1031 Exchange w/$1M as down payment

[Priyank Pandey]

Hi, I am set to cash out $1M from the sale of a property in about 10 years (hopefully closer to 7). Let me know if you see any issues with my plan to convert that into a substantial passive income.

As background, my wife and I purchased a 2 unit multi-family house in Jersey City, NJ, in mid-2014 for $575k. I refinanced in late 2016 to a 15 yr, with an interest rate of 3.38%. The rent just about covers the mortgage, insurance and taxes.

When I refinanced in late 2016, the appraisal came in at $775k. Assuming a 5% yearly increase in value (which may be conservative), in 10 years time, the value of the house should be $1.25M with an outstanding balance of $174k, i.e. equity of $1.075M. Assuming $75 grand for closing costs, I am basically looking at taking $1M and doing a 1031 exchange to buy a $4M apartment / multi-unit building. Assuming monthly rent is 1% of purchase price, I am looking at gross rent of $40k / month. Subtracting monthly costs of $14k for mortgage payment, $6k for taxes and insurance, $4k for property manager, $2k for vacancy (5% of the monthly rent), and another $2k for repairs, gives me $12k / month. After taxes, I am assuming I can count on about $10k / month because I would be taking deductions for the interest etc. Does this seem like a reasonable plan or do you see any issues / a better path?

[Josh C.]

On paper it looks good. Most likely the market will do better or worse. Rarely perfect, even over 10 years. Also, you'll need to have good reserves to buy a 4M building so I don't think you can use the whole thing as a down payment. Interesting one duplex could make you a millionaire in 10 years on paper. Let's us know how in pans out. :)

personally I'm less optimistic.

Good luck!