$6 million to 1031 exchange...Ideas?

Question

Some homeless housing developer offered us $6 million and we sold the motel.

The challenge is to 1031-exchange this money where we can make money passively.

What are some ideas? Apartment, multi-family units?

Where should I invest right now and make 10% return? Is it even possible to make 10% return in apartments/multi-family units?

Note: for 1031 exchange, we have to have our entity be a title holder we cannot invest in someone's funding group unless they offer us the true real property partnership.

Please recommend the next strategy.

Andrew Hogan · Answer

First off, be careful of the influx of messages that will come in from all the sharks ;)

There are actually other ways to achieve similar effects of a 1031 without having to jump through those hoops.
I see lots of investors taking advantage of accelerated and bonus depreciation to offset or significantly reduce their tax exposure on their sales.

Happy to elaborate.

Happy hunting!

Aaron W. · Answer

This is a very effective way to defer capital gains like a 1031 that is not often discussed.  I call this the Backdoor 1031.

https://www.biggerpockets.com/...

Adam Lacey · Answer

@Mrunal Panchal congrats on the sale! With that much $ to invest, you could definitely find operators that will set their apartment deals up to accommodate your 1031. They need to be structured in a certain way to do so, but as long as you are willing to bring a large chunk of $$ tot he table, most will accommodate.

Jack Martin · Answer

I would second the comment by @Andrew Hogan with respect to opportunities with cost segregation & bonus depreciation. IMHO that is superior to a 1031 exchange, particularly due to greater flexibility on timing and the flat recapture rate on the backside of the investment.

If you target mobile home park investments, you should be able to achieve dollar-for-dollar passive losses and in some cases even more than that.  Keep in mind you will need to invest in the same year as the sale of your property, and a cost segregation study / bonus election will need to be a part of the investment(s) you roll into.

Ryan Beatty · Answer

You could split the proceeds into a few assets rather than finding one 6mil property. TIC's might be an option if you like larger assets

Bobby Larsen · Answer

As other have said, you have many many options.  A DST (not a fan if you have other options), finding your own upleg, or investing with another sponsor either as 100% owner or a tenant in common. As a tenant in common, your entity would own a percentage of the passthrough entity which holds title to the property. All options are very common.  Investing as a tenant in common is only complicated if your exchange entity owns more than one property. 10% cashflow is going to be extremely difficult in today's environment but 6 to 7% cashflow and 10 to 12% total return with appreciation is realistic.

Time is ticking with a 1031 though, so you'll need to move quickly.

Kyle Winther · Answer

@Mrunal Panchal a dst can offer you the deferral of capital gains tax, passive monthly income, and the potential appreciation when the dst property sells. A 10% year over year return with passive income and appreciation may be feasible. I would recommend 5-6 dst portfolios spread out between different asset classes. If you have any questions, I would be happy to answer them for you.

Is there any debt on the property being sold?

Ken Naim · Answer

@Mrunal Panchal 10% cash on cash is achievable, 100% passive less so. I'm in contract on an office building that has no deferred maintenance and just needs some lease up, 16% vacant. Coc is close to 15%. With $6m you may need to purchase several properties especially if you need to replace debt as well.

Leslie Pappas · Answer

Mrunal, if you’re an accredited investor there is an investment product called a DST (Delaware Statutory Trust) that might be beneficial for you to learn about if you decide to perform a 1031 exchange. From my experience (and many of my clients) DSTs have helped eliminate the day-to-day hassles of property management, allowing for more free time to do the things that are more important. All the details of rent collection, leasing, maintenance, repairs and bookkeeping are handled by national class, professional property managers. The DST real estate providers (sponsors), who possess the special expertise in managing commercial real estate, perform the functions of overall asset manager and investor relations management.  DSTs offer potential cash flow, tax shelter and appreciation. Loans are non-recourse.

Aaron W. · Answer

@Mrunal Panchal Yes to all your questions. With that amount of capital, you could be a capital partner on one or several deals. Investing in a syndication with 1031 funds is possible through a TIC (tenant-in-common) structure, which essentially is a partnership with the syndication. This is all very possible, but you will need to move fairly quickly to identify your next properties since there is a strict timeline for 1031 exchanges.

Best of luck!

$6 million to 1031 exchange...Ideas?

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