When to 1031 small portfolio.

Question

I purchased a 3 unit building in 2018, a 2 unit in 2020 and another in 2021. While Redfin isn’t the most reliable source for estimating the values it indicates that I have about 400k in equity. About 250 in the first three unit, 100 in the first 2 unit and 50 in the second.

My goal is to 1031 the entire portfolio into a single large multi unit. Ideally I’d want to purchase in the same area my properties are currently. I’m benefiting from being really close to the site of the soon to be finished Obama library.

I don’t know if I should wait until the library is finished where I’d be selling at the top of the growth stemming from the library. At that point I’d also be purchasing at the top of the growth if I stay in the same area. More importantly, I’m super hesitant with the idea of the 1031 given that both the purchase and the sell need to be coordinated together.

Does it make sense to wait? Are there any newbie 1031 exchange resources? Are there any other things I should be considering?

Bill B. · Answer

If you are buying more than you’re selling. (As most 1031 exchangers are.). You’d want to sell and buy before any anticipated appreciation.

Example: If you’re going to sell $800k and buy $1M.

Today it costs you $200k plus maybe $50-$80k in selling costs. So you’d have maybe $335k in equity left and a loan for $665k.

If they both appreciate 20% you’d be selling for $960k and buying for $1.2M.

So you’d have maybe $480k left after selling costs. Now you need a loan for $720k. You’re $55k worse off. You only want to wait if property values are crashing, crashing hard enough to make a difference.

Don’t forget. The new property has to perform enough better than what you have to pay the higher interest rate on the higher balance, AND ADDITIONAL profit just to payback the $65k you lost selling. This is JUST TO BE EVEN, with doing nothing.

Aristotle Kumpis · Answer

Hi Kadeem. I'm assuming the main reason for the 1031 is to increase cash flow, right? If the numbers are not making much sense where you live, you should consider investing outside of your market. I will say that it will be more difficult to find a buyer for all 3, or trying to close them at the same time. That's the challenge with doing a 1031 with multiple properties. I have a great 1031 company I work with that has a lot of education and information if you want me to send it over.

Dave Foster · Answer

@Kadeem Kamal, consolidation from several smaller properties into one larger property is a classic 1031 strategy called a "consolidation exchange".  You can use the 1031 to sell a larger unit that provides better cash flow while minimizing active management.

You can either try to cluster those sales together so they close in a way that lets your replacement property be listed on each 45 day period and you close on it within 180 days of the first sale (the first exchange that will expire).

Or you could do something like a reverse exchange where your Qi purchases the new property and holds it for you for up to 180 days while you sell all of your properties.  these can be a life saver.  But are more complex and expensive.

If the market is fairly balanced you should be able to sell those in such a way that you can make a consolidation excnange work for you.

Kadeem Kamal · Answer

I never even thought about the idea of getting a new build under contract to better time the 1031 (and have the benefits of a new building). That's a huge opportunity. Thanks!

Kadeem Kamal · Answer

That makes perfect sense. I would love for you to send over their information!

Jake Fugman · Answer

@Kadeem Kamal - Congrats on adding value and creating some solid equity in recent years!  As mentioned your biggest challenge is going to be selling the package at/close to same time. In 1031 world this is called a "consolidation exchange".  Selling several properties and using the proceeds to purchase one larger property.  There are a couple of key components to this.  But it is very doable...

1. Your replacement property needs to be equal to or greater than the aggregate amount of your net sales. Ex: Sell 3 properties for $500K each and purchase one larger MF for at least $1.5M

2. The purchase of the new property needs to be timed so that it can meet the 45 and 180 day deadlines for every property you want to put into it.  If you get 2 of them sold close together and 1 hasnt, then use just those 2 to purchase your larger MF.

Here's a couple of things to look for as well.

1. As mentioned, sell them as a portfolio if possible.  You may have to take a discount.  But it may be worth it.

2. These types of exchanges are great for purchasing new construction. Find a builder building a MF you might like. Get it under contract to close in 6-12 months when it is done. Then wait until it is about 5-6 months from completion and start selling your old properties. Get as many of them sold as possible and then close on your new property when construction is complete (but still within the 180 day timeline from the date of your first sale).

You can go into contract for your purchase before you close your sales.

When to 1031 small portfolio.

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