1031 exchange with lease in place

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1031 exchange with lease in place

Candyce E.
Member since 2024 · 15 posts · 4 votes

I have located a property in my home town that I'd love to acquire in a 1031 exchange.

To do this, I will need to sell one of my existing rentals. One in Centennial, CO, the other is in Lincoln, NE.

Here are some details:

  • Centennial has a mortgage. Lincoln does not.

  • Centennial is a SFH, Lincoln is a townhouse.

  • Both are 3 bdrms 2+ bath

  • Centennial is currently vacant, but I have a tenant moving in Dec. 1 (lease not signed yet)

  • Lincoln is rented, lease ending in April

  • Both properties are in good condition and represent turnkey opportunities.

  • Centennial rent - $2750. Approx value $495K

  • Lincoln rent - $1899. Approx value $260K

I realize that it's a terrible time to list a property (interest rates and time of year) and that it's harder to sell a property with an existing tenant. Both states make it hard for me to end a lease, so the buyer will have to honor the lease, meaning an owner occupant won't be able to get a mortgage to buy a property currently leased.

So, what would you recommend I do? I don't think we could qualify to get another mortgage without selling one of the properties. Is it possible to find an investor to pick up one of the properties?

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Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
17h

You seem to have everything figured out including the downsides. You could offer the Centenial tenant a couple thousand not to move in. If you sell it to an investor you’re probably going to get $50k(?) less from an investor than an owner occupant. You could also offer Lincoln tenant same deal. Selling Lincoln, the paid off property would give you the most cash to buy the new property and you wouldn’t give up a good rate (if you have one.) on Centenial. What you didn’t mention is the price of the replacement property you want to buy. Would lincoln give you enough cash to pull off the purchase? You also didn’t mention the equity on Centenial to know if it’s worth the selling costs to do the exchange.

Second alternative. Could you sell your current primary residence tax free and move in to the new property. This would give you a lower rate, lower down payment, and maintain your rental income. Plus most sellers wouldn’t want to wait that long, much less as long as it will take to sell one or both rentals, check to make sure they are or this is all just a waste of time. I’d also check with your preferred lender to see if you need to sell both to qualify. Good luck.

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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    17h

    You seem to have everything figured out including the downsides. You could offer the Centenial tenant a couple thousand not to move in. If you sell it to an investor you’re probably going to get $50k(?) less from an investor than an owner occupant. You could also offer Lincoln tenant same deal. Selling Lincoln, the paid off property would give you the most cash to buy the new property and you wouldn’t give up a good rate (if you have one.) on Centenial. What you didn’t mention is the price of the replacement property you want to buy. Would lincoln give you enough cash to pull off the purchase? You also didn’t mention the equity on Centenial to know if it’s worth the selling costs to do the exchange.

    Second alternative. Could you sell your current primary residence tax free and move in to the new property. This would give you a lower rate, lower down payment, and maintain your rental income. Plus most sellers wouldn’t want to wait that long, much less as long as it will take to sell one or both rentals, check to make sure they are or this is all just a waste of time. I’d also check with your preferred lender to see if you need to sell both to qualify. Good luck.

    2Reply
    • Candyce E.
      OP
      Member since 2024 · 15 posts · 4 votes
      16h

      Thanks for your thoughts @Bill B.

      You make some excellent points. The interest rate on Centennial is low - 3.65%
      Centennial has about $305K equity. Lincoln has about $260K. Of course, I'd have closing costs to sell either of them.

      Neither property can fully fund the purchase of the target property, so I'll have to get a loan. It does meet the 1031 exchange provisions for a similarly sized loan. Replacement property is currently $495K but overpriced. It's a reverse mortgage situation and bank owned. I have no idea how much that will complicate things.

      I did my cash flow analysis assuming that I'd sell Lincoln, and the numbers work. If you were the buyer, would that one look more attractive assuming a $260K price tag?

      Here are the numbers on Lincoln:

      Rent 22,788.00 (1899/mo)

      Tax 2,936.00

      Insurance 2,508.00

      HOA 1,200.00

      Prop Mgmt 1,595.16

      Vacancy 1,139.40 (5%)

      Net rent 13,409.44

      Selling my primary residence isn't an option. My goal is to move my mom to be near me. She'll be one tenant and we'll rent the basement apartment to a separate tenant (complying with local laws on that). Mom will pay market rate so we comply with 1031 rules.

      I do have a lender and will be reaching out to them next week to look into it.

      0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    17h

    The rent to value on Centennial sucks overall, but your COC rate of return might be better than the other one depending on the size of your mortgage. So it really just depends on what your goals are other than buying the hometown property. Based on this limited information, I would sell Centennial because it's too expensive relative to the rent it commands.

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    • Candyce E.
      OP
      Member since 2024 · 15 posts · 4 votes
      16h

      I'm more interested in which one might be easier to sell. As an investor, would you find either of them interesting, or are they both poor rent to value?

      Both properties generate roughly the same cash flow.

      The hometown property has significant benefits. It allows me to rent to my elderly mother. It's 5 minutes from my home, and allows me to relocate her to where she's close by (yes, she'll pay market rates and be in a formal lease). She currently lives 3 hours from us.

      So the real question is, how do I go about selling in a crappy market, and which property seems like the better one to use for this purpose? Both have roughly the same equity, but only one (Centennial) has a mortgage.

