Closed
I value everyone's feedback and I appreciate your input on this. Given the deadline extension, this feels like its dragging a bit and I want to make a decision NLT 15 June. Because I would have to get under contract BEFORE 15 July ideally (if I choose the Turnkey route)
- Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes6y
@Andrey Y. - I sent you a PM.
- 6yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
the refi proceeds along the way are NOT tax free they are tax differed ergo your need to 1031 to avoid cap gains tax.
from what I read about the DST those you must choose the team very wisely as you lose all control.
not sure if any of the syndicators you tagged above have any projects that will allow small 1031 investors into their deals.
TIC's used to be pretty common then I think things got a little tougher from the regulatory aspect.
Personally I would avoid low value assets and keep buying nice stuff that has a good chance of going up in value
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Justin Tahilramani:
@Andrey Y. - I sent you a PM.
Roger. Will get to it in a bit.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Jay Hinrichs:
the refi proceeds along the way are NOT tax free they are tax differed ergo your need to 1031 to avoid cap gains tax.
from what I read about the DST those you must choose the team very wisely as you lose all control.
not sure if any of the syndicators you tagged above have any projects that will allow small 1031 investors into their deals.
TIC's used to be pretty common then I think things got a little tougher from the regulatory aspect.
Personally I would avoid low value assets and keep buying nice stuff that has a good chance of going up in value
Thanks Jay.
For the standard syndications, it sounds like you would need at least $500K-$1M in your 1031 for them to entertain you as sizable partner in a syndication (I believe a fraction becomes a TIC interest), but alas, my deferred funds are rather small so doesn't look like that is an option.
I'm looking to use leverage so either it would be a property with say 25% down, or this DST thing. Or maybe some other partnership.. any ideas? Was trying to get away from being a landlord but obviously doing a 1031 was a no brainer and all of the sale proceeds would have went to paying taxes if I didn't..
- 6yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
Originally posted by @Andrey Y.:
The two companies I am considering for purchasing a Turnkey property (both are big names in the industry)
- JWB
- Mid South Home Buyers
JWB would likely be one $200K or two $140K properties in Jacksonville. Mid South would be two properties in Memphis, TN. If we are looking at $65K properties, that around 3 of them that can be purchased! (hmm..)
I am hoping to get some feedback on how I should consider investing the proceeds of the 1031 exchange. Options being either the DST route or the Turnkey route.
@Brian Burke @Account Closed
I value everyone's feedback and I appreciate your input on this. Given the deadline extension, this feels like its dragging a bit and I want to make a decision NLT 15 June. Because I would have to get under contract BEFORE 15 July ideally (if I choose the Turnkey route)
Andrey,
First let me point out what a great investment you made in the original $150k condo in Hawaii. I've read your posts on other forums, but this is the first time I've seen the detail on that particular property. Congrats. That was a fantastic investment that appears to have paid off multiple times for you.
As for the particular question you asked, I am familiar with both companies. They both are well run and have very respectable teams in place. I do not think that you will find issues with either company and certainly not like GEG. If I were in your shoes today, I would lean toward Jacksonville, but only because of personal experience in lower price points. I had to endure several very tough years from 2008-2010 due to being heavily invested in lower-price properties in very challenged parts of Memphis. The JWB team is very good and I personally like some of their newly built inventory and some of their infill projects. They have a big profile locally and an experienced team. We've masterminded together multiple times and still connect to share on challenges and successes.
However, I often speak with investors who want to invest in lower-priced properties in Memphis and some of these same challenged areas that I had experience with and Mid-South is a company I suggest they speak to. I have a lot of respect for them and think they do an excellent job in these areas. My past pushes me to personally invest in different properties and areas that are generally more expensive, but I recommend Mid-south without hesitation.
