All Forum Posts by: Diane Perry

A 1031 Exchange is a real estate transaction that takes advantage of a Federal tax law, so the state you do it in is of no consequence. I myself sold a piece of property in New Jersey (raw land) and purchased a property with a house on it in Nashville, TN for my 1031 exchange. Some of the most important criteria are these:

1) Both real properties must be investment properties, and not your personal residence. In my case, I wasn’t sure my land qualified because it was essentially my back yard, but because it was always a separate lot from my house, I was able to still do it because raw land without improvements on it is always considered investment property. It took a while to find trustworthy advice about this but I read the text of the law and it explicitly stated this, so I was lucky.

2) The time you have between selling and identifying the replacement property is very short, and the time you have between selling and purchasing is also short. You can’t identify a purchase or purchases willy nilly until one hits. In other words, there are certain parameters you have to be within when identifying replacements, so if a deal goes south for some reason, after filing the papers that identified that property, you might lose the opportunity to take a 1031 at all. (I didn’t want to take any chances, so I didn’t sell until I had both identified and actually gone to contract on a purchase. It was not easy, since without having my property under contract I had trouble getting a property owner to sign a sales agreement with me. But I am especially risk-averse about some things, and I couldn’t afford to NOT do a 1031 exchange.) Also remember, you can NOT identify more than a certain number of POTENTIAL replacement properties, and they have to be within a certain percentage of value of the old property, and you can’t file this identifying paper and then change your mind. It’s a bit of a tangled web, but if you need more info on it, do your research first, and then you can contact me to help you sort out the current rules. 

3) The tax benefits are severely hampered if you there is any money from your original property that doesn’t get spent on the replacement property, so it’s best to purchase a more expensive one to avoid losing those benefits.

4) It is imperative that you do not receive any money directly from the sale of the original investment property. It may sound funny to pay a 1031 exchange service to simply receive money for you and spend it for you, but it is essential. The 1031 exchange is designed to give you a loophole: You are not considered to be selling and buying, you are simply trading your property for a different one or ones. Thus, you kick any capital gains down the road. 

5) The best part of the law says that once it has been an investment for a certain number of years, you can actually move into it, and once you have owned it for a certain number of years, the capital gains you kicked down the road can be rolled into the capital gains that is exempt as your personal residence. Obviously, this is not something easily done with a commercial warehouse, but theoretically you could do ANOTHER 1031 exchange of the warehouse after the prescribed number of years is up, for a residential home, rent that home out for the prescribed number of years, and then move into IT. In other words, you can exchange the exchange. Each exchange starts the clock again, and you lose the tax benefit if you do not hold and rent out each property for enough time to satisfy the rules.

6) I used a 1031 exchange lawyer in the city that I purchased in. I chose them because they knew what they were doing. Make sure this is a specialization of whomever you use. The rules are complex, and unequivocal. If the exchange attorney makes a mistake and fails to file exactly when and how they are supposed to or if anything else goes wrong, you lose your tax benefits. Mine cost me about $1000 to $1500. In my state there were lawyers who did not specialize in 1031s and they wanted to charge me $3000!

7) If you don’t have significant capital gains on the property you are selling, it may not be worth it to do a 1031 exchange. Mine was ALL capital gains, so I had to make sure I got it or it would have cost me tens of thousands of dollars.

Good luck, and let me know how it goes!

Diane

@Casey 

@Casey Roman Hi Casey,

I totally "get" where you're coming from. I, too, am in a business where my expenses are extremely high compared to my income (musician) and COVID-19 has shut me down completely, possibly for a year and a half to two years. I, too, have great credit and no debt but one credit card, and even with my Mom co-signing with me (has tons of cash, stock and other liquid investments and owns her home outright) was refused by every bank I went to. This despite owning my own home in New Jersey, and a SFH in Nashville, TN that's rented out, with NO mortgages! I Even got turned down on a HELOC on my own home after being told I qualified for $250K.

Don’t think it didn’t occur to me that despite apparently meeting all the requirements, being a single woman didn’t somehow enter into it.

So I too have decided not to bother with banks. I look for great deals. Make your money on the front end. It can take a long time of constant searching to buy a property at 85-90% of ARV with a little lipstick, but buying with cash on my first investment property meant that I am pretty bulletproof for any recession. (spent K200k on a house worth approx $240K and getting good rent for over two years now.)

I am now looking for my second investment property, and only have half the cash you have, and am making an offers on a properties approx. 1 - 1 1/2 hours from major cities. Sometimes I get outbid. Sometimes the seller takes it off the market not getting what they hoped. But time and patience and constant looking can be rewarded. I plan to buy and hold, and rent out. Why? Because by the time I have three properties I own outright rented out I will have enough income the banks will be dying to lend to me.

Then I’ll just laugh at them, because I won’t need them.

