Seeking advice on Scenarios for 1031 Exchange/Loans/Cash on Hand

[Faraz Rashid]

Hey BP Community,

I am currently seeking some advice and experience from individuals who have been in a situation like myself to better understand so I can decide the most logical and strategic decision.

My partner has a 1031 Exchange for X amount. They are looking to purchase 2-3 properties. I am not on the 1031 exchange but I will be providing support for loans, income, etc.

Scenario 1: Purchase 1st, 2nd, 3rd property with 1031 exchange X amount fulfilling transaction and all requirements for exchange granted all financing is approved and completed.

Scenario 2: Purchase 1st property with 1031 exchange under parters name only, fulfill requirements for exchange, acquire rest of funds with no tax, then complete 2nd and 3rd property transaction with funds on my name only.

Scenario 3: Purchase 1st property all cash with 1031 exchange, HELOC on 1st property to acquire property 2 and 3.

Look forward to hearing what the BP community can assist with and allow me to learn through this process

Thank you!

[Mark H. Porter]

I’ll jump.  Whatever entity sells the property needs to buy the replacement properties.

[Guifre Mora]

Originally posted by @Faraz Rashid:

Hey BP Community,

I am currently seeking some advice and experience from individuals who have been in a situation like myself to better understand so I can decide the most logical and strategic decision.

My partner has a 1031 Exchange for X amount. They are looking to purchase 2-3 properties. I am not on the 1031 exchange but I will be providing support for loans, income, etc.

Scenario 1: Purchase 1st, 2nd, 3rd property with 1031 exchange X amount fulfilling transaction and all requirements for exchange granted all financing is approved and completed.

Scenario 2: Purchase 1st property with 1031 exchange under parters name only, fulfill requirements for exchange, acquire rest of funds with no tax, then complete 2nd and 3rd property transaction with funds on my name only.

Scenario 3: Purchase 1st property all cash with 1031 exchange, HELOC on 1st property to acquire property 2 and 3.

Look forward to hearing what the BP community can assist with and allow me to learn through this process

Thank you!

 @Dave Foster can be of great insight on 1031 he is the expert on this. 

[Dave Foster]

@Faraz Rashid, I sense that your question is really more about balancing the investment than the mechanics of the 1031.  @Mark H. Porter said it, if your friend sells in his name then he has to take title to at least the much real estate in his name.  So all of those options might be on the table depending your your druthers.

1. One replacement that is later refinanced to purchase others (there will be no requirement on how those need to be titled.

2. One two or three replacements that are of sufficient value that both he and you can go on title as tenants in common and the 1031 still be satisfied (if he sells for $300K then he needs to take title to 300K.  This could be 3 $200K properties that he takes title to as a 50% tenant on each.)

As long as they are buying at least as much as they sell and they are taking title as the same tax payer that sold their 1031 is not going to get in your way.

[Faraz Rashid]

@Mark H. Porter Thank you for you response! Yes I am weighing the options to understand what I should do.

@Guifre Mora Thank you for referring me to Dave!

@Dave Foster Thank you for your detailed response! I sat down and ran my numbers to understand the capital gain tax etc. All scenarios work for me! The one thing I am looking at is financing due to Covid-19 who knows how much down you have to put, what the interest rate I will get or will it change in 1-2 months, is better to buy all in cash and wait? Weighing all options and will see what comes out of the next month. Appreciate the assistance!

[Guifre Mora]

Originally posted by @Faraz Rashid:

@Mark H. Porter Thank you for you response! Yes I am weighing the options to understand what I should do.

@Guifre Mora Thank you for referring me to Dave!

@Dave Foster Thank you for your detailed response! I sat down and ran my numbers to understand the capital gain tax etc. All scenarios work for me! The one thing I am looking at is financing due to Covid-19 who knows how much down you have to put, what the interest rate I will get or will it change in 1-2 months, is better to buy all in cash and wait? Weighing all options and will see what comes out of the next month. Appreciate the assistance!

 Faraz, as of today lending on investment properties: 

LTV is low compared to 3 months ago so I would suggest allocating 30-25% down plus cost.

There are 15% down lenders but rates will be high. 7.85 ++

Rates are low for O/O but for investors, it could range from 4.5 to 9's. But I would be looking to calculate mid 5's to put you in a good spot. 

What will happen in 1-2 months who knows but I don't expect N/O/O to change much except the would-be some reserves required as part of the loan qualifier. 

Hope this helps.

[Faraz Rashid]

@Guifre Mora Thanks for the response! Yes this information helped a lot as I am currently looking at lenders for the property I am under contract. Learning about the financing has given me a tremendous amount of knowledge on the market, down/fees, and how rates work with investors vs O/O. I am keeping an eye out for what will transpire in the next 1-2 months

[Steve S.]

@Faraz Rashid you need to avoid certain things... major pitfalls out there my friend... major pitfalls

https://www.biggerpockets.com/...

there are better options for sure

[Faraz Rashid]

@Steve S. Thank you for your response and the link. It was very informative and definitely trying to be smart with the 1031 exchange.