1031 exchange in california 2021 opinion
Member since 2020 · 34 posts · 16 votes
1031 exchange in california 2021 opinion
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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes@Tobias Joneses, The time lines can be daunting. But if it encourages you we're seeing a 200% increase in 1031s just this year. and the fail rate hasn't increased a bit. Planning is important of course. Finding the new property and getting it under contract even before you list or sell your old property can help - You can stagger the contracts either way. But you must close your sale before closing your purchase.
So get the hard part done first - find your replacement and then sell your old property.
Regarding the zero sum game - if it truly is then do not sell. You're just wasting commissions and closing costs. But there are many reasons to still sell that can make it worth your while and increase your ROI at the same time including
1. Accessing 100% of equity to purchase new property at lower interest rates with fixed term financing as a hedge against financing.
2. Going from a higher capital repair potential to a building in better shape at lower risk for cap ex.
3. Changing sector - residential to commercial or multi family.
3. going from something with HOA to non-hoa.
4. selling in a topped out market and buying in path of progress
5 1031ing into something you might like to live in a couple years time. Then selling your old primary tax free and moving into the property with deferred tax so that it stays deferred while the sale of your primary is tax free.
The 1031 Investor5137 Reviews
12 Replies
- 5yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Tobias Joneses, The time lines can be daunting. But if it encourages you we're seeing a 200% increase in 1031s just this year. and the fail rate hasn't increased a bit. Planning is important of course. Finding the new property and getting it under contract even before you list or sell your old property can help - You can stagger the contracts either way. But you must close your sale before closing your purchase.
So get the hard part done first - find your replacement and then sell your old property.
Regarding the zero sum game - if it truly is then do not sell. You're just wasting commissions and closing costs. But there are many reasons to still sell that can make it worth your while and increase your ROI at the same time including
1. Accessing 100% of equity to purchase new property at lower interest rates with fixed term financing as a hedge against financing.
2. Going from a higher capital repair potential to a building in better shape at lower risk for cap ex.
3. Changing sector - residential to commercial or multi family.
3. going from something with HOA to non-hoa.
4. selling in a topped out market and buying in path of progress
5 1031ing into something you might like to live in a couple years time. Then selling your old primary tax free and moving into the property with deferred tax so that it stays deferred while the sale of your primary is tax free.
The 1031 Investor5137 Reviews - Member since 2020 · 34 posts · 16 votes5y
Originally posted by @Dave Foster:
@Tobias Joneses, The time lines can be daunting. But if it encourages you we're seeing a 200% increase in 1031s just this year. and the fail rate hasn't increased a bit. Planning is important of course. Finding the new property and getting it under contract even before you list or sell your old property can help - You can stagger the contracts either way. But you must close your sale before closing your purchase.
So get the hard part done first - find your replacement and then sell your old property.
Regarding the zero sum game - if it truly is then do not sell. You're just wasting commissions and closing costs. But there are many reasons to still sell that can make it worth your while and increase your ROI at the same time including
1. Accessing 100% of equity to purchase new property at lower interest rates with fixed term financing as a hedge against financing.
2. Going from a higher capital repair potential to a building in better shape at lower risk for cap ex.
3. Changing sector - residential to commercial or multi family.
3. going from something with HOA to non-hoa.
4. selling in a topped out market and buying in path of progress
5 1031ing into something you might like to live in a couple years time. Then selling your old primary tax free and moving into the property with deferred tax so that it stays deferred while the sale of your primary is tax free.
Thank you for giving me a substance reply and not something like "you should consult a professional" :)
You make some very good points. The only piece that i'm very hesitant about is getting in contract before selling the investment property. It would be great for me, but in Southern California, people are bidding 10-20% over list with a 17 day close and only an inspection contingency. I don't think they would be willing to take the contingency of selling the investment property first but its worth a shot before I say anything concretely.
I am thinking of waiting because selling high, and buying high == higher property taxes, but lower interest rates, which doesn't really entice me since the loan will be so low.
Very very good points and this was a valuable post. Thank you for that. I'll probably wait to see when more properties come on the market, I'm not down with over bidding so much that it makes the investment cash flow less than what I currently have. It's scary for residential buyers who have to compete with 1031 investors on properties out there. Will be in touch to pick your brain on other things :)
- 5yGrant SchroederPro MemberLender · OR ID AZ CA WA CO NV TN MT · Member since 2018 · 598 posts · 312 votes
@Tobias Joneses, @Dave Foster is right on! I am working with his firm and a client from BP purchasing in AZ. Our client was able to get an off market property so he didn’t have to compete in the open market fortunately. But like Dave said, definitely try to identify a replacement property ahead of time or right as you are preparing to list. It is also good to make sure your lender understands your timelines and sense of urgency. If you have a lender that can help you close in 20-25 days tops, that will definitely help your timelines.
It may be worth your while to do some direct mail marketing to find something off market and ease your timeline worries?
One thing to be aware of when you purchase in California, is that your property taxes are automatically reassessed at the purchase price x1.25% within a year of closing on the new property. When you buy, the property taxes may stay lower in your escrows per the old assessed value since the assessors office is about 1 year behind. So even if that current assessment is lower, the property taxes will jump quickly after a year or so and cut your cash flow significantly. Whereas, if you have held your current property for a while, the assessed value has slowly crept up from where you purchased it years ago. California is one of the few states that this automatic reassessment at 1.25% of purchase occurs because they sure do love their taxes.
