which is better, 1031 exchange or take the money and run

[Rich Weese]

99% of the respondents will select 1031 exchange. If you know me very well, you know I march to the beat of a different drummer. I also like to play the contrarian.

If I decided to part with one of my 150 unit apartment buildings, the logical decision is to complete a 1031 exchange. I actually purchased two buildings using a 1031 exchange from a storage facility in Florida I sold. I understand how they work. Here is my question:

Do I really want to sell a large ridiculously priced property using a 1031 exchange for a larger ridiculously property? I need to determine what other options are before I make that decision.

1. I could put it in the bank and make nothing.

2. I could purchase bonds like many of the financial geniuses are recommending.

3. I could try and I'll approach that I have been using on SFR S.

I've owned quite a few single-family residences free and clear. Over the past three years I have been selling them. I furnish owner financing. It is amazing how many people have money but no credit. The homes I've been selling have been in Rio Grande Valley, Texas. It is a very high percentage of Hispanic residents. I have been selling those homes at 9% – 9.5% interest, amortized over 30 years with a 10 year balloon. The buyers had adequate down payment and great income or owned their own job or.....  I had owned those homes for a while and the appreciation has not been very good in that area of Texas.

It is passive income with a collection company handling the collection and disbursement of payment ,whose services are paid by the buyer. The loans are PITI and tenant pays insurance and lists me as insured.

Back to the apartment building. I would end up with a big stack of cash that I could sit on and wait for the next correction or crash in real estate. I could also offer financing on properties I did not own. I'm confident there are buyers out there that do not have the credit for an institutional loan and are able to pay 9% – 9.5% interest.

I would not do this on expensive homes. I would assume the median priced home in Rio Grande Valley is under $150,000. I have one in escrow right now that sold for $123,000 at 9% interest.

I guess the question comes down to what are my thoughts about correction or recession. My age also figures in where I am already collecting Social Security and have adequate reserves to live on. I would just like to make a good play and the right decision.

Has anyone else thought of this as an option? I realize the property must be free and clear to carry your own financing unless you are willing to try a wrap.

Thoughts?

[Dave Foster]

@Rich Weese, interesting conversation.  Back to your original post, the reason 99% of the respondents would recommend 1031 is because they are not where you are in the investor life cycle, the risk/reward continuum, or the growth/depletion curve. And they're right just like the 1% who tell you to sell are also right.

The 1031 represents a powerful tool to geometrically grow your personal portfolio using deferred tax dollars to accomplish that growth.  99% of the investors on this site are in growth mode.  They are younger and in a more active phase of the their investing life cycle.  And they are affected more positively by rewards that pay off than they are risks that come true.

You're more in need of security than growth.  You rightfully should be looking at taking accumulated assets and trading high performance for higher safety.  And the move to passive from active investing is part of that discussion.  

The 1031 can get you there it just depends on how and when you choose to stop.  Do you want to provide estate planning and continue the tax deferred ride indefinitely?  Then 1031 into safer more passive instruments and stay there until you pass and let your heirs benefit from the step up basis.

Do you want to step back but be ready to play again if the mood strikes - not because you have to but because it's fun?  Then by all means pull some off the table, pay the tax, and be ready to deal again.

Or the middle road you're contemplating works well for a risk averse investor.  Selling your properties on owner carries stretches out your tax bill.  It also allows you to be more passive - you really are investing in notes but on properties you know intimately.

Doesn't matter whether it's a high priced guru or your neighbor across the fence. If anyone tells you there's one do all tool or secret - they're wrong! One trick ponies generally get retired early. So a bag full of REI tricks is the way to survive long term.