Decent winfall need to 1031 into something else. I'm brand new!?

Question

Hi - This is my first post. Apologies if I chose the wrong forum.

I have a SFH in SoCal that I want to sell as I have a ton of equity but is making bumpkiss. I haven't lived in it for 6+ years so I will need to 1031 into something else, preferably in Colorado or Wyoming. I can't understand if it is better to use this one-time big sum (>$300-400k, maybe a bit more) to leverage into a large (10-15 unit or up) MFH where I would be borrowing a lot, or to mostly pay off something smaller and immediately have a larger cash flow. I don't expect to have another chance to start with a sum this big, so I would like to make the best decision I can. I also don't have anyone I can ask for advice, free or paid. For the latter I may not know the title of the person...financial advisors have wrinkled their brows while tilting their heads.

I greatly appreciate any direction or advice the collective mind has out there. About me - late 30s, married, no kids, no kids planned, work in IT in Denver area. I plan to use a management company with anything I buy as I don't have time to be a landlord. The condo I have rented out has taught me that, so i will sell that too.  But those proceeds will be smaller and go towards my current mortgage.

John D. · Answer

I would respectfully ditch the friend that is an agent, and find an agent (or agents) that are seasoned and can help guide you, as a first step.  This may be one of the most important decisions of your life.  You want the best and most qualified person guiding you.

Matt K. · Answer

• You're going to make mistakes, not fatal but they will be there. The timelines allow for enough research but when little things come up you have to act quickly to over come them due to the time lines of a 1031.
• Inventory is going to be hit or miss... you might spend a lot of effort to come up with a plan but you don't control inventory so have backups. I tried and tried to make it work locally (Bay Area, CA) and just couldn't get it to click. None of the numbers made sense for my situation so as I was running out of time I had to go to a new market.
• Out of state really isn't that hard. Yes you'd have to research and yes there's more risk.... but the deals can really make up for it. I literally started with nothing, it was terrible, and I had to do everything myself and I still made it through. I found a agent (who wasn't investor friendly), they gave me a lender (who was terrible), who gave me a title company (who messed up the closing continuously), and finally the insurance person (who gave me too low of coverage). Lot of learning from all this and it sucked, but survivable. Looking back, if I had the time I'd build the team up first and foremost.... and I would do it by getting referrals from people that have done it already.
• The property itself works, but as I have had it a while now I've learned things that helped me get another one that was more valuable to me. I had no way of knowing some small things that had a big impact and I look at things much differently now. For example, the sewer lateral.... didn't do inspection because lot of work was done at the house and in really really really good condition. What i didn't piece together at the time and is obvious now.... there was a tree in the front yard. Well you guessed it, one sewer line replacement later due to root balls I learned a lesson.

Where am I going with this? If I had to do it again, start small. Find a deal and use this opportunity to learn. Don't look for a home run because you won't know that is... Just look to get on base. Look for that good deal, look for something that makes sense in multiple ways and have backups. You have 3 choices, get one you like, one that works, and one that's off market.Now the money part.... go small. Don't take proceeds and roll it all into the house. Maybe that means a low LTV on multi family.... that's fine but DO NOT GO ALL IN. You can always do a cash out refi once you learn what works for you. If you go all in you have nothing leftover to apply what you've learned from the first door.

Alina Trigub · Answer

@Dustin Booth In addition to the ideas above, I wanted to throw it out there for you: if you cannot find another asset to 1031 into, consider a "fractional interest" as one of your 1031 choices. You can do it as an intermediate step while searching for your next property.

Jean Bolger · Answer

Interesting that you say you already have an agent but you don't have someone you can ask for advice. Shouldn't that be part of the deal?

Dave Foster · Answer

@Dustin Booth, I'm thinking of this only because I'm sitting in Winter Park right now.  But depending on your goals you could purchase something to place under management as a str at one of the resorts.  Central management rakes you over the coals.  But there's lots of opportunities to tie in with local management for a much smaller fee.  WP is red hot right now.  So is everything in the State.

If you're looking Wyoming way dont forget that in a 1031  you don't have to match the type of real estate.  It only must be real estate used for investment.  so some acreage that could be used for agriculture or a hunting club etc would work.  For that matter there's still a lot of Eastern CO that is relatively inexpensive that could be used as a hunting lease or share cropped with a farmer.

Just a few of the more "out there" ideas.

Dustin Booth · Answer

Got it. Thanks!

Matt K. · Answer

Um so this is the mistake I made... no don't do that. Obviously you might not find something of the exact amount, but say you found something close and took out like a 60k mortgage. That'd leave you plenty to do a cash out refi later and get the next property. Yes you'll pay lot in closing fees, but if the deal is right it could be worth it. You could also do a HELOC.... TL;DR: Don't take the boot, pull the money out later on via cash out refi or HELOC...

Dustin Booth · Answer

Many thanks! On your final point, about money, are you saying keeping some cash in spite of having to pay capital gains to get it? Thanks again.

Dustin Booth · Answer

They are a close friend, and relatively fresh to commercial properties.

Decent winfall need to 1031 into something else. I'm brand new!?

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