Advice needed on 1031 exchange

[Andrew Briones]

Hello and thanks for taking the time to  read and putt in your input in advice in advance. 

   Here is the situation, first off the rental property i will be using has about 125k in equity and cash flows around $610 a month.  I will be doing a 1031 exchange on our rental property to increase our monthly cash flow. After talking with a group that specializes in these I found out i could do the exchange program and purchase multiple properties as long as I use up all the equity in the original sold property without paying a penalty.  This mean I could buy 2 rentals properties and double or more my cash flow per month according to my findings.  My questions are this,  would it make more  sense to purchase 2 separate properties assuming they cash flow  at least $1300 combined? and now I have 2 SF or condo rentals working for me or purchase one larger duplex property that would cash flow the same $1300? 

   Now the cash flow numbers can and will be adjusted, this is not  my main concern. My Main concern is weather 2 are better than 1? lol Please enlighten me on your professional advice and views that I cannot see.  I have done some extensive searches in my area and this should not be difficult to accomplish.  Maybe I am just overthinking this too much.  My area in utah has had fantastic growth and looks like it will continue for some time to come.   I strongly believe that  house prices will continue to grow with the upcoming big business coming if this help any.  Thank you  and invest well  -Andrew

[Dave Foster]

@Andrew Briones, What you're describing is commonly  referred to as a "diversification exchange".  You sell one larger property in a 1031 and purchase two or more smaller properties that have better ROIs and greater cash flow in total once complete.  This is a very popular strategy as you're building your portfolio.  I wouldn't go so far as to say that 2 is always better than one.  there's risk both ways - either all your eggs are in one basket.  Or  you're worried about two vacancies and loan payments and house repairs rather than one.

In your case one strategy that might be beneficial is to allocate your proceeds so that your first purchase in the 1031 is a cash purchase or with the least amount of leverage possible.  Then use the remaining proceeds to purchase your other property with the maximum leverage possible.  That provides the greatest margin of safety to one of the propertys.  And concentrates your equity in case you want or need to access it later through a refi.

One other thought to remember is that with two properties come two closings, two loans, etc.  One larger property like a duplex or small MF could provide the cash flow you're looking for but half the acquisition cost.