$1m in equity, what to do?

Question

Hey All,

I would love some thoughts on the following. I have a nice portfolio of properties that I have acquired over the years. Let me frame this by saying I don't have any heirs to whom I want to leave a large estate, so cashflow is most important to me. I am in my early 50's for context on where I am in life. So, I have this one property in particular that has done well on both the cashflow and equity fronts. It cashflows about 5k/mo and has about 1.0-1.2m in equity in an appreciating market. So, my question that I would like to pose to savvy investors out there. Where could I move that equity with a 1031 to get max NOI on an annual basis and how much could I purchase in commercial property with $1.2m? Any thoughts appreciated.

Dave Foster · Answer

@Rick Rochon, You can certainly move that equity into 4-5 mil of Commercial.  Whether or not that improves your NOI is going to be a factor of the financing as much as anything.  Moving into commercial generally does not create the equity build that sf in desirable areas does.  But it does provide predictability and stability.  And long term is a great growth play as you hold through new leases and can sell at a lower cap rate.  Sectors and locations that provide great appreciation generally don't provide as much cash flow.  Places providing superior cash flow generally don't appreciate as well.  And in a really broad generality. cash flow properties are not as easy to sell or manage as high appreciating assets. That's the trade off for you to find a sense of balance with.

So, taking you at your word  wanting highest NOI and if you're adventurous here's some suggestions:

1. Move into regional stand alone vacation rentals.  Stay away from resort management and build your own portfolio of vacation rentals.  Can be very lucrative in the right locations.

2. Move into oil and gas now.  Oil and gas rights, both working and royalty interests are like kind to investment real estate for 1031.  With bent crude starting to move up and the promise of an unfriendly administration to oil and gas there's a lot of upside to selling real estate at the top and 1031ing into an oil economy just coming out of recovery.

3.  Land development - buy your own land, develop it and create your own community.  Hold them to satisfy 1031 and sell occasionally managing your tax bill but providing buckets of cash.

4. SF homes.  I know this seems very stodgy and unsexy.  But working class SF homes are going to pop next in this economy.  Again the political direction is to encourage home ownership.  And when the govt wants something they throw money and incentives at it.  And where there are incentives for ownership prices will rise, demand will increase and rents increase as well.

5. 1031 into your next primary residence.  This one will take a little patience but amortized will actually provide the greatest cash flow of all.  Use the 1031 and buy a really killer house or two that you would like to live in one day.  Use them as rental for a couple years (cash flow will be meh but wait till you hear the rest).  In a year or two sell your current primary and move into one of those.  Immediately you take $250K of profit tax free.  That equates to 125K a year over the period of this process.  In addition to this your original capital comes back to you tax free as well of course so actual free flow cash in is much greater.  Moving into the former investment property does not create a taxable event.  Live in there so you've owned it for 5 years and lived in it at least 2 out of the previous 5 and sell it.  You'll get a proration of the gain tax free.  Move into the next one.....etc etc.  If you like changes of scenery this ones for you.  It generates tax free cash flow.

The world's your oyster.  1031 will work in all of these cases.

Dave Foster · Answer

@Rick Rochon, The real estate portion of the business is 1031 eligible.  Depending on your SBA loan it's easy enough.  A 504 loan is specifically for the building.  This is no problem at all.  Until recently however the 504 pipeline was pretty shut down and 7as were the vogue.  The problem with a 7a is that it is one loan for business (not eligible), working capital (not eligible) and real estate (eligible).  You have to have an accountant willing to give you the valuations you need to make the 1031 work in that instance.

Rick Rochon · Answer

@Dave Foster Thank so much for thorough and thoughtful reply. I should have been a bit more clear. I am looking for CASHFLOW on the monthly basis from multifamily in B markets. It is impossible to get great cashflow in California, but you do get amazing appreciation. I was thinking I could turn the $1m into $5m of cashflow by purchasing a large number of units in a strong B market and hand it over to a management company. I was looking for direction on those markets, or even better to find a person/company that can do the vetting and analysis to provide direction.

Steve Vaughan · Answer

Oil and gas are like-kind?  Learned another golden nugget this morning. Thank you, Dave!

Rick, lots of smart people have lost a lot asking someone just to take it over. suggest their market, use their analysis, brokerage and management.

I had a similar problem last year with a free and clear 10 unit I self-managed forever. I exchanged into a community of quads on their own parcels being well run by management in my backyard.  But finding the seller and creating and performing on an off-market package took work.  Do the work vetting on the front end.

I don't see a lot of difference in the top 5 cashflow markets in the Midwest and AL talked about on BP.  Find the best PM and invest in their market is what I'd do.

Jay Hinrichs · Answer

Steve so are Timber Deeds

Rick Rochon · Answer

@Dave Foster Are businesses with real estate still considered like-kind? This way I could leverage the equity into a cashcow and hire a CEO utilizing SBA funds of $3.75m.

Dave Foster · Answer

@Carlos Ptriawan Sending email.

Jaron Walling · Answer

I'd be moving that equity into safer and safer investments. You have enough to retire and live very comfortability (if you're not already). I agree the responses above. It just depends on how active you want to be with you future investments.

Carlos Ptriawan · Answer

Dave let me know if you know or have the people resources that can underwrite for oil and gas investments. I've contacted some 1031 oil & gas in the past but walk away because I don't understand the risk involved and how to verify their numbers. I knew some of them are offering DST as well and have much better return than SFR.

$1m in equity, what to do?

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