1031 Exchange - Seeking Upleg

11 Replies

I'm under contract to sell my 3-unit property in San Diego I've had since '04.  I'm looking to do a 1031 exchange.  I'm not impressed with the upleg properties my agent is showing me here.  The cash flow is nearly the same as I was getting for more debt at a higher interest rate.  He wants me to bet on better appreciation.  Are there out of state markets I should be looking in instead?  Where do I start?  I'll have ~$300k after the sale.  

I'm thinking residential multifamily properties. I would like to scale up from my triplex.  The properties my agent has shown me here have been turnkey triplex properties $1.1-$1.35 mil (recently renovated without the rental history of the high rents they're said to command in the marketing material, in my opinion).  My triplex could use some upgrading but also has room for growth in rents which would bring is the same cash flow.  So I'm not confident in the deals they're presenting.  

With their numbers the turnkey property cash flow would be $1950/mo.  With my conservative numbers it could range $1000-$1700. That's with a $900k loan at 4.75%.  I owe $515k on my triplex at 3.625%, with $1200 cash flow and at market rents after some cosmetic improvement a potential of $1750. My property only appreciated $200k in the 15 years so the agent argues it's better to change neighborhoods to expect 3% appreciation per year.  I heard that figure 15 years ago and didn't get it so I don't have the same faith.  The pro would be less maintenance and capital expenses and potential greater appreciation. Cons higher purchase price, larger debt, higher rents might make it harder to keep rented at the top of the market, less room for rent increases,...in my opinion.

Sorry for the drawn out story.  I'm just uncertain about the next steps.  I haven't purchased investment property in 15 years and rode a tough rollercoaster with the crash.  Now it's rebounded my initial down payment and some gains so I want to make the best financial moves.  I wasn't even in the market until he approached me.  

Signed Uncertain in San Diego

$200k appreciation on a ~$650k purchase in 15 years is not bad when the 15 years includes the Great Recession and what it did housing prices.  

Are you sure the area that your realtor is showing you did better in the last 15 years?

Realtors make their money by helping you sell and buy RE.  They are not exactly impartial because their pay occurs if you sell and/or buy.  

Good luck

Hi Neighbor!  That's the question I have.  I told him I'd like to see the numbers to support the projected appreciation.

My triplex was a $725k purchase and pending sale price of $927k. More like 1.6% than the 3% that's thrown around.  

You're right about the partiality.  That's how I ended up here.  I'm trying to look out for my best interest ultimately.

Thanks Dan.  

I’m in the same position here in San Diego. I sold a 4 unit in April and have my other 2- 4 unit buildings in escrow. I couldn’t find an upleg on the first building and not sure if I’ll find one for the other 2 buildings. I’m looking in the Midwest because I’m sure the statewide rent control is going to pass and I’m sure that’s just the beginning of what they want to do.

Thanks for the insight William. 

With the timing requirements of the 1031 exchange did you/will you find something else somewhere else in time to avoid taxes on the April sale?

Hi K, 

Who are you using for lending? The 4.75% sounds high, rates are low right now. I was quoted recently under 4% for a 10 year fixed. 

Are you able to do some repairs/TLC?

If you buy turnkey you won't have the cash flow as you would have by fixing something up, so its a toss up between having to put in work and reap the rewards or gaining something easy. If you exchange into a parallel cash flow you'll still be in a better position as you will have more units to do rent increases on and eventually will be far exceeding what you have now. 

Hi Christina,

I have a lender but the 4.75% is the figure the agent used to provide a rough calculation. It's based on 30 yr fixed.  

Buying something that needs fixing up is something to consider. The turnkey properties he showed me were actually triplexes as well. But your right when there's more units there's more rental growth opportunity. I'll keep that in mind when looking at turnkey properties with current comparable cashflow. 

Thanks, Christina, Trent and everyone for contributing. 

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