1031 exchange recommendations of my 3 Dallas properties

[Anna Cook]

Hi all investors:

I need your expertise on 1031 exchange which I have not done before.  We have 3 properties in Dallas which have come to a point that the cash flow is minimal due to huge increase in property taxes and insurance premiums.  The lease of two properties will expire at the end of June and the other one will expire at the end of July.  We have max out our 10 Freddie/Fannie mortgages.  So, it will be easier to do a 1031 exchange with duplexes, triplexes or quadplexes.  Our property manager suggests us to sell each property and exchange into 2-3 properties further north and east of Dallas in the path of growth.  So, we can repeat the process in about 3-4 years.  But the interest rate of portfolio loans are high and can fix for only 3 years.  Our concern is that we may not have cash flow and have to bet on future appreciation.  If we do a 1031 exchange with all 3 properties in one exchange, will it be difficult in terms of timing?  We can exchange into one multi family with more units in less expensive markets.  The equities are $95,000, $75,000 and $100,000, respectively for the 3 properties.  We are considering of doing a 1031 exchange with brand new triplexes and quadplexes in Oklahoma.  But it may be difficult since their inventories are limited.  Any suggestions as to what type of properties and which markets are highly appreciated.  I understand that the Dallas market is hot and if we exchange into multi families, the cash flow will be better but future appreciation will be low.  But if we don't do a 1031 exchange now, the cash flow may become negative very soon.

Thank you very much for your time and advice!

Anna

[Dave Foster]

@Anna Cook, You've got some flexibility but you do want to be careful as well.  First of all, the only way you'll be able to include all three of those properties in one exchange is if they are sold on one contract as a portfolio.  Of course then you may have to give an investor hair cut rather than selling each one separately and getting top dollar.

But if you're willing to watch your calendars you can sell each one and start a separate exchange with each and combine them into fewer more expensive purchases.  Just know that each one will be it's own 1031 exchange with it's own unique calendar and reinvestment criteria.  We do lots of these so they're nothing too anxiety producing.  But you do want to keep a good eye on it.

If you're looking at new construction You'll really want to hold the builders feet to the fire to make sure the properties can be complete within the 180 day exchange period.  They all want to say "no problem" till tornado season hits.

So much of your potential acquisition targets will depend on what you're actually performing at now.  So some modeling to see exactly where you are now is probably a good first step.  Investing for cash flow an defensive investing in a mature market is a very different animal than depending on appreciation provide profit.

Either way that is exactly what the 1031 exchange is designed for  - to let you change sectors and strategies while still retaining use of the deferred tax dollars.  Kudos to you and your success to date.