Aggressively scaling up through 1031 exchanges

[Steve Buchanan]

A couple years ago I bought my first value add multifamily deal (5 units). We put a lot of work into the building itself and a few of the units, thus increasing NOI and the value of the building. A year and a half later we decided we would get our greatest return on equity (ROE) by selling and 1031 exchanging into a new value add property so we did so and bought a 10 unit building. We have since been employing the same strategy on our current building and have been able to raise rents, NOI and thus the value again. We will have the option to refi some of our capital out but those funds will not be enough to purchase another building. We can also sell and 1031 exchange again and possibly buy a 15-20 unit building.

I originally went into multifamily with the intention of implementing the BRRR strategy as so many investors have successfully done but I am now wondering if it is a viable strategy to 1031 exchange after each successful value add deal and scale up quickly from say, 5-10-20-40-80 units. Have any of you done this or know investors that successfully have? What risks should I be aware? Some that come to mind are: what happens to this strategy if the market takes a turn or what risks are associated with passing along the tax burden of all the profits from the previous properties into the next deal?