1031 exchange and trouble financing property to purchase

[Jason Gallimore]

We are selling one of our rental homes in order to purchase one in the same state we reside in to better manage the property. We are doing a 1031 exchange however we are having issues getting pre-qualified for a mortgage for a rental property that would equal the sell amount of the original property ($425k) due to changes in jobs and relocating etc. We made the decision to sell the original house when we ran into an issue with our current property manager and our tenants deciding to end their lease early. Long story short we decided instead of finding another Manager long distance and new renters we would rather go ahead and sell the house. I have a couple questions about this scenario: 1) Are there creative ways to finance another rental property or properties to fully utilize the 1031 tax benefit even if we are having problems qualifying for financing? 2) Would you recommend just doing a partial 1031 and just finance what we can qualify for then pay the taxes on the remaining balance? 3) Has anyone used a 1031 exchange with a brrrr method strategy? We are looking at a fixer upper house to finance via a hardmoney loan for purchase and construction and then refi to a long term rental property loan. Is this possible to begin with? I realize we will still have issues with finding lenders to refinance the property or properties. Thanks in advance.

[Dave Foster]

@Jason Gallimore There are a couple ways to accomplish what you want.  And sometimes using hard money at a reasonable hard money rate is well worth the end result - especially if you're doing a significant value add project.

The most common way given your scenario (I'm guessing you've already completed your sale and started your 1031 exchange) is to do an improvement exchange.  Your QI forms an EAT and holds the new property while you improve it.  Funds from your exchange account are combined with hard money to complete the purchase and improvement of the new property.  Once that is complete you actually purchase the new property from the EAT so it doesn't have to be a refi necessarily.  It could be a new purchase if you can get better terms.