Looking for ideas to reinvest a 7 figure amount

22 Replies

I presently have a chunk of our SFR homes under contract which will yield a 7 figure return after taxes and fees.

(Of course, there is no guarantee that we ever get to closing and this will be an irrelevant discussion.)

I can repeat the same process which created this return in the SFR arena. I have created 25+% returns with leverage and I can replicate that process again although it will take time to redeploy that capital.

With the intention to always be learning, I am soliciting ideas that would return 20+% at a minimum on a 7 figure cash basis.

Thanks in advance for the BP world of wisdom.

I'm surprised to be the first to respond. I had the same problem when trying to refinance. They wanted a $500k minimum deal size. Someone recommended that i deploy that capital as a private money lender. You can charge 4%+1%/mo. If you turn over the money twice a year, that's 20%.

if you're selling assets, why don't you 1031 into another property to avoid capital gains taxes? Buy a cash flow property then refinance it to avoid losing 35% of your gains to taxes.

Hi David,

Thanks for responding.

As far as the 1031, it is not all profit and these are rentals that I have held longer than 1 yr so it will be capital gains on the net.  I am going to have a big tax bill but my thinking is that my tax rate is not going down in the future and I am just going to pay the taxes as I go.

I have not had good success on private lending in the past.  Thanks for the input and I will have to explore that some more.

what's your rationale for not using the 1031? Paying tax later is always better than paying taxes every time you sell. It's the classic case for the ira or 401k. For small deals, the $800 fee isn't worth the trouble. For a multi million dollar deal, spend some time and money to save some taxes that you can reinvest in more property.

as for private lending, what went bad? Assuming you can underwrite an asset, get an appraisal, and hire a title attorney to handle the transaction, you should be able to make money.

Hi Chris, 

One possible strategy to think about is a partial 1031 Exchange.  A partial 1031 Exchange would allow you to sell your current assets, structure the sale of those assets in a 1031 Exchange, and then do your best to redeploy them on a tax-deferred basis.  

You can decide how much of the transaction to redeploy while you are going through your 45 calendar day identification period.  You would  likely end up trading down in value instead of trading equal or up in value, but you would also likely defer quite a bit of  your tax liability.  

The partial 1031 Exchange allows you to "manage" your tax liability by keeping the taxable gain under certain thresholds that would otherwise trigger your higher tax rates.  It also allows you to spread your tax liability over time by completing numerous partial 1031 Exchanges overtime.  Partial 1031 Exchanges can be very effective in keeping your tax liability away from the 20% capital gain tax rate and the 3.8% Medicare Surcharge (Obamacare tax). 

Sometimes the partial 1031 Exchange is not intentional, but just happens because you can't find suitable replacement property during your 45 calendar day deadline, which is O.K.  The 1031 Exchange should not "run" the decision making process.  You should redeploy if  it makes sense and then you take advantage of either a full or partial 1031 Exchange if it fits within your overall transaction goals.  

The 20% gains that you are looking for are fairly simple to achieve on the smaller level but get harder as you grow.  It is certainly possible though.

Value-add is the easiest way to go here.  Find some poorly run apartment building or commercial project that can be polished up, filled with paying customers and resold. 

I have been able to achieve 100% in certain markets using this method.

David and Bill,

Thank you both for that input.  Those are excellent points to consider.  

Time to do some real homework on 1031's.  

Chris

If you end up going the partial 1031 route, you will want to put your most taxed properties into it.  At the size of transactions/profits you are talking about a consultation with an experienced 1031 lawyer and/or accountant will likely be money well spent.

A couple other tax deferral strategies are installment sales and self-directed 401Ks.  The 401K does lose the tax-advantage of depreciation - but it sounds like at your profitability that isn't a major concern.

@Chris L.  have you considered new construction? You could buy land at a good price and either build single family homes or an apartment building and rent them out. You'll get top dollar on best condition properties. Nothing to do, and you should be able to earn more than 25%.

Lumi Ispas, Real Estate Agent in IL (#475.113981)
773-392-2906

@Chris L. Since your post says your always ready to learn- two areas that we've set goals to learn more about are mobile homes/parks. We've seen the ROI numbers from some fellow investors & some of the numbers have been off the charts. Another area we're studying are distressed motels/hotels.

@Steve Olafson  @Jesse T.  @Lumi Ispas  @Crystal Smith  

Thank you for all of your inputs.

Lumi, I am exploring a new construction option.  I have enjoyed the "passive income" nature of rentals so I have to account for the extra taxation when doing new construction.

Steve, you are exactly right in terms of ROI when the amount gets bigger. Easy to get high ROI with smaller numbers.

Jesse, I am on the hunt to do more research on the 1031 options.  Thanks for the input.

Crystal, I have heard that as well and have explored mobile home parks in the past but need to put that on the list as well.

Hi @Chris L.  . I wish I had the good problem of deciding what to do with a 7 figure return. I have a question regarding your last response on new construction. You said there is extra taxation when doing new construction. What taxes are you talking about? If you did new construction do you have the option to do a tax abatement in your area to avoid paying taxes while construction is going on? I don't know much about new construction so I could be totally off-base.

@Damian Baynes  

Rental income is considered passive income and is not subject to social security taxes as opposed to flipping houses or new construction which would both be considered to be active income and would be subject to those taxes.