I'm not sure that helps much, but I wanted you reassure you from someone who has been in the industry for almost 20 years that both of these companies are well-run and if they meet your investment criteria, should be good choices. Again, congratulations on a successful investment and best of luck with your next moves.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes6y
Originally posted by @Andrey Y.:
We listed the property around Feb. 2020, and two weeks later we were in escrow. Whew! We closed escrow around April.
I decided to do a 1031 exchange. Since I have done two cash out refinances, most of the profit was already realized tax-free. Therefore, the from the ~$52K in proceeds from the sale, roughly ALL of it would have gone to pay Hawaii state and Federal capital gains tax. So doing a 1031 was a no-brainer.
Now, it was and is time for me to decide what to do with the proceeds.
Based on the way things are worded above, just want to make sure that you actually made the decision to do a like-kind exchange before closing escrow and that your funds are currently being held with a QI as we speak?
BTW, congratulations on the awesome return you got on your property. Your story sounds similar to one my properties except mine was in Los Angeles and did a like-kind exchange at the end of 2018. No way in hell was I going to pay that kind of tax....both Federal and State.
I know based on reading some of your other posts that you are a fan of syndications for accredited investors. Do you have any interest in Opportunity zones? In order to get the max reduction in capital gains (15%), you would have needed to invest by 12/31/19. But you can still invest this year and get a 10% reduction. Either way, you'd be deferring ALL your tax liability till 2026. Of course, the downside is that this would only apply to federal tax and you would still be liable for depreciation recapture.
Personally, turnkeys and DST's don't interest me at all. I especially would not want to exchange prime Oahu real estate for Midwest properties that aren't going to appreciate very much. As for DST's, when I did my 1031 exchange, I looked into them and concluded they were more of a last resort option for me. Maybe when I'm 65 and want to go on a permanent vacation, I'd consider DST's, but right now it's way too early for me to be investing in them.
- 6yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Andrey Y., congrats on the successful investment. I'm staring down the same hole--I have a couple of houses that I bought in the early 2000s and refinanced not long before the 2005 market peak. Got way more out of them than I had into them, then had to suffer through negative equity for about 6 or 7 years. Now I can sell them but with depreciation and the refinances I'll net just enough to pay my taxes. So I have essentially two choices--hold them for another ten years and let the debt amortize down more, or sell them and add outside cash to a 1031 to buy something else. But what else? Beats me...now that I buy mostly 150+ unit buildings, buying houses in my personal portfolio is about as exciting as a prostate exam. One thing is for sure, I have no plans to buy a DST nor a TK, so I guess that leaves me with option 2, sell, add some cash, and buy a 10-unit or something. I'm just not anxious to endure the exercise.
I wish I could guide you on what to do here--seems like Door #1 and Door #2 is a choice between two not-so-great alternatives. Maybe Door #3 for you is to 1031 into a 4-plex or some other small income property and hire a property management company??
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Chris Clothier:
Originally posted by @Andrey Y.:
The two companies I am considering for purchasing a Turnkey property (both are big names in the industry)
- JWB
- Mid South Home Buyers
JWB would likely be one $200K or two $140K properties in Jacksonville. Mid South would be two properties in Memphis, TN. If we are looking at $65K properties, that around 3 of them that can be purchased! (hmm..)
I am hoping to get some feedback on how I should consider investing the proceeds of the 1031 exchange. Options being either the DST route or the Turnkey route.
@Brian Burke @Account Closed
I value everyone's feedback and I appreciate your input on this. Given the deadline extension, this feels like its dragging a bit and I want to make a decision NLT 15 June. Because I would have to get under contract BEFORE 15 July ideally (if I choose the Turnkey route)
Andrey,
First let me point out what a great investment you made in the original $150k condo in Hawaii. I've read your posts on other forums, but this is the first time I've seen the detail on that particular property. Congrats. That was a fantastic investment that appears to have paid off multiple times for you.
