20-50 unit apt building or flip

[Michael Siladi]

Hello BPers, long time reader, first time poster. I currently own 12 Apt’s in Fairfield county CT and about to sign contracts on 10 of mine to sell. Looking into doing a 1031 to defer taxes. My question for y’all: is it too risky to put all profit in one building (20-40 unit or whatever I can afford). Probably somewhere in the ballpark of a $4mm property. If I split it and buy a flip house and a multi family I end up paying taxes since single family houses don’t count for 1031.

One last question— if I’m looking into a property between $3mm-$4mm how much is a good cushion to have for reserves? I would most likely sub out management. I’m a builder in the area I live and depending on how far the property is, my time is better spent making money than managing 40 units.

I’ve had good luck with my 12 units and trying to learn as much as possible for a larger apartment building investment.

All advice and information is greatly appreciated! Happy Friday!

Michael

[Dave Foster]

@Michael Siladi, You can actually have your cake and eat it too on this one!!!!

1031 exchanges are available on any type of property that you intend to hold for investment purposes.  So you can 1031 from any type of investment real estate into any other type of investment real estate.  I don't know where you heard that single family homes don't qualify but they do.  What doesn't qualify is doing a 1031 either on or for a primary residence or a property that you intend to flip.  And the number of properties doesn't matter either.  It's the amount of the reinvestment.  As long as you purchase at least as much as you sell you can defer all tax.

So in your case why not do a 1031 and buy exactly what you're thinking of - get a single family value add (my favorite one of all time that I did was near you in Stamford on Shippan Point - great back story there), and get another MF property as well.  This way you get risk mitigation and total tax relief.

The one thing you'll need to watch for is that the single family isn't viewed simply as a flip.  Purchase it with the intent of fixing and holding.  Find a good candidate (or two).  Fix them rent them and then evaluate after a while to see if it's time to sell and 1031 again.  Meanwhile you can do a cash out refi after you improve it and take that cash to use as reserves for your growing empire or for more acquisitions.