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    • JD MartinBusiness Member
      Moderator
      Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
      16h
      Quote from @Candyce E.:

      I'm more interested in which one might be easier to sell. As an investor, would you find either of them interesting, or are they both poor rent to value?

      Both properties generate roughly the same cash flow.

      The hometown property has significant benefits. It allows me to rent to my elderly mother. It's 5 minutes from my home, and allows me to relocate her to where she's close by (yes, she'll pay market rates and be in a formal lease). She currently lives 3 hours from us.

      So the real question is, how do I go about selling in a crappy market, and which property seems like the better one to use for this purpose? Both have roughly the same equity, but only one (Centennial) has a mortgage.

      There's no way to answer this question. No way to know from a keyboard if a property is easier to sell in Lincoln or Centennial. Broadly based, one market may be better than the other right now but your property might be in a better location in the poor market than the good market. The Centennial is definitely a worse return overall comparatively speaking.

      How do you sell in a crappy market? Price it aggressively. Anything will sell anywhere for the right price. If you don't particularly care which one you sell, but have to sell one to make this work, then put them both up for sale simultaneously and see which goes first. That can be a strategy.

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    • Candyce E.
      OP
      Member since 2024 · 15 posts · 4 votes
      16h
      Quote from @JD Martin:
      Quote from @Candyce E.:

      I'm more interested in which one might be easier to sell. As an investor, would you find either of them interesting, or are they both poor rent to value?

      Both properties generate roughly the same cash flow.

      The hometown property has significant benefits. It allows me to rent to my elderly mother. It's 5 minutes from my home, and allows me to relocate her to where she's close by (yes, she'll pay market rates and be in a formal lease). She currently lives 3 hours from us.

      So the real question is, how do I go about selling in a crappy market, and which property seems like the better one to use for this purpose? Both have roughly the same equity, but only one (Centennial) has a mortgage.

      There's no way to answer this question. No way to know from a keyboard if a property is easier to sell in Lincoln or Centennial. Broadly based, one market may be better than the other right now but your property might be in a better location in the poor market than the good market. The Centennial is definitely a worse return overall comparatively speaking.

      How do you sell in a crappy market? Price it aggressively. Anything will sell anywhere for the right price. If you don't particularly care which one you sell, but have to sell one to make this work, then put them both up for sale simultaneously and see which goes first. That can be a strategy.

      My hubby and I were discussing just such a strategy - putting both on the market to see which one sells. Thanks for sharing your thoughts on this.

      0Reply
  • Stephen Foster
    Member since 2026 · 45 posts · 7 votes
    10h

    Hi Candyce, nice find, and it's great that the new place lets you keep your mom close. One thing that might help on the financing side: since you're worried about qualifying for another mortgage, a lot of investors in your spot don't use their personal income at all. A DSCR loan underwrites on the property's rent instead, and you can also pull equity from the free-and-clear Lincoln townhouse (or Centennial) with a cash-out loan to fund part of the purchase, so you may not have to sell both. A 1031 timeline is tight, so it helps to line up the loan before you list.

    0Reply
  • Jimmy Samaha
    Staten Island, NY · Member since 2013 · 148 posts · 74 votes
    5h

    If you sell Lincoln with the tenant in place, your buyer pool is mostly investors, and they'll price it off the numbers you posted. 13.4k net on 260k is about a 5.2% cap rate, so an investor will weigh that against whatever else they can buy in Lincoln, while an owner occupant would usually want it vacant, which you'd get in April. I'd ask a local agent whether vacant townhouses there sell for more than tenant occupied ones before you pick a listing date, and keep the 45 day identification window in mind once the sale closes.

    0Reply
  • Joe Waltman
    Member since 2026 · 10 posts · 2 votes
    3h

    Candyce, two things nobody has raised yet.

    First, the Centennial lease isn't signed. If you might sell that one, decide before December 1. A vacant house in Centennial can sell to owner-occupants, who often pay more than an investor pricing off $2,750 rent.

    Second, the size math. To defer all the gain, you generally buy at least what you sell for and reinvest all the cash. Selling Lincoln (free and clear, about $260K) could let you buy the hometown property with no new loan, if it's in that range. Selling Centennial means buying roughly $470K or more, or paying tax on the gap.

    Renting to your mother at fair market rent as her main home is generally treated as rental use. Keep comps, a written lease, and real rent payments, and confirm it with your QI or CPA.

    I own a 5-unit and a rental house.

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  • Erik EstradaBusiness Member
    Lender · Los Angeles, CA · Member since 2022 · 7k+ posts · 1k+ votes
    2h

    Hi Candyce, a few financing points to bring up with your lender next week, since they can affect the replacement loan:

    1. Renting to your mom. Many DSCR and investor lenders treat a family member's lease as non-arm's-length. Some won't count that rent, and some will want proof of market rent and payments. Ask this upfront.

    2. The basement apartment. If it's a legal second unit, the appraiser can usually count both rents, which helps the numbers. If it isn't permitted, expect only one unit's rent to count.

    3. Bank-owned reverse mortgage properties usually sell as-is. Get an inspection in early. If it needs real work, some lenders won't close until it's fixed.

    4. Line up a pre-approval before you list either rental, so the 45-day identification and 180-day close don't catch you short.

    If you'd like a second set of eyes on the loan side, feel free to tag me.

    Erik

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