1031 Exchange to Invest in an Apartment

Bill B.

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

7y

You could try selling them to an investor. You might get less for the properties but you wouldn’t have the vacancy expense and it might end up being a wash. A landlord might be less picky about the interior of an occupied property than an owner occupant as well. Every real estate contract I’ve seen includes a check box or language about this sale may involve a 1031 exchange the buyer/seller will help make that transaction smoother/possible.

Exchanging 3-1 should be no problem, getting an apartment seller to hold their property in a hot market or if it’s marketed at a great price may be hard without some non-refundable deposit. Maybe if 1 sells fast you could get a 6month to 1 year loan from the seller to give you time to sell the rest. make sure you line up a 1031 Qi to handle all the money there are friend informative ones on BP.

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

7y

@Syed Z. some great suggestions from @Bill B.. It is perfectly fine to exchange from SF to MF rentals. The type of real estate is irrelevant. You've rightfully identified the logistical obstacles as the issue. Each sale is it's own 1031 exchange and has it's own unique calendars. In order to combine three sales into one purchase you will need to bunch the sale so that they all close close enough together that the time lines overlap. That's why Bills advise is timely.

Some other options.

1. Use contingencies on your sales so that the closings of the sales cluster naturally.

2. A reverse exchange is a special process that let's you control the new property before you close the sales of the old properties.

3. Maybe the seller would go into contract with you with a floating closing date but also with a management agreement so you have control and operate them before you purchase the entirey.

4. If the seller has no debt or a friendly lender you could simply by a % of the new property as each sale occurs. So while you're selling your old properties you become a tenant in common with the seller and with each sale you own a larger % of the property.

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Eli Rupnow

Hugo, MN · Member since 2013 · 5 posts · 6 votes

7y

You could also look into doing a reverse 1031 where you find the property you want and then either sell to an investor who would take all 3 at a time, or sell retail in the 180 days after. Works as long as properties are in same name or single member LLCs, but definitely need a good QI.

Sean Morrisey

Residential Real Estate Broker · Aurora, IL · Member since 2017 · 96 posts · 45 votes

7y

Syed -

I would recommend speaking with Lauren Spiedel with Exeter 1031 Services. Lauren can answer your 1031 questions. PM me and I'll send you her contact info.

On the flip side, it would sound most attractive to me to do the "cashout" refinance rather than 1031 exchange. Of course, this is relative to the townhomes cashflowing positive as rental properties. At the same time, you will be obtaining cash "tax free" with the refinance while continuing to build your portfolio and net worth.

Just my $0.50...

Lan Raby

Member since 2019 · 61 posts · 44 votes

7y

@Syed Z. I recently helped my parents do a 1031 through the First American Exchange Company where they sold a small strip mall exchanging for several SFHs. Over half a dozen transactions in two weeks. It was painless and easy, and remarkably affordable. I highly recommend them. Call the experts at an exchange company (or several)...that’s my advice. Don’t go it alone, the timeline is too strict and tax penalties too stiff to not have an actual exchanger. I think your exchange scenario is valid. Best regards and good luck.

Guy Azta

Investor · Los Angeles, CA · Member since 2016 · 89 posts · 73 votes

7y

Syed - I did one 1031 deal from an SFR to MFR. It worked fine, but it's really not a great process. it can be very stressful because of the time limitation. If you're trying to sell 3 SFRs, this would add another layer of complexity. I also used Exeter (saw someone else recommended them) and they were always helpful and ready to answer all of my questions. You'll get the best answers directly from the QIs. I've heard some people saying they wold rather just sell, not deal with the stress and just pay the taxes. There's nothing wrong with structuring 1031 and trying it out. Worst case you'll miss the window. Saw someone referred to reverse 1031, where you buy first and then sell. It's an expensive process, so you'l need to evaluate whether it's worth your while. At the end, the one most consistent thing I've heard listening to dozens of presentations about tax strategies is to never do anything just for the tax savings alone. On another note, MFR investing is not as easy as SFR, from my personal experience, and while MFRs stand to make more cash flow, they don't always do. Didn't seem like you have much experience with MFRs, so you want to talk to more people esp where you want to buy, and get their 2 cents.

