How to scale your REI

Question

How can one scale your REI. I have a few multi-units, is it better to sell and get one big apartment complex? 1031 exchange? Thoughts, advice highly recommended.

Matthew Ryan · Answer

@Nav Madhwan - I always think it's a good time to sell: when you have a decent amount of equity. Return on equity should be the metric you're looking at. Along with how much more passive income you can/will generate by recognizing that gain and investing it (hopefully tax-free) into other investments. That said, MF deals are hard to find. There may be other asset classes worth looking at but it's all based on what you want your income to be and your current return on equity.

Andrew Hogan · Answer

@Nav Madhwan I'm not a CPA, but I do know of several people who traded up their smaller properties for a portion of a larger MF deal and, in turn, got the same effect of a 1031 because of Cost seg, bonus depreciation, and accelerated depreciation. They just had to reinvest within a calendar year.

Austin Andrews · Answer

Without any numbers being known, this is hard to answer. Sure, in a perfect world, it would make sense to sell a 4-family with some equity and 1031 into a 12-unit.

Are these properties currently cash flowing? Are they appreciating? Do you know how much trapped equity you have?

There are a million different ways to scale up. You could pull the equity out and purchase more. You could cross-collateralize the buildings. You could sell and upgrade, etc.

I would get in touch with a local Multi-Family Broker, your accountant, and a 1031 Exchange Specialist and they should, hopefully, be able to point you in the right direction.

Good luck!

Dave Foster · Answer

@Jarrod Covey, The Brrr strategy you reference is powerful . But not always practical.  You have to understand the market where @Nav Madhwan finds himself.  He's rightly concerned that an increase in payment or a tick in interest rate will negatively impact his cash flow.  And while putting together a whole bunch of highly leveraged properties that throw off little cash but have accelerated debt pay of fcan be a great strategy for someone in heavy growth mode like you. It's not necessarily appropriate for an investor looking to position for a retirement lower risk environment.

In addition to that you guys are in two different markets. Your market is awesome  as a cash flow market and rent to asset ratios.  But in CA appreciation is the play.  Cash flow is tenuous at best and when appreciation really kicks in as it has for a few years cash flow goes into the crapper.  So his strategy of selling and repositioning for better, more secure, and more passive cash NOI is probably a more appropriate strategy than a brrr at this point in that market.

Jarrod Covey · Answer

@Nav Madhwan - buy, renovate, rent, refinance take money out and do it again. 1031 exchange is an inheritance strategy

Dave Foster · Answer

@Nav Madhwan, As @Austin Andrews there's a ton of ways to scale.  And what does scale mean to you?  Scale could be to larger properties where you've scaled your management costs.  It could be to more properties where you scale appreciation.  It could be to passive commercial where you scale your time involvement.  It could be scaling actual cash or scaling return by making it most efficient.  All depends on what you're looking to do.

But the question of a 1031 exchange isn't either/or.  You can use 1031s in any sale and move of investment real estate.  No matter what your goals the 1031 is used to get you to those goals without having to pay tax on the gain and depreciation recapture from the sales.

How to scale your REI

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