Should I leverage smaller units into larger apartments?

Question

Hoping to get some input here. I started flipping properties back in 2001 as a part time hobby, as I had a full time job and active family. After flipping some 25 properties, I realized that buying and holding would probably build more wealth and cash flow, rather than paying those high short term taxes. I took 7 years off investing in down economy and job change, but now own four 4 plex units, one 5 plex and one 8 plex (the 5 and 8 plexes are 50/50 with my son).

Here is my question?  I have these buildings in differing cities, all within 30 min drive of my house. They are all cash flowing well, but should I try and do a 1031 and move up into a bigger apartment building? The hard part is finding a deal where I can attempt to do 1031s on smaller units to move up? Curious how investors have done this or what should be the best steps to accomplish successfully? Or, should I just keep what I have and be happy? Thanks for you responses! Todd

Todd Powell · Answer

@Dave Foster thank is so thoughtful and helpful. This gives me some amazing info to mull over. Thanks for your time and insight.

Jordan Moorhead · Answer

@Todd Powell yes!

I just did a 1031 with a duplex into a 12 unit. I now no longer have to manage the place, make 5x the cashflow and have a much more valuable asset.

With the current market I would recommend trying to identify the new property first, then be ready to sell other property(s) at a moments notice. Start your search and any rehab you need to do on your properties now!

You can easily double your cashflow, all your equity in your current places isn't working for you as hard as it should.

Alina Trigub · Answer

@Todd Powell 1031 is definitely a good strategy to implement. Keep in mind it works backwards as well. In other words, you can first identify a property to buy and then start selling yours. You got to work with 1031 expert though. Perhaps @Dave Foster can help you with that.

Todd Powell · Answer

@Peter B. that is awesome! Off market larger apartment was my goal and it sounds like it worked for you. Off market and flexible seller gives you the time to sell your smaller units. This is my goal for my son and I @Jason Powell!  In this NW market in desireable Oregon locations it seems to be challenging. But then again, every deal I have done, the properties were always worth more. I like your idea, and I need to write more letters. Cheers

Peter B. · Answer

I was in a similar situation. I had a group of sfh,duplexes,and 4plexes for a long period. I chose to releverage the desireable ones and 1031 the less desirable.

I found the replacement properties mostly off market, through mail.

The bigger multis I purchased 20-22 unit had substantial value ad that couldn't be done with the 4s and duplexes.

On the flip side the buildings I kept are great buildings that have great cash flow and I simply could not replicate.

Pete

Dave Foster · Answer

@Todd Powell, you're right a contingent contract can be tough (but not impossible - it's worth the ask,  the larger the asset the more willing they can be) when trying to consolidate a portfolio.

But what @Alina Trigub was referring to was a specific process called a reverse exchange.  Because the statutory order of a 1031 exchange requires you to sell your old property before you purchase your new property you cannot take title to the new property.  But your QI for the 1031 can form a holding entity called the Exchange Accommodating Title Holder and actually take title to the new property to hold it for you.  From the day we take title you then have 180 days to sell the properties you want to exchange into this new property.

Reverse exchanges can be a great way to lock up your new asset first and mitigate some of the risk associated with trying to get someone to give you a contract contingent on several sales.  But they do have some disadvantages as well.

1. They much more expensive than a regular 1031 (think $4K - 6K more)

2. You still have to sell your old properties in a compressed time frame but this time you know the property you want to buy is waiting for you.

3. You have to provide the financing for us to buy the new property - either from cash reserves, a private loan, or a loan from a portfolio lender like a community bank.

Todd Powell · Answer

Thanks you guys for your feedback!  I did understand you can find an apartment first, but most sellers don't want to have it subject to me selling my smaller units. And, @Jordan Moorhead, I agree, in this market its harder to find the deal that makes sense.

Bjorn Ahlblad · Answer

@Todd Powell Welcome and congrats! Sounds like you are doing well. Wanting to trade up into larger buildings is effective all things being equal there are definitely economies of scale, and personal preferences too. So decide on the type of properties you prefer and go from there. I have a duplex in a 1031x that I would love to drop and get a 6-12 unit; but in this market there aren't any in my area that measure up to what I want for a return and values are just as likely to go down as up IMO. So I'm holding; but still looking.            Nothing wrong with duplexes they are just not my thing anymore. All the best!

Should I leverage smaller units into larger apartments?

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