How to start investigating markets for 1031

Question

Hi all: Just found this forum via google, so much amazing information! My husband and I own a couple of small buildings(3plex & 4plex) in the bay area. They are both doing great cashflow wise and we don't hold a lot of debt on them. However, we want to think about location diversification. One of the tenants in the 3plex just vacated and we are thinking it might be a good time to sell since here in the bay area, buyers are sometimes interested in owner occupy in 3plexes. We are interested in 1031ing going out of CA. Any suggestions in education materials we should start digging into?

Thanks!

Leslie Pappas · Answer

Hi @Annie Shao, if you're an accredited investor there are options you can explore, DSTs (Delaware Statutory Trusts) are one of the options. It is a trust/pass through entity in which a sponsor (think big real estate investment corporation) buys institutional property (apartments, self storage, commercial, medical office, etc) and then sells interest in the Trust/Property to investors. DSTs are 1031 eligible and can work great for people looking to defer tax on their sale, diversify in different markets across the country and just want hands-off real estate plus the potential cash flow. Loans are non-recourse.You can check out my blog to learn more, happy to answer any questions.https://www.biggerpockets.com/...

Alex Olson · Answer

@Annie Shao I would start by reading David Greene's book on long distance real estate investing. It gives you a crash course on how to get it done without being present. Also, can look at how your returns might be better in a different market. Midwest has great cash flow, and of course I am partial to KC. May want to speak to someone like @Dave Foster who does 100s of 1031 transactions a year for folks such as you. Happy to chat further as well.

Todd Dexheimer · Answer

If you want help in finding good markets, read this article: https://www.biggerpockets.com/...The main points are to find markets that are growing in population and jobs, with job diversity and rent affordability. You also want markets with growth in growing and sustainable industry, good landlord laws and business friendly. The article dives into details and resources.

Danny Randazzo · Answer

@Annie Shao timing a 1031 exchange is very important so you should start looking for new investment opportunities to buy on your own, partner with Someone else, passively invest with a group via 1031 JV or DST. Good luck

Amit M. · Answer

@Annie Shao I own a few residential properties in S.F. and also entertained 1031 into NNN or DSTs, but decided against it for several reasons. NNN isn’t as secure as you’d think (look at all the major formerly solid retailers that are going banckrupt), and the secure ones have pretty low rate of returns. DSTs have significant fees, and you’re not in control of the investments. When I get tired of managing my properties, I’ll just pass them over to a property manager, so they’ll be mostly hands off. Long term appreciation is still great in prime Bay Area IMO, so I should see better returns and cash flow than the above options too.————-my2c

Arlen Chou · Answer

@Annie Shao I am currently in the middle of a 1031 in the SF Bay Area. It is my first one and process has not been difficult. As @Danny Randazzo has stated it is all about the timing. You have only 45 days to submit 3 target properties. You can have more, but things get a little more complicated. This is more difficult than people imagine, especially when your properties are in a high value area like the Bay Area. If you go from your 3-plex here to out of state you will need to jump significantly in asset size or buy multiple properties. As an example, if your 3-plex sells for $1.5M here, you would have to close on 2 similar size properties in Boise. But you only have 3 properties on your list, so the pressure to win is heavier on you. Or you need to find a single larger purchase. The buildings on your list have to be almost a sure thing, or there is a danger of not getting the benefits of the 1031. I would suggest that you do your target market research before putting your building up for sale. In my case, I was already in contract for the new property before I sold mine. I just negotiated a long close on the upleg property and did a fast close on the downleg property. But I have to still scramble, because this upleg property does not cover my entire sale price of the relinquished property. I have to purchase 1 more property, but I only have 2 slots left on my list. Also keep in mind that you only have 180 days to complete the exchange period. Like I said, I am doing my first one. I am sure there are many people here who have much more knowledge in this space. Good luck to you!

Annie Shao · Answer

Thanks for everyone's comments so far. I think that DSTs and syndications are currently out of our interest area right now. We are both full time working (and now teaching) parents with youngish kids. Sigh, maybe even the 1031 exchange is too much to take on right now. I know there are plenty of people who buy without seeing, but I am not sure if that's something we are comfortable with and travel is pretty hard right now.

Dave Foster · Answer

@Annie Shao, You risk nothing but a couple months rent to put that 3 plex up for sale just to see what the market says. As an outrageous price and if someone bites then you got a problem - what to do with more than you ever thought you would get for that property :)Life gets in the way of education unfortunately. But the market waits for no one. And educating your self on the market today will be irrelevant in 6 months - until it comes around again. So I'd recommend either making date night real estate education and research night. Or take the patient route and rent the unit again. Unless you're feeling desperate you'll never lose money if you don't sell.Knowing the market and type of property you want to move to and it's proforma numbers are most important. The mechanics of the 1031 exchange are easy enough to manage if you have a good QI to guide you. That's our entire job.

Annie Shao · Answer

@Paul Moore I am not uninterested in DSTs but feel that like everything else, it will take studying and diving into a brand new thing is outside of both my comfort zone and time bandwidth right now.

Paul Moore · Answer

Hi @Annie Shao. What are your long-term goals? Do you plan to stay passive? If so, why are you uninterested in DSTs and syndications? I'm preparing to make a large sale and will be investing in a DST and a syndication. Both provide outstanding bonus depreciation and of course, the DST will also allow a 1031-exchange.