I'm looking at doing a 1031 of a property later this year into 3 new properties and have been toying with the idea of instead simply paying the taxes on the proceeds and investing in notes. That got me to thinking about comparing the two scenarios in a simple way.

So let's say I net $150k after taxes for notes, or $170k in 1031 (tax-sheltered) for buying three new properties to replace the one I sold. Here's a rough approximation of how I see both going down (I'm near-completely-ignorant on notes so help me out here):

- 1031 for property

Put 56.6k down on each of three 175k houses = 3 mortgages at about 118k each. At about 4.75% for 30 years I show a PITI of about $959 (or $1262 for a 15 year note). These will rent in my area for $1300-$1500 so it will cashflow either way.

So, at the end of the mortgage term, let's say we now have three properties, each worth $225k (from their original 175k value). The cashflow seen during the mortgage can be considered a wash, from maintenance expenses, vacancies, etc. The end result is for 170k down, we now have three properties free and clear that are worth $675k. That's a 390% return!

- pay taxes and buy note(s) instead

Pay the taxes and net $150k from the property sale. Invest that into one or more notes that earn 10-12% interest annually. Just for simplicity's sake I'll assume I got one note at $150k. By the time that note is fully paid off (assuming it all goes according to plan) I may have collected (here's where my note experience makes the math fuzzy) a total of 325k or so from the owner. Making for a profit of 175k on the initial 150k investment, a 116% return!

So it seems houses have won. Or have they?

Notes seems to be a better idea as you near retirement, as they avoid tenant issues, unanticipated maintenance expenses (when your income is less since you're not working) and they also keep you from the snowballing of costs as the number of properties rises (more rental houses equals more chances for things to break). But they also carry with them the threat of the buyer defaulting and you having to "take steps" to either get them realigned in an adjusted note or take them to court and repossess the house.

I'm 49 now, and will be 50 by the time I go to do this move, so I want to make sure I've considered everything and make a good decision that sets me up for entry 10-15 years from now for retiring. Any help/feedback appreciated.

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