Converting Equity in SFH into Multi-Family Strategy

[David Johnson]

Hey everyone,

I'm currently in the process of evaluating real estate strategies going forward and attempting to convert the substantial equity I have in two single family homes into cash flowing multi-family properties seems to be an appealing possibility, but I'm not totally certain on how the process would unfold, so I figured I'd put it before the public for advice. Here's the situation:

Current Portfolio:
4 Properties Total
2 SFHs in Washington, DC, each worth about $530K (with loans of $180K and $200K, respectively)
2 SFHs in Baltimore, MD, one worth about $150K and the other worth about $180K (no mortgages)

Proposed Strategy:

1) Sell both SFHs in Baltimore using standard method

2) Use the proceeds to pay off as much of the DC mortgages as possible (for sake of the example, ~$280K, so likely all of one and a good chunk of the other)

3) Use the paid off house in DC (~$530K in equity) as a down payment for a 1031 exchange to trade up to a multi-family property

So, my main questions are:

1) Would this strategy even technically be possible? 

2) Even if so, is there a better way of leveraging all the equity I have in the SFHs to trade up to more valuable, better cash flowing real estate?

3) What is the maximum down payment (%) that can be used for a 1031 exchange?

4) My experience with banks has been difficult since my income has been mainly derived from income properties and freelance work, so I'm curious how easy are banks to work with to get approved for a new loan with a 1031 exchange? (Currently my credit score is about 815)

5) Are there any special considerations for a 1031 exchange that converts an investment property that's residential (SFH) to one that is commercial (multi-family)?

Let me know what you guys think when you have a free moment.

Thanks in advance for the help!

[Jason Dillard]

Can't sell one to payoff another without creating a taxable event.  Using all of them as a down payment (exchange) for bigger property is possible.  I've done it a couple of times.  The key is educating the seller on how the houses are a quick path to cash. So make offers WITH the houses.