As for the particular question you asked, I am familiar with both companies. They both are well run and have very respectable teams in place. I do not think that you will find issues with either company and certainly not like GEG. If I were in your shoes today, I would lean toward Jacksonville, but only because of personal experience in lower price points. I had to endure several very tough years from 2008-2010 due to being heavily invested in lower-price properties in very challenged parts of Memphis. The JWB team is very good and I personally like some of their newly built inventory and some of their infill projects. They have a big profile locally and an experienced team. We've masterminded together multiple times and still connect to share on challenges and successes.
However, I often speak with investors who want to invest in lower-priced properties in Memphis and some of these same challenged areas that I had experience with and Mid-South is a company I suggest they speak to. I have a lot of respect for them and think they do an excellent job in these areas. My past pushes me to personally invest in different properties and areas that are generally more expensive, but I recommend Mid-south without hesitation.
I'm not sure that helps much, but I wanted you reassure you from someone who has been in the industry for almost 20 years that both of these companies are well-run and if they meet your investment criteria, should be good choices. Again, congratulations on a successful investment and best of luck with your next moves.
Chris, thank you very much. I appreciate you going into that level of detail.
I am leaning towards a Turnkey property (probably 2) with JWB in Jacksonville or maybe a A class property in Vegas.
Are you still selling Turnkey properties? What can I expect being an owner of 1 or 5 Turnkey properties 5-10 years from now?
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Tony Kim:
Originally posted by @Andrey Y.:
We listed the property around Feb. 2020, and two weeks later we were in escrow. Whew! We closed escrow around April.
I decided to do a 1031 exchange. Since I have done two cash out refinances, most of the profit was already realized tax-free. Therefore, the from the ~$52K in proceeds from the sale, roughly ALL of it would have gone to pay Hawaii state and Federal capital gains tax. So doing a 1031 was a no-brainer.
Now, it was and is time for me to decide what to do with the proceeds.
Based on the way things are worded above, just want to make sure that you actually made the decision to do a like-kind exchange before closing escrow and that your funds are currently being held with a QI as we speak?
BTW, congratulations on the awesome return you got on your property. Your story sounds similar to one my properties except mine was in Los Angeles and did a like-kind exchange at the end of 2018. No way in hell was I going to pay that kind of tax....both Federal and State.
I know based on reading some of your other posts that you are a fan of syndications for accredited investors. Do you have any interest in Opportunity zones? In order to get the max reduction in capital gains (15%), you would have needed to invest by 12/31/19. But you can still invest this year and get a 10% reduction. Either way, you'd be deferring ALL your tax liability till 2026. Of course, the downside is that this would only apply to federal tax and you would still be liable for depreciation recapture.
Personally, turnkeys and DST's don't interest me at all. I especially would not want to exchange prime Oahu real estate for Midwest properties that aren't going to appreciate very much. As for DST's, when I did my 1031 exchange, I looked into them and concluded they were more of a last resort option for me. Maybe when I'm 65 and want to go on a permanent vacation, I'd consider DST's, but right now it's way too early for me to be investing in them.
Tony,
Yes, the exchange was set up properly before closing escrow and the funds are being held in a 1031 QI's Trust account as we speak. (Exeter) Ever heard of them?
This was Oahu real estate, but not PRIME Oahu real estate. I have a couple other units on Oahu that I don't want to sell. This was 1972 construction, not in Honolulu, and I noticed FLAT rent growth since 2015. Plus, I am a fan of the saying "No one ever lost money taking a profit!" ;)
The Plumbing, Electrical, and everything else was original, and the 15-20+ hours of mild headaches I got dealing with the tenants at the end of 2019 was the last straw. Might as well take the 4-5 Bagger and run!
I am interested in Opportunity Zones. I am fairly certain they wouldn't accept such a low capital investment. If you know otherwise, please let me know! I would love to participate in ANY sort of passive syndication over an active rental.
