Thoughts on this transaction/strategy?

Question

Hi All - My wife and I bought a cabin a few months ago for $250k that is a little over an hour from us that needed some rehab to turn it into a STR. It's by a state park so the numbers provided by AirDNA show really good bookings for about 3/4 of the year (winter has more vacancies but we feel our cabin is a bit more modernized than others and will do fine - we won't be sitting empty for 3 months).

Recently though, a pair of campus properties came up for sale that I'd like to purchase for 330k each. They're only 20 minutes from us so managing is a lot easier and they have really good numbers for cash flow. I feel like campus properties have great predictability and you don't have to worry about months of vacancies. I also don't foresee the need to campus houses going away any time in the near future.

Considering we've gained some good equity on the cabin, my thought is we use a 1031 Exchange and use the proceeds from that cabin to help us fund the down payment on the 2 campus properties. The campus properties being closer are also easier for us to manage. Thoughts?

Dave Foster · Answer

@Wayne Brooks, thanks for the shout out.  @John Flanders, Wayne's absolutely right.  There is no statutory holding period.  Your intent must have been to hold the property for productive investment use.  It sounds like that was every bit your intent.  Keep all of that documentation in case you're ever questioned.  But you've got a great case built.

I'm actually doing an exchange for a client right now who's only owned his mountain cabin for a couple of months.  He had to sign an agreement in the contract to let the tenant stay.  That's pretty good documentation by itself.  But it gets better - The tenant left because a bear took up residence near her trash cans and she feared for her safety.  He's got pics and Fish and Wildlife reports and the whole nine yards . How can you argue with that!!!

You can go into contract on your new properties at any time.  You only must close on your sale before closing on the purchases.  The 1031 will start with the closing of the sale of your old property.  Remember that the QI for the 1031 must be in place prior to the closing of the sale.

@Michael Skoczylas makes a good point.  In a sellers market sellers sometimes don't like to offer contingencies like that.  But you could also negotiate as long a finance and due diligence period as you can get.  You can even offer  staggered and releasable earnest money for a delayed closing.  Or a lease with a healthy option payment and a short fuse on the lease.

There's a bunch of ways to skin that cat.  You just need to get into the shoes of the seller.  And if they have a realtor remember that the realtor is going to be highly motivated by commission today rather than commission down the road.  So maybe a structured contract that gets them taken care of and out of the way earlier would be more enthusiastically presented to the seller ???!!!! :)

Wayne Brooks · Answer

A 1031 after a few months is hard to justify, but doable I think. And the only reason to do a 1031 is to defer taxes on a Profit, how much profit would you have in a few months?

@Dave Foster ??

Glidden Rivera · Answer

@John Flanders

I like it.

Student housing requires active management but the returns can be awesome. I did this on NY and don’t regret it one bit. The cash flow caused a demand for my property and I sold it very well. I would do it again in a heart beat.

I am not a subject matter expert and perhaps my results were not the norm.

Bought it for 70k (2 unit)

Invested 60k into a nice remodel

Fully rented prior to work completion

Sold it for 192k.

Michael Skoczylas · Answer

@John Flanders You could try that with the 2 properties; sometimes sellers do not like that, but it is definitely worth a try. Once you have a signed contract you can start the 1031 process. It is a quick process, and does not take long. I work for a QI - so let me know if I can help.

John Flanders · Answer

That was my hope.  We already built our AirBNB listing and everything, just waiting to finish the remodel before we went live with it. We also recently added a little one to the family, so the hour drive has started becoming more problematic than we originally anticipated - hence the properties closer to us.

I guess my other question is around timeline to put together an offer for those properties.  Can we do that now with a contingency on the sale of the cabin, then once accepted we work on the 1031.  I'm sure I could find some details, but figured asking now is best.  What's the best order of things in my scenario?

Michael Skoczylas · Answer

That sounds like a good plan. As @Wayne Brooks stated- a 1031 is doable within a few months, particularly if you can show that your intent was to use as a STR and not just a flip. The proceeds can be used to identify both properties and put your down payment on each of them- and finance the rest. I do not see an issue with this plan as long as you show some sort of intent to use as an STR. Let me know if I can answer any other questions. I should add- since its only a few months you would not get the benefit of LTCG treatment, so the plan is a really beneficial one if you can show the intent.

John Flanders · Answer

40-50k. Cabin had two appraisals, one for 315k and one for 275k. We bought it for 255.

It was built 30 years ago and nothing had been updated. Did a ton of updates, opened it up, etc.

Thoughts on this transaction/strategy?

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