Need Lender for 2-4 Unit owner occupied using 1031 exchange funds

11 Replies

Does anyone know a CA lender that will lend on a 2-4 unit property that will be owner occupied and that will use 1031 exchange funds as part of the down payment. Thanks in advance! Eugene
Originally posted by @Eugene Rogachevsky :
Does anyone know a CA lender that will lend on a 2-4 unit property that will be owner occupied and that will use 1031 exchange funds as part of the down payment.

Thanks in advance!

Eugene

 I assume that your 1031 exchange facilitator will put in unambiguous & explicit writing that it is 100% certain that it isn't tax fraud to 1031 into a 2-4 unit primary residence? 

@Chris Mason it's not fraud. As an example, for a fourplex, 3 of the units will be 'investment' so the 1031 exchange funds will be attributed to that. The owner occ unit will be 'primary'. So yes, that non-fraud language will be used.

Originally posted by @Eugene Rogachevsky :

Chris Mason it's not fraud. As an example, for a fourplex, 3 of the units will be 'investment' so the 1031 exchange funds will be attributed to that. The owner occ unit will be 'primary'. So yes, that non-fraud language will be used.

 OK. I'm not a 1031 expert. Neither are mortgage underwriters. I don't see this as being an issue, in that case, if the folks that ARE the experts will sign off on it in writing.

@Chris Mason I've been told by a couple people (big bank lender and mortgage broker)that this won't be possible. I still think they might be mistaken. That is why I'm posting to find an investor who has actually worked with a lender that has done this type of loan structure or a lender that will do this type of loan.

@Chris Mason , It's not fraud.  It's about tenancy allocation and use.  Which is why the accountant sets up depreciation schedules.  Happens all the time but that doesn't keep the stodgier lenders from balking.

Originally posted by @Eugene Rogachevsky :

Chris Mason I've been told by a couple people (big bank lender and mortgage broker)that this won't be possible. I still think they might be mistaken. That is why I'm posting to find an investor who has actually worked with a lender that has done this type of loan structure or a lender that will do this type of loan.

The big bank lender and mortgage broker (and myself) are not 1031 exchange experts. Lenders should defer to those that are. I've done a bunch of 1031 exchanges, but typically the borrower doing the 1031 is established enough that they already have a big nice primary residence that wouldn't cashflow as a rental, so you don't see scenarios like yours every day. 

This isn't fundamentally different than when a mortgage underwriter thinks one thing, but a lawyer says something else, and it's a legal matter... defer to the lawyer. Or a CPA says that a K-1 isn't necessary but a LO thinks it is... the CPA is the tax pro, not the LO. Similarly if a mortgage underwriter says something on a mortgage matter, the underwriter is the expert and that's that.

The only thing Fannie Mae says is that it must be documented and "in compliance with Internal Revenue Code 1031." The 4000 pages of Fannie guidelines have literally just that one comment. The old saying that people, including lenders, need to "stay in their lane" applies here. 

EDIT Yup just confirmed one of my colleagues has done this years ago. Like I suggested a few posts up, he just had to get something in writing from the 1031 exchange facilitator confirming that this is on the up-and-up, since it's a relatively unusual scenario.

Originally posted by @Dave Foster :

@Chris Mason, It's not fraud.  It's about tenancy allocation and use.  Which is why the accountant sets up depreciation schedules.  Happens all the time but that doesn't keep the stodgier lenders from balking.

 Curious how the tax deferment works. Let's say I have $200k from the sale of the other rental property. And I'm buying a 4-unit where I will live in one of them, and for simplicity sake lets assume equal square footage in all 4 units. That $200k is my entire down payment. Does that mean cap gains are only deferred on $150k of it? 

@Chris Mason , sort of.  One of the quirks about 1031 is that the IRS really doesn't care how much gain you're deferring.  If you want to defer all (whatever that amount is) you must purchase at least as much as your net sale.  And you must use all of your proceeds.  So the calcs in a situation like this become pretty straightforward.

Change your example to you are selling a property for $200K.  In order to defer all tax you must purchase at least $200K of investment real estate.  If you are buying a tri plex for $300K then each unit would be valued at $100K.  So if you wanted to do a 1031 into that property you would have to use 2 of the units for investment ($200K worth) but could use the remaining unit for personal use.

This is actually an awesome tool and extension of the house hacking approach.  when you sell you get a mix of tax free (from the one unit) and do a 1031 on the remaining two units to get tax deferred.

@Chris Mason will it be possible to get a loan on this type of loan structure with less than 25% down? I wouldn't qualify for FHA because I currently exceed 4 financed properties, but I'm hoping to get in with 20% down max (and obviously less if possible). Thanks.

Originally posted by @Eugene Rogachevsky :

Chris Mason will it be possible to get a loan on this type of loan structure with less than 25% down? I wouldn't qualify for FHA because I currently exceed 4 financed properties, but I'm hoping to get in with 20% down max (and obviously less if possible). Thanks.

 Yup, 20% down is doable with conventional financing since you're going to owner occupy. You're kind of hacking the system here, in a nifty way... the IRS thinks it's an investment and is giving you 1031 goodies, and a lender can give you primary residence goodies, on the same transaction. 

Also note that FHA does not cap you at 4 financed properties. Individual lenders might. FHA actually has no limit on the number of financed properties. But 1031 borrowers always have the opposite problem -- they need to use all their money or they say they will be taxed on it. I don't have all your info, but it might not be worth doing 3.5% down and taking on the FHA mortgage insurance if all you're getting out of it is NOT being able to defer cap gains taxes.

@Chris Mason hmmmm. Ya I was told if I have more than 4 financed I couldn't do FHA.

So the property I'm selling will be around 200k (around 90k net to 1031). The upleg will be between $800k-1.2m (3 or 4 unit).

Down payment funds would come from all three of three following if necessary:
1. 1031 exchange (90k)
2. personal liquid funds (50k)
3. Gift funds (100-150k)

I'm assuming I'd also need reserves in the range of 6% of all outstanding investment property principal.

So from an underwriting perspective, I just want to make sure my plan is kosher and would potentially allow for less than 20% down. Ideally I would like to lever as much as possible so I have funds remaining for renovation.

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