1031 process exchange idea

3 Replies

Hi, I have an idea to maximize selling my properties with no notes on them using 1031's and thought I would bounce it off y'all because the wife thinks it seems to good to be true. LOL. Based upon the cash I would walk away with from closing, I was looking to invest in anywhere from 2-4 properties. My thought was to maintain cash flow as good if not better than what the current NOI is with the property paid off. I would target properties needing rehab with hard money $140k or less range with rehab costs of $25-35k and the ARV of these properties would range up from $175k-200k. By putting about $50-60k on each property using the 1031 I would purchase it and rehab it with private hard money notes since it would be far below the 70% finance barrier. I figure my ALL IN fully rehabbed property of 85-100k and ARV's at 170-200k I would not have to bring anything to closing to convert to a 30yr note using the equity to pay all closing costs. My risks? mainly would be locating 2-4 properties and closing in the 180 day window right? IF I had to I could just purchase a full retail using the balance of the 1031. What do you think. Any holes we could punch in that idea?

@Mark C.

Another potential issue has to do with the 1031 limits.   I believe in order to complete the transaction and not pay any taxes, you also have to:

  • Identify the replacement property within 60 days and close within 180 days. 
  • Purchase property of equal or greater value of the relinquished property.   
  • The debt from the new purchase should be equal to or greater than the debt from the relinquished property.  If you do not want to increase the debt, you can bring cash to pay off the balance of the new property.   

Thanks . This the true risk but even that its minor, i believe it was 45 days to locate and 180 days to close.   Also the net purchase of multiple properties have to only be greater than the selling properties price.  So if i sell it for 190k I can by 2 or 3 properties at 120k hard money would meet that requirement exceeding the sale price of 190k.

@Mark C. , I like the plan.  It's basically a variation on using 1031s to diversify (sell one and buy several) and grow your portfolio exponentially.  You're correct on the 45 day identification window.  The 180 days is total days and the 45 day identification period falls within the 180 day exchange period.  That is your real risk.  But if you're focused in your shopping you should be able to find what you need.  You can go into contract for your replacements even before you close the sale of your old property.  So maybe you sell with a floating or contingent closing date and as soon as you get a contract you go find your replacements and get them under contract pronto.  

Another option that could avoid the private money would be to do a reverse exchange on your first one so at the end of the process it is rehabbed and in cash.  then refi out of that and use that cash as your war chest for improvements on the others you will buy with the next 1031s.  You'll pay more for the reverse but you'll save yourself a heap of points and higher interest.

Not too good to be true at all.  Just needs focused attention.