What would you do with a 350k tax exchange opportunity?

Question

My family and I are deciding to go into business together by upgrading our rental properties.

We have an opportunity to sell:- 1 rental (one of my parents) for 350k

- 1 rental (of ours) net 80k-100k (use to start process of adding value)

And yes we do also have reserves in the event of low occupancy.

We need some ideas from experienced investors on what you would do in our situation?

Our goal is to get into a value-add multifamily (5+ units). Living in Colorado, it’s a little more difficult to find a property that makes sense to invest in. So buying out of state is not off the table.

Thank you in advance!

Justin Moy · Answer

Do you want to invest actively or passively? Syndications or funds could work really well especially with you wanting to invest out of state.

Value add properties are tough to do when you're not there depending on the level of value add.

If you want to be active I'd start out by picking a market you want to invest in and start digging into that area. I'd pick somewhere relatively close and offers direct flights so you can go in and out easier

Bjorn Ahlblad · Answer

We drew a circle representing an hour's drive, with our home in the center. That's our area and it contains several markets. It worked in Ca and again in Wa.

Dave Foster · Answer

@Chris Reyes, Your contribution of the small property and desire to build your contribution resonates with me - Kudos.  One of the best ways you could add value would be with your credit.   MF everywhere is competitive as heck.  And a 5+ unit is going to not only be expensive.  It will be expensive money to borrow as well.

But the numbers of your two properties might work well with a smaller multifamily (4 or fewer units) in CO.  If you can be mobile you could us a 1031 exchange and purchase a small multifamily with favorable primary residence financing using your and your parents 1031s.  You live in one unit and the others are treated as the replacement properties for the 1031.  Since you have to purchase at least as much investment property as you sell this could be a $900K duplex that you live in half of.  Or it could be a $675K triplex that you initially live in one unit of.

You'd live there for a year to satisfy the lending requirements.  And then back fill with a rentor and use a refinance of the triplex as a down payment on your next small multi with your family using the same process.  Your mobility and credit would be a great value add to your family.  We've done this with each of our children as they've been ready.  And it's worked great.

If you're still living up north you will have some luck looking north and east to the edges of growth in CO for your project.

Carlos Ptriawan · Answer

Thing is, I'm worried there would be no deal that's making sense for CRE MF even for the future. Anywhere the cap rate is always 4%.Sometimes the best bet is to just UPREIT it or split it between UPREIT, a dst and/or convert to primary property.

Steve Vaughan · Answer

It's rare a syndication qualifies as a replacement property so all the fund solicitors can save it.

I wouldn't 1031 if I didn't have to.  Property 2 wouldn't have a lot of tax it sounds like.

I'd start sourcing an off market deal in a market I knew well and have it IDd before I relinquish.

Ben Rhodin · Answer

Hey @Chris Reyes! This is not a bad situation to be in, and I have been seeing these questions more and more lately. Of course, as @Justin Moy eluded to it will come to your personal investment strategies. You could invest passively in syndications, or be more active. Personally here in Colorado, one of my favorite strategies is currently the hybrid Small-medium multifamily space. Meaning you mix MTR/STR and LTR rentals. You get the nice baseline contingency with the LTRs and then you can capture the cash flow from the MTR/STR. I have closed numerous of these in the past months and most of the clients are able to capture a 10% COC return. With that kind of capital, you should have no problem getting into a property depending on your goals. Are you aiming to hit a certain COC or ROI, or are you looking more in the long term? I don't agree with a lot of the people that say that Colorado is tough to invest in, I have clients closing deals each month. It comes down to making the deals work.

Depending on your goals, you could put that cash to work on a larger property and get some economies of scale, and ease of management. Possibly also putting down more to assist the cashflow number. Or you could invest in a couple of deals and put less down. There are 100 different ways to invest your cash but without some more info, it's tough to guide you. Feel free to DM me if you want to help strategize.

What would you do with a 350k tax exchange opportunity?

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