3 Reply

Syed Z.

OP

Real Estate Agent · Minneapolis, MN · Member since 2018 · 9 posts · 4 votes

7y

Originally posted by @Guy Azta:

Syed - I did one 1031 deal from an SFR to MFR. It worked fine, but it's really not a great process. it can be very stressful because of the time limitation. If you're trying to sell 3 SFRs, this would add another layer of complexity. I also used Exeter (saw someone else recommended them) and they were always helpful and ready to answer all of my questions. You'll get the best answers directly from the QIs. I've heard some people saying they wold rather just sell, not deal with the stress and just pay the taxes. There's nothing wrong with structuring 1031 and trying it out. Worst case you'll miss the window. Saw someone referred to reverse 1031, where you buy first and then sell. It's an expensive process, so you'l need to evaluate whether it's worth your while. At the end, the one most consistent thing I've heard listening to dozens of presentations about tax strategies is to never do anything just for the tax savings alone. On another note, MFR investing is not as easy as SFR, from my personal experience, and while MFRs stand to make more cash flow, they don't always do. Didn't seem like you have much experience with MFRs, so you want to talk to more people esp where you want to buy, and get their 2 cents.

Thanks Guy, in your experience, what makes MFR investing harder than SFRs?

Guy Azta

Investor · Los Angeles, CA · Member since 2016 · 89 posts · 73 votes

7y

@Syed Z. - SFRs are pretty easy because you're really only dealing with one tenant. Yes there are repairs from time to time, but it's just one tenant. Now at least in my experience the type of SFR tenants tend to be very stable, pay rent on time and if you treat them well, could stay for a long period. They also tend to cause less problems. Of course there are always exceptions. With MFR there's always something going on. There are always complaints, problems and repairs. The more unit - the worse. Also, the tenants tend to drop out. Some stop paying. Some just jump ship and disappear. Some cause real damages to the units. Essentially you're dealing with a very different human element. Of curse if you have a really nice MFR in a really nice area it would be a very different story. Or if you have a crappy SFR in a crapy area. In such case, it's better to go for the MFR. But now you're dealing with most likely a low cap rate situation, which is ok if you're well capitalized and can be ok with low returns, but I would venture out to say that majority of people on BP are not sitting on millions of dollars just waiting to be deployed. I suggest you talk with many people who own MFRs. Some will have a very positive picture to tell and some may not. Not everyone is upfront. I will tell you right now that I have a 12 unit building I've owned for 2 years and it's yet to be profitable. I also have a triplex that due to damages done by a tenant and another one moving out at the same time, is not going to be profitable until March or April. I also have a 4-plex that because couple of move-outs and AC unit going bust, it wasn't profitable as well for couple of months. So yeah, when they're profitable, they're great. But when they don't - it's going to hurt. On the flip side, most of my SFRs are typically profitable each month.

Joe White

Property Manager · Philadelphia, PA · Member since 2015 · 515 posts · 196 votes

7y

I hate the idea of you selling to an investor. An investor is just one very small market, and a market that requires a deal. By definition, they are stingy!

Opening it up to those that want your properties as their live space, opens you up to the entire market, not just that very small segment. Allowing conventional financing is extremely helpful; but allowing FHA opens your properties to accept offers from those that only need 3.5% down payment to buy them. I think you need to keep your market open to 100% of the buyers and not just that 10%.

Morgan Klein

Rental Property Investor · Jefferson, GA · Member since 2017 · 95 posts · 145 votes

7y

Originally posted by @Joe White:

I hate the idea of you selling to an investor. An investor is just one very small market, and a market that requires a deal. By definition, they are stingy!

Opening it up to those that want your properties as their live space, opens you up to the entire market, not just that very small segment. Allowing conventional financing is extremely helpful; but allowing FHA opens your properties to accept offers from those that only need 3.5% down payment to buy them. I think you need to keep your market open to 100% of the buyers and not just that 10%.

