1031 Strategies or Cash?

Question

Hi All,

I will likely be selling a property soon that will have a large capital gain in equity ($900K). I'm a bit torn on how best to re-deploy these proceeds within the current market. I'm currently located in and will likely be reinvesting in a growing Florida tourist area.

At a minimum I will need to purchase a small/moderate condo/house to replace the one being sold. Besides that I would like to build a small portfolio of cash flow generating properties for the long term. The options I'm considering are:

1) buy a small commercial lot to develop into RV/tiny homes etc. (1031)

2) buy multiple small homes to be rented either short or long term. (1031)3) Should I buy the above options as cash only or extend leverage w/ partial 10/15 year mortgage. (1031)

4) hoard cash and pay 20% capital gains and re-deploy once the market has cooled down substantially.

5) hybrid of the above options.

6) something else entirely.

Thank you much for your time and any guidance you may have with helping develop a strategy for my next steps!

mb

Edwin Epperson · Answer

@Michael B. There is an investor looking to do the tiny home/ RV park in the Panhandle of FL, near Fort Walton Beach.  There could be a way that you leverage the $900K so that you're not putting it all into one project, and can spread it out.  I would honestly say that should be a goal of yours, leveraging a DSCR lenders capital, along with a combination of purchasing and Joint Venturing with owner-operators to spread your risks, as well your portfolio diversity.  The JV option allows you to tap into equity/ cash-flow without having to manage the assets, and the leveraging DSCR lenders for your own asset portfolio allows you to take that $900K and spread it across several performing assets.  Yet as @Scott Wolf mentioned it's your 1031 and your financial future, we can not tell you what to do. If you would like any connections here in FL I can provide the Tiny Home/ RV park GC, as well I have some 1031 QI's that could help if you have not identified one yet.  Best wishes and much success.

Scott Wolf · Answer

@Michael B., I'd use a 1031 exchange here.  Hoarding cash with inflation the way it is will most likely make recouping the capital gains hit near impossible.  I can't suggest what strategy to use, as that's a decision you need to make for yourself.

Tim Coppola · Answer

@Michael B. Could another possible option be to put some of that money into an S&P500 index fund. These are down 25% from beginning of the year. If you believe that they will eventually get back to where it was and then continue to rise like it historically has then I'd say putting money there would be a good option if you're thinking long term.

Michael B. · Answer

Villy,

Thank you so much for your reply.  I definitely am leaning towards your approach of using 1031 to secure multiple properties that others may not be able to easily obtain or are not as in "favor" of the higher end product.  Thank you so much for your great advice on this!

Villy Ellinger · Answer

@Michael B. I tend to agree with the advice about looking into a 1031 Exchange. While prices are currently very inflated, properties are starting to sit on the market and prices are "softening" already. With a 1031 you will be buying the exchange property or properties with CASH, so you will have very good leverage to get the best possible pricing. Condo financing is already tough and financing of properties that need some repairs is almost impossible. That puts a lot of buyers out of the investment game and gives cash buyers an advantage. I just bought a townhouse for cash and I got a good price for it. Needs new roof. No big deal, I'm getting that done now. I'm in Florida, BTW. I also currently have some clients selling their condos here and using the 1031 funds in a different market where they are buying land that they believe will be developed soon and will bring appreciation that way. Lots of options.

I personally feel that the market is oversaturated with super-luxury or multimillion dollar properties at this time, at least here on the Florida Panhandle. Several smaller properties seems like a more versatile way to go. Someone mentioned the RV / small house development in Defuniak Springs, FL. I'm aware of that too. There are several other such developments being started aiming at affordable housing (very, very needed here on the coast or we'll have no place where people who service the hotels, restaurants or vacation rentals to live).

Michael B. · Answer

I agree Jack, I'm very happy with my first post in this community.  A great group friendly and knowledgeable folks!

H. Jack Miller · Answer

you got a lot of good answers

Michael B. · Answer

Thank you Bruce.  I share your sentiment exactly about the cyclical highs as I was caught "holding the bag" from a purchase I made in 2004.  It's important to clarify there is an additional 20% capital gain + 8% (infl) that must be factored against the cash premium.  As in many things I try to find the middle ground/balance so perhaps dollar cost averaging may be appropriate here (buy a small home now to replace one being sold) and save the remaining cash for commercial opportunities like the great example you provided above.  Thank you much for your response!

Bruce D. Kowal · Answer

Keep in mind that real estate prices are at a cyclical high, and interest rates are also high.  If you decide to redeploy your proceeds you will be doing so at the top of the market ... just think about that before you do anything overly complicated and hasty.   There is an intangible premium to sitting on cash, despite the ravages of inflation.  That premium is the ability to swoop down and get a property from an Owner desperate to sell.  IMHO that premium outweighs 8% annual inflation.

Try talking to commercial real estate brokers.  Tell them that you have pile of cash for use to buy property at fire sale prices.  And that you will pay their commission, instead of the Seller.  See what kind of response you get.

1031 Strategies or Cash?

Most Popular Reply