Private Money Scaling

[Matthew Brown]

I am in a position I am not exactly sure of the best strategy to take. I currently own a 3-unit multifamily I am selling/1031ing. I initially wanted to buy something using the BRRR strategy that fits the 1031 profile. My father is pretty close to retiring and has had a very successful last couple of years of his career. He approached me about taking a low-interest loan from him instead of a bank. I would be foolish at the rate he gives me not to take him up on it; I just do not know how to leverage the property to buy another one. I am looking to build my portfolio for cash flow through MTRs and STRs - I run a STR management company as my job. My question is, how do I take money out of the property or leverage the property so I can buy the next one?

My current property will probably sell for around $800k. I purchased it two years ago for $700k and have about $600k left on the loan. 

Any advice helps :) 

[Dave Foster]

@Matthew Brown If you don't mind diversifying your real estate portfolio there is a way to take advantage of both financing options and all of the benefits of the 1031 exchange.

There is something known as a diversification exchange that allows you to sell your relinquished property and purchase multiple replacement properties. So if you are selling for $500k and want to purchase two properties for $250k, that would be perfectly fine. As long as you meet your reinvestment requirements it doesn't matter how you allocate the proceeds.

Now (now not needed) In your case if you"re selling for $800k (after closing costs and commissions) and maybe you decide you would like to purchase two properties for $400k. You can purchase the first one with a private loan from your dad or cash to minimize risk, and leverage a second or third property with a bank loan and the rest of your cash. This let's you ramp up your purchasing quickly. And once you complete your 1031 exchange you could then do a cash out refi on one of the properties to access the cash you need, and fully take advantage of all the benefits of the 1031 exchange.

You just want to be mindful of the time frame requirements in this scenario, but as long as you are proactive it shouldn't be an issue.