Totally okay with taking a 15% IRR where I don't have to hear about any tenants over a 30-35% IRR where I am actively involved in the trenches of the rental. You and I aren't getting any younger. Time is more valuable. You get to know this first hand working in a hospital.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Brian Burke:
@Andrey Y., congrats on the successful investment. I'm staring down the same hole--I have a couple of houses that I bought in the early 2000s and refinanced not long before the 2005 market peak. Got way more out of them than I had into them, then had to suffer through negative equity for about 6 or 7 years. Now I can sell them but with depreciation and the refinances I'll net just enough to pay my taxes. So I have essentially two choices--hold them for another ten years and let the debt amortize down more, or sell them and add outside cash to a 1031 to buy something else. But what else? Beats me...now that I buy mostly 150+ unit buildings, buying houses in my personal portfolio is about as exciting as a prostate exam. One thing is for sure, I have no plans to buy a DST nor a TK, so I guess that leaves me with option 2, sell, add some cash, and buy a 10-unit or something. I'm just not anxious to endure the exercise.
I wish I could guide you on what to do here--seems like Door #1 and Door #2 is a choice between two not-so-great alternatives. Maybe Door #3 for you is to 1031 into a 4-plex or some other small income property and hire a property management company??
Thanks, Brian!
Yes, I agree both aren't the most ideal alternatives. 4-plex.. the question is, where?? If I was moving back to the US this summer, I would get an FHA loan on a $1M four-plex somewhere, put the 1031 proceeds and be sitting pretty. Or even a 10 unit. But, I've been liking East Asia so much (great food and super convenient to do short trips overseas), I decided to extend another year.. so there goes that plan.
Wonder where would be good to buy a multi-unit and hire a PM.. North Carolina near a military base?
Definitely curious what you end up doing.. if you end up selling and doing the 1031 let me know what you buy!
Can't speak much on prostate exams.. but reading a prostate MRI is pretty fun, and painless ;)
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes6y
In my view, this game is all about appreciation if your main interest is creating wealth. If you want to store wealth, Class A TK works.
- Real Estate Investor · Steamboat Springs, CO · Member since 2008 · 54 posts · 33 votes6y
@Andrey Y. You mentioned an interest in Opportunity Zone Funds. Let me know if there are any OZ questions that I can answer for you. Most funds multi-investor funds are limited to accreddited investors. The typical mimimum investment is 100k though many are higher and a few are lower. Our mimimum is 100k as well, though we can waive the minimum at our discretion, especially for an investor who may also have future gains. It's really an issue of needing to put in the time to make sure each LP truly understands the risks and rewards of OZ investing.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Chris Montgomery:
@Andrey Y. You mentioned an interest in Opportunity Zone Funds. Let me know if there are any OZ questions that I can answer for you. Most funds multi-investor funds are limited to accreddited investors. The typical mimimum investment is 100k though many are higher and a few are lower. Our mimimum is 100k as well, though we can waive the minimum at our discretion, especially for an investor who may also have future gains. It's really an issue of needing to put in the time to make sure each LP truly understands the risks and rewards of OZ investing.
Chris,
Do you accept 1031 funds? Please PM me.
- 6yPaul MoorePro MemberCommercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
Hi @Andrey Y.. Like others, I congratulate you on a great investment. Did you make a decision yet? I know the 7/15 1031 deadline is looming. A Delaware Statutory Trust (DST) is certainly a good alternative if you are out of time (or even if not).
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes6y
Originally posted by @Paul Moore:
Hi @Andrey Y.. Like others, I congratulate you on a great investment. Did you make a decision yet? I know the 7/15 1031 deadline is looming. A Delaware Statutory Trust (DST) is certainly a good alternative if you are out of time (or even if not).
Paul, haven't found the DST option to compelling. Most of those deals I can't even fully understand nor explain to someone in simple terms. Didn't get a response back regarding the OZ fund option.
I picked up two brand new construction homes in Central Florida. One should be completed by the end of August and one by the end of September. The numbers look solid and this is all money that would have went to taxes anyway had I not done the 1031.
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