Is a 1031 Exchange a good idea?

Question

Hello all,

I have some properties that all cash flow pretty hard and they all have a good amount of equity in them. I bought them with 15 year loans back in 2011 and they’ve all doubled or tripled in value. I’m thinking of selling one of them through a 1031 exchange, but I’ve never done it and I’m not sure how best to leverage my situation. The property I want to do it with is worth 200k and I owe 45k. I rent it out for $1,000/mo. I could bump rents up to $1200 as well (I havent raised rents in a while).

If I do a 1031 exchange, I’ll be left with 155k in sales proceeds (prior to fees). I can take this and put 30% down on a multi family worth 500k. Hopefully I could find something with the same cash flow, but I will be selling at a high point in the market and potentially buying at a high point. And this house I own now will be paid off in 6 years, so if I don’t do anything and I just hold on to it I’ll be collecting $1200/mo off one property I own outright.

What are your thoughts? Should I hold it and enjoy the cash flow and high equity or should I do a 1031 and increase my property value, while also increasing my debt but not my cash flow?

Thanks for reading

Dave Foster · Answer

@Reggie Powell, That's kind of the poison pill of 1031 investing.  You are buying at the peak.  But you're also selling at the peak.  If you do it in a down market you're selling at a trough but you're also buying at the trough.

So the takeaway is to weigh other factors when looking at what to do.  1031 to move into different properties, locations, or sectors.  Use it to avoid looming capital expenses or deteriorating neighborhoods.  It's very probable to actually buy properties at their peak but still improve your NOI.

Scott Wolf · Answer

@Reggie Powell, that's a great position to be in.  Since the loan will be paid off in 6 years, have you thought of keeping the property and tapping the equity through a refinance?  If you're happy with the property and the market, while the 1031 is a great tool, a refinance(even at 50% LTV) is a great way to tap some equity.

Dave Foster · Answer

@Reggie Powell, I think you got it.  Start with your reinvestment requirements.  If you want to defer all tax you need to purchase at least $200K ish using all $155K ish of proceeds.  Right now with the one property your gross rents are $1000 maybe $1200 if you raise them.

So that can you buy with your 1031 that will provide better gross rents and then back out any additional financing costs.  3 50K down payments on three new 200K houses might provide better cash flow over all considering that borrowing is so cheap these days.    Moving into 4 smaller 100K properties would almost surely boost your NOI a lot.  And the move from 15 0 to 30 year fixed loans will be a real game changer for you.

That's the beauty of the 1031.  You can sell one and buy several.  You can sell several and buy one larger if you're wanting to streamline management.  And you can go anywhere in the country into any type of investment real estate you want depending on where you can get the best returns.

Aubrey Tatarowicz · Answer

@Reggie Powell I think you're thinking about this in the right way.  The 1031 exchange have quite a few hoops to jump through and requirements so make sure you're working with someone to guide you through the process.  If you're concerned about buying at a high time, you could consider a refinance because rates are so low to pull out some equity.  It is all about the numbers making sense.  A refinance would give you more flexibility to use that money as you wouldn't have the same time requirements.

Steve Vaughan · Answer

@Reggie Powell  Every time I've exchanged, I've traded up to a different asset type.  Like you're doing with a single up to a multi. Each one (3 for me) has resulted in at least a $50-$120k net bump in NW.

But I generally operate solo, so no agent commissions.  Doing one now with an agent on the sale side and after the $12k in commissions, the net bump is still $50k because I'm trading up to a triplex off-market he's owned since 1985. No competition and he's happy with the price even though he may earn more going through the hassle of the MLS.

If just buying high, I'd say it's not worth it.  The big factor to me when deciding to sell or relinquish is headache factor.  I must have less indigestion in my life when the deal is done.

Reggie Powell · Answer

@Dave Foster

I think it’s the best option. I can more than double the investment value, and potentially cash flow more as well. I just need to identify where to buy.

Joe Splitrock · Answer

I was in a similar situation with smaller loans. I refinanced one property and took the cash out to pay off the other property. I ended up combining two loans into one at a lower rate and funded the down payment on the third property. In other words I traded up from two to three properties with no cash out of pocket, plus I ended up with one paid off property. The lower interest rate saved me enough money to make up the closing costs within two years.

Carlos Ptriawan · Answer

All these Uncle CU only requires 70% LTV from the last time I spoke with them, there're few in SoCal too. I think there're million Californian is having these issue since they bought in 90 or 2000ish so it shall be pretty common situation

Reggie Powell · Answer

@Dan Schwartz

Thank you. I’ll give them calls and see what we can work out. I appreciate your help!

Dan Schwartz · Answer

@Reggie Powell in CA, off the top of my head, check out UNCLE, YOLO, and SRI Credit Unions to start. There’s three that offer them. PenFed Credit Union also does (I just got off the phone with them this morning).   A good search term is “non owner occupied line of credit.”   In theory, a line of credit writer would be thrilled with a paid-off property, as their line wouldn’t be subordinate to any other financing.  Good luck!

Is a 1031 Exchange a good idea?

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