I couldn't agree more. One of the great benefits of owning SFRs vs. any other property type is when you decide to exit, you have the largest market of buyers and can max out that property's value. Unless an investor is out there willing to pay FMV for your properties, I don't see that being a viable option.

Syed Z.

OP

Real Estate Agent · Minneapolis, MN · Member since 2018 · 9 posts · 4 votes

7y

@Joe White, @Morgan Klein I agree it makes more sense to sell to a home buyer rather than an investor. The advantage with an investor might be that if I really wanted to do 3 to 1 1031 exchange the investor would be more likely to work with me on the timing of the closings.

However the difference in price I would get from an investor vs a home buyer would probably make it a wash... I could just not do a 1031, sell them to a home buyer instead, pay the taxes and end up in the same place.

Syed Z.

OP

Real Estate Agent · Minneapolis, MN · Member since 2018 · 9 posts · 4 votes

7y

Seems to me like being able to do a 1031 exchange is possible and would be great however the stars have to align just right for a deal like that to be successful. The complicated logistics of it make me feel like just biting the bullet and selling the properties to get the equity out of them to use for BRRR or to buy and apartment would be the best approach.

Refinancing to get the equity out is an option to but the properties would barely cash flow at that point and the properties attract difficult tenants that are a hassle to deal with... not worth it for the low return in my opinion.

Loving the great feedback from the community on this! Really appreciate it.

Armin Nazarinia

Saint Paul, MN · Member since 2018 · 189 posts · 107 votes

7y

@Syed Z.- I won't say I have much experience in this arena yet, but I would explore the reverse 1031 exchange, my CPA talked to me about it and with a MFR if you're going large enough that it's commercial you may have the ability to have the seller carry some of the financing until the sale on your properties go through then pay that seller financing portion off similar to a balloon payment. I don't know the repercussions of this with a 1031, but it would be worth exploring and seeing if anyone else has thoughts on that?

Mark Creason

Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes

7y

@Syed Z.

@Armin Nazarinia

A reverse exchange might be a good idea. The one thing to consider in a reverse exchange is you will need the cash in order to close on the new property. Could be a significant amount of cash to have to come up with in this situation.

Mark

Armin Nazarinia

Saint Paul, MN · Member since 2018 · 189 posts · 107 votes

7y

@Mark Creason

@Mark Creason @Syed Z.

Could you do this with the Seller holding the down payment as "seller financing" until the sales of the other three properties go through?

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

7y

@Armin Nazarinia, Owner carry financing is a common way to make a reverse exchange work. The client brings the down payment and the seller holds the note. Portfolio lenders and private lenders also are common solutions. Community banks who are invested locally and hold their own paper are also a great resource.

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Tim Johnson

Investor · Becker, MN · Member since 2014 · 144 posts · 82 votes

7y

Hey fellow Minnesota IT guy/Real Estate investor! I did one to one 1031 exchange from a SFH to 20 unit Multifamily last summer. A 3 to 1 exchange should work, but it would certainly make me nervous. Three closings, and if any one of them had a hiccup it would put the whole thing in jeopardy.

Can you pick the one house with the most equity, and exchange that into a (perhaps) smaller multifamily?

Justin Bauer

Investor · Cannon Falls, MN · Member since 2016 · 149 posts · 55 votes

7y

My suggestion is attend the Mn. real estate exchangers group and talk with some of the bankers about what you are trying to accomplish there. I have a motel in southern Mn. that I would trade out of.this is a link that I have to there web site.Check out there have and want section

https://mree1031.com/

John Woodrich

Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes

7y

@Armin Nazarinia good idea :) Many people aren't familiar with reverse exchanges but they can be a powerful tool in a seller's market.

I didn't read all the commentary but as suggested the logistics would be difficult for a forward exchange. It may be possible to delay "selling" to your buyers until you can line it all up but then finding a working apt may be tough.

If you are serious about this connect with @Dave Foster. If Dave can't complete deals in MN call Jeff Peterson with Commercial Exchange Partners and he can talk you through everything. A reverse exchange may be your best bet here, these cost a bit more to coordinate but figure a rough QI cost may be around $5,000.