1031 during COVID-19

[Harsh R.]

Hi Everyone,

I've been a quiet observer on these threads for the most part, but given these precarious times, thought I would get some community feedback. 

I own a 4-plex in South Scottsdale which is under contract for a sale. Although not the best time to be disposing a property, i) I have conviction in the buyer's ability to perform, and ii) believe the sale price is a defensible exit value given the current climate. My question is how I should be looking at a possible exchange. I've tied up a 4-plex and a 3-plex in the East Valley (PM me if you want a more exact location - this city does not have a ton of inventory currently) for approximately $100K a door. All units for both properties are 2BD/1BA and my underwriting/required returns will pencil if I hit $800/mo conservatively for rents. To be clear, these are workforce housing properties. Not new and shiny but solid builds nonetheless. 

I consider myself a long-term owner and have sufficient reserves to withstand collection issues/turnover. Curious to get the broader community's thoughts on whether it makes sense to 1031 in a time like this (assuming the deal pencils conservatively given what I know about the market now), or if I should just take the capital gains tax hit as a California resident. 

Best,
Harsh

[Stone Jin]

@Harsh R. after doing the exchange does your return on equity increase?  Unless there is a significant increase you are just buying more headaches. More doors does not mean more profit.  Over the last 3 years I’ve been 1031 exchanging from the Phoenix metro to a city in the Midwest where my return on equity doubles or triples.  Granted the large majority of our properties are still in Az. I just haven’t been buying in Az in the last few years. 

I think it is a good time to sell in Phoenix and we will continue to prune our portfolio.