3 rental homes paid off. What's the next step up?

Question

I have 3 homes I bought in 2011. They are worth 200k, 300k, and 260k respectively. I get $900, $1000, and $900 in rents after all is said and done.

I am set to retire in a year and looking to 1031 exchange these homes.

3 questions;

1. Can I sell three separate SFH in that time-frame and then roll it into an apartment complex for example?

2. Should I be looking at Apartment complexes? I really don't like the headache of tenants.

3. Where in California do you think I could look to maximize my returns? It feels like I'm getting ridiculously low amounts of of my hard work overtime I paid those homes off with over the past few years.

Thanks for any guidance!

Dave Foster · Answer

@David Osborn  You can do exactly what you are thinking of with the 1031 exchange.  There are some pitfalls you'll want to avoid.

First you want to think of each sale as one separate exchange with it's own unique 45 day identification period and 180 day window to close.  This is important since you are wanting to "consolidate" your three properties into one larger property.  The only sure way for this to happen is for all three to sell within 180 days of the first one.  Even more important is the potential for a slight delay in between the sale of the first and the sale of the second and third.  If you've sold the first and it's now day 35 you have to start thinking about your 45 day list - do I only leave bigger units on it and risk not getting all three sold in time?  Or do I put an "escape" property on the list that would only absorb what I have already sold?

Second you'll want to think about using contingencies on both sale and purchase if they work in your market.  Extend closings out as long as possible to give your 1031 calendars time to mesh.

Third, with the numbers you are looking at you may want to look at a reverse exchange.  If you own your properties free and clear it would be a simple matter to obtain some financing secured by these and by your new building and use a reverse to purchase your replacement property first.  These are more complicated than a straight exchange but there are some key benefits.

1. You know you have your next property under your control through the QI's exchange accommodating title holder so that leaves you free to sell your old properties at will.  And since the replacement building is arguably a harder unit to find than it is to sell 3 SFH you have a huge leg up on your process.

2. You will have 180 days from the day your purchase your property to sell all three of your others but again this should be an easier process and if you also include a 90 - 120 day due diligence and contract to close dates you can actually create a window of 9-10 months to sell your old properties.

3.  This is key - Duing the entirety of your reverse exchange process you are actually double dipping revenue flows and appreciation.  In a rapidly appreciating market 180 days of appreciation is nothing to sneeze at.  Let alone if you can get 6 - 10 months of additional cash flow out of both your old properties (that alone could be $28,000) and your new property (hopefully quite a bit more than the $28K gross your are selling)

4. Any indebtedness is cleared up as each property is sold so you aren't entering retirement with any further debt.

A reverse might be just the ticket to you.  But either way a 1031 exchange can be a powerful ally to you at this point.

Nick C. · Answer

1. Yes, just make sure to set the closing dates as close as possible to one another.

2. Yes, and if you don't like headaches maybe property management is the way to go.

3. For what your houses are worth that's not a lot of rent. In our market houses that rent for $900 - $1000 are generally worth around $60 - $75k. Since you're on the verge of retirement you probably want to maximize your to cash flow. I'm biased, but I'd look outside of California. Too expensive for those rents!

Account Closed · Answer

You in theory can sell the homes and buy an apartment complex, but getting all the transactions to line up in the 45 day identification period of a 1031 exchange might be difficult.  You should talk to a 1031 exchange QI before you list them to discuss how that process works and familiarize yourself with the time requirements of each transaction.

Leslie Pappas · Answer

hi David- I'm an investment advisor in the Palo Alto area.  I have some options for you which I cannot talk about online, as what I do is heavily regulated.  If you wish to learn about some alternatives you likely haven't heard about before, please give me a call.

Many thanks- Leslie

3 rental homes paid off. What's the next step up?

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