Good luck, and let me know if you do decide to partner up. I’d love to talk it over with you. Talking things over is a great process in and of itself, gets the creative juices flowing.

Hi, I spent 4 years looking into Nashville real estate, and tried DOZENS of realtors. I was looking for an investment property that was something I could see myself moving into eventually. There were some agents who were competent and accommodating, but the one who found me the house I purchased, Bob Hoff (now with of DeSelms Real Estate) went SO above and beyond for me, I cannot say enough good things about him. I highly recommend him to EVERYONE! 

Besides being scrupulously honest, he is also extremely capable, knowledgable, and patient. He did facetime tours of homes for me, (since I live in NJ) and always gave the right advice about what was a good deal, and how best to make offers.

I ended up buying a house I had never set foot in, and was so confident in his ability to spot the cause of some damage that looked worse than it was, that I was able to beat a bunch of other cash offers by removing the inspection contingency.(which I would NEVER recommend to anyone, even though I did it.) Because of him, I was able to purchase the house I wanted at about a 10% discount.

When I came down to Tennessee for the closing (I live in NJ) the sellers wouldn't allow the walk through and the whole deal was moved to after the weekend. Just in case the deal went south, Bob spent every minute of the weekend showing me every house in my price range. Luckily, the deal did close, but I am telling you, this man deserves a medal for what he did for me! 

Please tell him Diane from NJ sent you. Apparently I am not able to share hi phone number here, but I am a real person, not some Bigger Pockets alias, and you can google him or find him on the REALTOR website. Make sure you contact the one who is with DeSelms RE.

Bob Hoff REALTOR® 

DeSelms Real Estate
3325 Aspen Grove Drive, Suite 201
Franklin, TN 37067

And the house I bought? Even nicer than I thought it would be. (It's available for rent, by the way, in case you need a place while you are looking.)

I just took a look at a few articles about The Nations part of Nashville and have two more centuries s. I see that it is a somewhat new, hot area, so chances are there are not many not-new units, although I would check first if I were you. Looks like development there has been ongoing for at least four years. If you are getting in early enough on the curve, it could be fantastic, if you are buying at the very top of the curve, you can lose some, although probably not most, of your money. Does the investment atmosphere there feel a little feverish? Will the maintenance charges stay steady? Taxes? Infrastructure? As soon as people are saying you can’t possibly lose, that’s usually the time to get out.

 I am not as experienced as some on this site, but I’m posting my two cents with that caveat for you to consider. New homes to me are not the best use of resources, especially for a rental.  Like a shiny new car, the bulk of the depreciation happens in the first year.  You will be giving that depreciation to your first renter, who may not even stay very long. The next tenant is not getting a brand-new unit. 

In addition, a new unit has not been tested, and unless you know the builder’s reputation, you could be buying something that will give you major headaches soon, although that is a long shot. 

Common sense tells me that it would be better to spend the same money on a superior, (either larger or better located) or less money on a similar, unit which has a track record, both in terms of rental desirability, and property management history that you can confirm with other tenants in the complex. Especially if you are making your very first investment. 

That way, there will also be some built-in assurance that a property is holding it’s value. As they say in the ads for stocks, past performance is not a guarantee of future performance, but I know someone who bought a brand-new house in a new development in Florida from the same developer who had several successful, similar ones nearby.  As he awaited construction to be completed, the developer dropped the prices when demand started to wane, and he lost more than 10% of his investment before he even moved in. Then, the new neighbors moved in, and were not caring for their homes to the same standards as the other developments he had seen, and the value of what he had just bought dropped again. Bam, he was under water on his beautiful brand-spankin’ new home.

Personally, I like to buy “Used.” Then, when I sell, it is also “used.” In fact, I once bought a used piece of construction equipment, which should have gone down in value, for $1900, and after using it on several projects for five years, I then sold it for $2200!  

A home in a desirable area of Nashville should continue to appreciate, if current trends continue. But just look at all of the bankrupt property owners in Atlanta who lost their shirts when too much development outpaced demand, leaving new apartments empty.

No bet is a sure bet. By definition a bet is a risk, But I think buying in a brand-new building for a rental could end up not being as profitable as something with a track record, unless there is something truly novel about that particular community that is a gamechanger. 

In a year, your new rental is just like a “used” one, and not knowing who else is buying or will be living there or how the the management will be is a risk you can do without.

That being said, I would love to hear opposing arguments.

Hi Russel, Mike and Greg,

So I did find out, as I thought, that I have to place bids with my realtor, at least on this one property, because she showed it to me, and I signed a doc that she would represent me on those properties that she shows me. I could ask her to agree in writing to let that agreement fall by the wayside, but I can understand she would be upset. She agreed that she is going to seta daily reminder on her phone so we could talk everyday about the property.