- Investor · San Diego, CA · Member since 2018 · 62 posts · 16 votes5y
Many of us CA property owners feel the same way -- i.e. lots of profit, then lots of profit to stick into another inflated property lest Uncle Sam grab the capital gains. I have been planning on out of state, but my idea of "out of state" was the PNW, which is inflated AF as well. I am here reading and learning about markets I previously turned my nose up at, out of state.
I see @Dave Foster has commented and always find his advice timely and useful! I understand there are more than one ways to flex a 1031 - buy with repairs that need to be done, buy a MF with room to expand into more units, etc.
Ah..learning, it's a wonderful thing.
- Member since 2020 · 34 posts · 16 votes5y
@Grant Schroeder @Dave Foster you touched upon pocket listings. I never understood why someone who is selling would want to do a pocket listing especially in this market where you can get a lot of offers? if you're doing a pocket listing in my eyes, you are limiting yourself to just one offer, whereas if you put it on the MLS you could get competing offers and more exposure?
I see it as a way for agents to drum up business giving themselves the idea that you will get a great deal because only we have these secret listings...
- 5yGrant SchroederPro MemberLender · OR ID AZ CA WA CO NV TN MT · Member since 2018 · 598 posts · 312 votes
@Linda West we love all the learning that comes with REI! Have you looked at AZ or ID at al for out of state investing? Tucson, AZ and locations in the Boise, ID metro are still higher in rent, but still slowly trailing behind in price points.
- 5yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Tobias Joneses, You're right. Pocket listings can be beneficial to a realtor wanting to get both sides of the commission. But like everything they have their uses for the seller as well. This market is whackadoo with buyers. But throughout history, smart investors usually held this attitude - "Nothing I have is for sale. And everything I have is for sale". When an investor has a good property they are content to hold it. But in their minds, if a fool and his money come along how can they say no. So a pocket listing can be a very non-intrusive way to test the market without the hassle of officially listing.
It also gives the seller a much stronger negotiation position. Since the property isn't actively listed for sale the buyer has to first "convince you to sell". And then you get to negotiate the price even higher. And while having several competing buyers can be nice, a great negotiator who doesn't feel like they have to do something only needs one buyer at a time.
And in a more stable market a pocket listing can help keep your property from going stale. Everyone wonders what's wrong with the property that has been on the market for 100 days. With a pocket listing you avoid that"what's wrong" issue.
The perfect example would be in a 1031 exchange. A great realtor will know a person or two who have properties they could be convinced to sell in case their 1031 client is struggling to find good properties.
And before I get flamed for suggesting that 1031 buyers should overpay or buy bad properties just to complete a 1031 let me add: There is no penalty for starting and not completing a 1031. For the price of an exchange (usually less than $1000) the client gets the option to try and defer thousands in tax. If they buy a bad property or "overpay" thats not a 1031 problem. It's just a bad decision on their part. No one should feel pressured to complete a 1031 exchange with a bad replacement. We're seeing a geometric increase of 1031s starting and the raw numbers of those that don't complete is still the same as last year.
The 1031 Investor5137 Reviews - 5yEric GiovannucciBusiness MemberInvestor · Boise, ID · Member since 2014 · 172 posts · 99 votes
Originally posted by @Grant Schroeder:
@Linda West we love all the learning that comes with REI! Have you looked at AZ or ID at al for out of state investing? Tucson, AZ and locations in the Boise, ID metro are still higher in rent, but still slowly trailing behind in price points.
Even better than Boise- going out into Canyon County just outside- the growth here and rents are following the upward trend. Looks like there is a lot more room for growth and value add opportunities in that area than in Boise proper.
- 5yGrant SchroederPro MemberLender · OR ID AZ CA WA CO NV TN MT · Member since 2018 · 598 posts · 312 votes
Love your feedback @Dave Foster!! Spot on.
@Eric Giovannucci I definitely agree with you there on Canyon county. I was using the “Boise basin” terminology more for out of state investors not familiar with the area. Most of the investors I have been helping have been in Fruitland, Homedale, Caldwell & Nampa, with just a couple on the other side of the state in Idaho Falls. Like you said, Boise itself is a little overbought as far as residential investments go.
- 5yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
I've overseen about 20 1031s, mostly money coming our of CA, in to my market so far this year. Have five going currently, so yes, they are definitely happening. Inventory is tight, but if you have an excellent advocate and intermediary working for you, they can be easy and stress free.
Best of luck!
- Rental Property Investor · Edmond, OK · Member since 2017 · 1k+ posts · 1k+ votes5y
I'm seeing a lot of 1031 exchanges coming into the Midwest. If you end up trying to sell, I would look for a market that has more favorable returns than the market you are selling in. (Or even switching it up to a more favorable asset class, neighborhood, etc).
It's definitely a daunting timeline, but totally do-able as long as you are prepared and actively trying. On the agent side, I make sure that I know the deadline dates and start making offers on day 1 to get properties locked up. When I have a buyer in a 1031 deadline, we're offering on multiple properties a week (sometimes per day) until we have the appropriate number in escrow. Most of my buyers have pretty tight criteria, so anything that comes on the market that meets the criteria gets an offer. An "inflated" 200k turn-key property in the Midwest is usually still going to cashflow better than some of the crazy prices that you see condos/townhouses on the coasts.
- Investor · Tucson, AZ · Member since 2015 · 209 posts · 79 votes5y
With almost 30%+ increase in Rent and insanely increase in property value with low inventory, still locations like Arizona, will deliver potential if the money is coming from coastal states, specifically CA. Remote investing by far provides solution to 1031 Exchange as I see more people playing that option from CA.
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