Timing 1031 Exhanges with Market Cycles

[Jason Powell]

I know this is probably elementary, but I would like to know how one should react to both the peaks and valleys of real estate cycles, using both a 1031 exchange and a conventional buy/sell as an example. Bear with me and I’ll try to explain. For the sake of discussion, assume we have a crystal ball that will tell us future real estate market trends with certainty.

In a perfect world, we buy low and sell high, but how does a 1031 exchange fit in? If I exchange at a peak market cycle, I get top dollar for my property, but I also pay top dollar for the property I exchange into right? If I exchanged in 2009, I would have sold during a “crash”, but would that become irrelevant because the newly acquired exchanged property would have been (theoretically) purchased at a steeply discounted price? Does it matter at all when one exchanges? (I realize this doesn’t factor in the possibility of buying a property at a discount or adding value over time.)

Now take the buy sell example. Say I buy at a low and sell at a high. Do I then park all my cash in the bank inactively for a couple years so I can then buy at the next low?

I’m a 22 year old in Portland, OR and recently purchased my first property (a fourplex). I’m trying to figure out my best game plan moving forward, and it led me to start thinking about how to react to market price fluctuations. I bought my plex for 400k. If it’s worth 600k three years from now (let’s say we use that as a peak price period), what do I do to best grow the seeds of my initial investment? I could exchange up into a bigger property, only to ride the price all the way down to the next low. I could pull equity out to buy another property, only to ride the price of both properties down. I could sell, pay taxes on the profits, and just camp out until I buy at another discounted price, but keeping a ton of money in the bank just doesn’t seem wise, plus I’d miss out on cash flow.

I’m aware I’m overlooking a lot, but I wanted to Q&A to be specifically about best decisions for the highs and lows of market cycles. I appreciate any input!