1031 Exchange alternatives

[Derek Cheng]

Hi

I am selling a triplex. I had planned on doing a 1031 exchange with the proceeds. My closing date is 11/13 but I have been looking to identify a property since the end of September. I have not found any properties that meet my criteria.

The criteria I am working off of based off my boot camp from dave lindahl is

Cap rate: 10%

Debt coverage Ratio 1.6

Cash on Cash 12%

I have 2 questions

1. Is my model outdated and requirements too stringent? Are there other models i can look at to round out my search criteria

2. Would it be better to get taxed and wait for the right property to come across? My net should be approx 200k so the taxes are going to hurt. People have recommended syndications but my 1031 company says it has to be a physical property that i own by myself.

Thanks

[Dave Foster]

@Derek Cheng, Your criteria are certainly aggressive for this market.  Are they available?  For every person who says no there will be another person who says they do it all the time.  Kind of reminds me of a political debate - no winners only losers.

But underpinning your situation is really a question - "What is the opportunity and alternative costs of not doing a 1031 and paying the tax now vs. buying a property that may not perform as advertised or may be overpriced, or may lose value in a correction?"

I'd never advocate buying a poorly performing asset just to complete a 1031.  But paying tax rather than purchasing an asset that is performing at market levels is another issue.  I've got many clients who 1031d into  properties in 2005-2006.  Some of those properties lost 80% of of their value due to the severity of the crash yet these investors never lost a penny.  How.  They never sold.  They simply held on and eventually mad up every penny plus a whole lot more.  And that really encapsulates the mindset of a 1031 investor - patient and willing to wait while keeping tax deferred rather than take the tax hit to time a market.  That's the two sides to that type of investing.  

Beyond that though you can indeed exchange into a syndication if that syndication will allow you to take title as a tenant in common on the actual property.  That's not likely so you'll probably be looking at a specific Tenants in Common project or a Delaware statutory trust as the products most commonly used as passive fractional replacements that make decent holding places for a few years while a market turns around.