@Wayne Brooks My realtor at first did not understand that every day is a totally different auction and that we had to keep bidding every day. Then one bid was marked “under review “ and she failed to put in my bid that day, thinking they would either accept it or counter. Then, as it went under OBS (other bid selected) she said it was gone and didn’t believe me when I told her that we had to check each day to see if it came back on, and yes, 

@Mike Cumbie

@Greg H. 

Often by the time it was back on the HUD site it was past her (though not my) bedtime.

And as I said guys, even at 90 or 87 of list it is wildly overpriced. Investors keep getting too high for it and then a few days later after they go look at it and have walked away it goes back on, without any warning. Today, we heard from the asset manager that it will give it be going on at a reduced price. 90% of the reduction is still too high considering how many repairs are needed and how much it will cost. There is a dysfunctional heating system, broken and missing radiators, knob and tube wiring going to A panel with fuses instead of circuit breakers, and all of the bathrooms and the kitchen are got job. Some of the Rooms have either only one, or no outlets at all in them, and to top it all off, the county information on square footage is about 30% higher than actual, but of course the realtor wasn't paying any attention and put it in the listing. So to an investor, with the information given from HUD, it looks like a great deal! Once you get on site and see all the rotted, broken, or just plain missing windows and vandalism damage and all the repairs needed just to make it habitable, let alone renovated, you get an entirely different picture. The after repair value was also way off because there are no comps in the area, this house has so much greater square footage because the attic third floor is finished, although that's a lot of stairs to climb to use every day and it is still just a finished attic.

My last thought is just to say that I would like to do the 203K with a cosigner, but if not, I do have a loanshark, ahem, I mean a private money lender who is willing to make me a loan on an investment property I have in Nashville Tennessee, but because I would have to borrow it all upfront, and the rates are so high, I would prefer to do 203K. 15 or 20% down is not a problem.

Thank you everyone for your comments and help.

Diane Perry

There is a HUD home that I want to purchase. I missed the owner occupant period, and because it is showing up as IE, insurable with escrow, which would seem to indicate it needed less than $10,000 worth of work, a whole bunch of investors keep outbidding me.

The truth is it needs about $100,000 worth of work, and so when the investors go to check it out they invariably don’t go to contract and the house comes back on. 

Although I originally looked at it as an investment, I would buy this particular home as an owner/occupant and move into it after reno.

I have spent a whole month teaching my agent everything that I've spent months researching about how to bid on HUD homes, but she has little kids and a couple of times has gone to bed with her ringer off and I can't reach her when I see the house is back on the site and need her to put in another bid.

I am fed up.

I have read on this site that some people have NAID numbers and automate their bids. 

Because she showed me the house, does it obligate me to have her put in the bid for me? 

Does anyone on this site licensed in Pennsylvania want to put in the bids for me instead?

I also want to get a 203k loan with a non-occupant cosigner.

If you can help me with bids or have an underwriter who will write for a 203k with a co-signer, please get in touch. Thanks. 

Diane Perry

@Mark J. Well believe it or not John it took me three or four years before finding the right deal in Nashville, since the prices were going up faster than I could get in.  It had to be a very specific thing, i.e. something I could afford but that I could envision myself in a few years moving into, because I was doing a 1031 exchange, and  hope to take advantage in the future of the erasure of my capital gains if I move into the house in the future. I’m looking down there for a second deal if I can’t find one in jersey or PA. 

Who do you like for financing your investments? I’d like to find that private money lender who contacted me a few months back before my phone did an accidental reset and erased their contact info. 

 I, too, am fearful of investing in the congested areas closest commuting distance to New York City. And taxes are the reason. 

If it was a fix and flip and it ended up being more complicated or taking longer, a common scenario considering how unreliable contractors can be, or a buy and hold and rent situation where finding quality tenants might take some time, property taxes of $1000 or $2000 or more per month can sink me pretty quickly.

I have a very successful  rental investment in the Nashville area, but I would love to find something similar closer to home, and I too am looking in the western part of the state. 

Taxes are lower there, but possibly so is the tenant pool, but my  biggest concern is always to buy well, as I think that is where the money is made. 

There are a large number of older and even historic properties out there, and I imagine only a small number of them have been renovated up to current standards, So whether you’re renting it out or flipping it, if they look and function beautifully I think they’ll be in demand. 

 A lot of flippers don’t worry about quality, and I think it ends up showing in how long those properties can sit on the market. People will always lust after a drop-dead gorgeous property, IMHO.

Haven’t done it yet though, so we’ll see!

@Vanessa Grant Thank you. The banks I do business with don’t do construction loans to private people, and I am not sure I have the income to get the kind of loan that I might need. If you have the names of any banks I might check with I’d appreciate the info. In the meantime I’d love the contractor contacts you might share. 

It would be great to connect with a fellow female real estate investor in the area. Thanks for writing.