1031 exchange to what type of asset?

7 Replies

Plan to sell two SFH for an 1031 exchange. Never done any 1031 before. Need your input on what type of asset to go after. I know 1031 exchange has time pressure. I better to do a lot of homework ahead of time to narrow down a certain class of asset, its geographic location etc, before selling my existing SFH. Two SFHs would like to sell: one is in Bay Area with base 450K, now worth 1.3M which is only renting for 3.7k/month. Another one is in NC with base 265k, now worth 380k which is renting for 1.8k/month (this one can be optional as it doesn't have much taxable gain anyway). Both are currently in Month by month lease. Hope the new asset (target value 1.7M or a little more) would be:

1. Easy to manage

2. Prefer to be located in CA, close to NorCa is prefered or maybe stretch to Reno, NV that still would be in driving distance.

3. I am not looking for super high cap rate.  Reasonable is ok.  Key is stable and low risk (Not looking for partner or joint venture that seems would increase the risk)

So what type of investment and geographic location I need to look for?

I would try to stay away from CA for the near future as the effects of the shut still have to be realized in large parts of the state. Would you ever consider AZ? You could go for smaller multifamily near Scottsdale or Phonix and self-manage or get a property manager. I have clients that operate in that market and have had lots of success there. If you are going to 1031 exchange NNN or multifamily would be the easiest/best bet.

@Jim G. , Since you're attempting to do a consolidation from 2 - 1 larger you'll be really well served if you can get under contract for whatever you want before your old properties close.  I know the cry is that sellers never give contingencies these days.  But that's not entirely true.  You never know what is in a sellers mind.  And you will miss 100% of the shots you don't take.  So if you find the right property try to get it under contract.  You can go into contract for your replacement before your old property closes.  You just can't take title until you close your sales.

If that fails then don't forget you're also a seller.  And you may want to sell your old properties contingent on finding the right replacement.  There are many buyers willing to wait out there right now as long as they know they'll get their property eventually.

Those two things can ease some of the calendar angst that goes with the 1031.

@Jim G. 

@Dave Foster is absolutely right about you being able to call your own shots as a seller. In our brokerage, which was founded by an investor and is very investor friendly, we created a seller contingency addendum. Basically it details what has to happen for the seller to complete an accepted contract. In your case it would be giving you the time to identify and go under contract for a target property.

Because you would already be under contract for the properties you are selling, your purchase offer will be much stronger. I recently advised a seller to take a contingent offer (highest price among 4 offers) because the buyer's home was already under contract and had passed inspections and appraisal. It was a smooth transaction.

We have lots of California investors looking at Metro Phoenix now. And I can recommend a good property manager, so keep us in mind.

And thanks @Brandon Despras for the shout out to Scottsdale!

Melanie

Thanks for all the response! @Brandon Despras AZ is a good place to consider. As a matter of fact I still have a SFH in Phoenix which is one of my best return. In terms of NNN asset, do you have more specific? I learned before that typical big box retailer such as CVS, Walgreen lease building in NNN. But this pandemic changed the dynamic. I have huge concern of any retailer asset. Or may be it is good time to get into it since it is depreciated? @Dave Foster @Melanie Johnston thanks much for these operational advice.  You are ahead of me.  I would ask these type of questions when I identify what type of asset and geographic location I want to invest in.  At this moment, I focus on strategy such as asset type and location etc.

@Melanie Johnston hey if you want to connect let me know! I work the Charlotte NC market but I was a broker/ investment manager in San Diego prior to moving to NC. Scottsdale was runner up but I lived in a desert before and I can't handle 120 degrees! Visited a bunch and been to some football games! I would invest in the area after I finished my 2021-2022 goal in NC. 

@Jim G. it comes down to what's on the market and what fits your goal. NNN's are very common for larger companies anything from the service industry (fast food/coffee shop) to high-end & lower-end retail. I would focus on the company and what space they operate in. CVS is a great play long term as a company/stock play and with them being an essential business that is something to pay attention to. I would review LoopNet & local MLS of the market you choose and take it from there. Find a commercial broker that focuses on NNN and they will be able to help.

@Brandon Despras Would love to connect! I lived here the summer it hit 124 and the planes had to be grounded at Sky Harbor International Airport.

After living through that, 110-115 is a piece of cake  ; )

Maybe you'll invest in an STR here so you can enjoy the cooler temps and all the fun!

Looking forward to future conversations,

Melanie

@Jim G. We are in the middle of one of the 1031s in similar situation and swapped bay area investment with Florida new construction properties. It seems like you already have OOS investments In CA or OOS for ~1.8m, you may want to think about investing in commercial asset to get predictable and stable 5-5.5% cap which will still get you a decent upside from your current returns, primarily because you will be putting the appreciation money to work. Commercial leases are a lot longer, stable and less headache than the residential properties. If you are leaning however towards the residential, considering OOS or central CA especially near new railway line project may makes sense.