I invest for return but also pay attention to how those earnings are going to be taxed to determine my best return. For example: I was flipping houses from 2010-2013. As the market changed and the margins shrank, I determined I could get an equal return by using my capital to hold more rentals. If the ROI is the same between flipping a house and holding it as a rental, I am keeping more of my money by holding rentals.

Hope that clarifies my thinking for you.  

(I am not an accountant which is why I hire a CPA to do my taxes and someone may chime in to correct my explanation on this.)

Originally posted by @Chris L. :

@Damian Baynes  

Rental income is considered passive income and is not subject to social security taxes as opposed to flipping houses or new construction which would both be considered to be active income and would be subject to those taxes.

Not sure what you mean by that, SS taxes are collected on wages, you can flip houses and have only capital gains unless you are paying yourself a salary, which you could do the same thing with rentals or not.

Is it possible to do a 1031 of SFH's into land and construction of something like retail or offices?

That may be one avenue if you can. I know someone that sold a retail store and 1031'ed it into a retail strip rehab and is getting great returns.

@Chris L.  congratulations on being in the position of a potential 7-figure gain!  Would love to hear a little bit about how you found yourself in this position?!  I am selling a little 3-family and am facing the same questions on a much smaller scale. Haven't sold before and it's kind of weird.  I am selling because prices seem a little crazy high to me.  Are you finding the same?  Are you selling into the froth, or just changing strategies?  My vote is to do a partial 1031 to keep you below the thresholds that result in the highest cap gain rates and medicare tax. Please keep us posted as you get to the closing!    

Originally posted by @Mike F. :
Originally posted by @Chris L.:

@Damian Baynes  

Rental income is considered passive income and is not subject to social security taxes as opposed to flipping houses or new construction which would both be considered to be active income and would be subject to those taxes.

Not sure what you mean by that, SS taxes are collected on wages, you can flip houses and have only capital gains unless you are paying yourself a salary, which you could do the same thing with rentals or not.

 If you flip enough you are considered a "Real Estate Dealer" by the IRS and your income is treated as income earned from a job vs. investment activity.

Well aren't the IRS just a nice bunch...

@Michael J.  I am in the process  of determining if I am going to do some type of 1031 exchange.  

@Steve Vaughan  Our market is not frothy at all.  I just got a call from a Realtor asking if I might have access to a larger package of homes.  This investor is from out of state looking for good returns on large numbers.  I do not have a big profit on this.  If I replace this group of homes in Ft Wayne, I am looking at making a 10-15% profit.  Of course, I am calculating the time/rent that will be lost while I rebuild the numbers.  The more I analyze the options the more I am really ambivalent about selling at all.  The investor will be coming out to do the due diligence within the next couple of weeks.  Not a terribly exciting story but one I have been building for 6+ years.  No home runs just a lot of singles.

Hi Chris

Just read all the suggestions on how you should handle a 7 figure gain on real estate.  I suggest you get out of the way of yourself.  Forget 1031 exchanges, capital gains or Tax at all.  Yes! there is a legal way to benefit from no Capital Gain Tax.  Plus, make money off your 7 figures with Tax free growth of your assets.  You and your heirs you leave your assets  one day should benefit.  Not the I.R.S.

Most people are not motivated to make gifts to a 501 ( C ) (3) tax exempt organization solely for the Tax Free benefits, that is why my associates and I use Charitable Reminder Trust ("CRT's").

Researchers from Boston College estimated that the I.R.S. will Tax $41 Trillion to $135 Trillion in assets of people in your situation Chris.  But, there are other ways in helping Uncle Sam that, few people take advantage of.  With all this money we baby boomers, and older generations will be passing to our younger heirs, and capital gains or current tax laws like they are, take a hard look at a CRT.

With a CRT you dictate the return you want on your investment, as long as it is not under 5% or more than 50%.  You receive income on sales, rentals, new construction, and other growth of the asset that is in Trust, while getting a proven way to reduce your Tax burden, and/or get rid of Tax all together.

Thank you for the explanation @Chris L.  .  So a profit of 10-15% on low 7 figures would change my answer to: pay the cap gains @15%.  I don't see this rate dropping ever.  You will have the freedom to re-invest however and whenever you wish. Plus no 1031 hassles or fees! 

To piggy back on what @Michael J.  was asking - it is possible to structure your 1031 exchange into raw land that is also built upon.  Variations of the process are called a reverse or improvement or construction exchange.  Depending on the timing of your sale and the extent of construction you need to do it may or may not be feasible for you.  But the same valuation rules will apply.  The  IRS will expect you to invest at least as much as you sell and to use all of the cash proceeds unless you carve off some as a partial exchange.  

Keep researching. You've got tons of options for making the most of this hard won windfall.

Originally posted by @Mike F. :
Originally posted by @Chris L.:

@Damian Baynes  

Rental income is considered passive income and is not subject to social security taxes as opposed to flipping houses or new construction which would both be considered to be active income and would be subject to those taxes.

Not sure what you mean by that, SS taxes are collected on wages, you can flip houses and have only capital gains unless you are paying yourself a salary, which you could do the same thing with rentals or not.

 Wrong.  Exactly wrong.  I hope you are not doing this.

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