1031 into the Seattle market ~ 2.5m in equity, suggestions?

Question

Talk about a beginner post... I'm in charge of investing ~2.5m into real estate via 1031 in the next half-year, with the expectation of about a 10% return cash-on-cash. Buy and hold for a year minimum, stable properties and locations. I was thinking multifamily/NNN. This is my entire family's source of income and their nest egg, so the pressure is on. My experience: nil.

Very first question I have (and there are a *lot* of questions): is this even possible in the current Seattle market?

Very first question I have (and there are a *lot* of questions): is this even possible in the current Seattle market?

John Smith · Answer

Appreciate the response @Steve Vaughan. I think you're right about staying in the back yard, and I'll heed your advice.

Steve Vaughan · Answer

I thought 'gurus' had a bad name on here LOL.

Thanks for the mention anyway, Jay.

The b commercial cap here is about a 6.5, so a 10% COC is pretty easy.  Problem with $2.5M here is lack of inventory. Have to get 3-5 bldgs.

I personally only work with principals. Too many checkpoints and decision-makers is all PITA.

I have a couple commercial broker contacts if you'd like them, but would probably recommend staying in your backyard.

Ben Leybovich · Answer

10% IRR - yes, on the right property, with a 4% cap and the rest back-loaded. But, 10% CCR out of cash flow in Seattle is about as realistic as @Jay Hinrichs and I both putting on tutu's and dancing the Swan Lake at Lincoln Center... Scratch that - Jay and I doing the dance is actually much more realistic :)

Nathan Click · Answer

@John Smith - Sounds like the pressure is on.  But honestly you have a pretty good opportunity.  If I were you before settling on property type I'd discuss with your family what kind of returns you are looking for, and what your long term goals are.  Once you have that nailed down a good team of consultants (CRE broker, financing, legal, etc) can help you from there.  Since your experience is low i'd definitely enlist the help of trusted advisers.

Adrian Chu · Answer

By leveraging $2.5m, you are looking at having only $500k down payment and the rest on a loan. So your 10% cash on cash requirement simply means being able to generate $50k a year?

Most commercial lenders want at least 25% down, though 20% may be doable as well.

There are lots of ways to build a $2.5 million investment portfolio, with lots of potential to generate more than $50k returns if you are interested in putting the time into it.

There are many creative high return opportunities we can look into in the Seattle area.

Let's chat.

John Smith · Answer

Thank you for the replies, everyone. All input is appreciated!

@Joel Owens: Hey Joel, the plan is to hold minimum 1 year for tax purposes, meaning I wasn't interested in short term value-add and sell. I don't want to divulge too much about what we're selling, but we are no longer interested in running it. We need to diversify.

To all respondents: My family is expecting enough cash flow to sustain their current lifestyle. Although I was thinking it, I should have specifically mentioned that I intended to leverage the 2.5. My thinking was 80% LTV (another reason to have stabilized property).

Given the scenario of leveraged 2.5, 80% LTV, MF and maybe NNN in Seattle or N. King County. If we're looking at purely NOI, what do you guys think I reasonably expect to find?

Joel Owens · Answer

John why would you just hold for 1 year on a 1031 purchase property? If you get a loan for commercial retail there are prepay penalties on the loan. Lenders want to make so much interest on the loan over xx number of years or it is not worth it to them to fund.

You mention exchanging 2,500,000 equity for your family. What is it you are selling to then exchange with?

Buying something NNN that is quality tenant and location all cash for a 10 cap is a pipe dream plain and simple. There is junk out there in weak suburban to rural areas with mom and pop tenants where you might get close all cash but long term a bad investment. 9 caps were 4 to 5 years ago for NNN.

Now you could nationally get a high quality retail strip center for say 7.5 cap and with the proper debt structure with 30% down achieve close to the 10% cash on cash going in by leveraging. Remember there are other drivers to increase yield such as depreciation, principal pay down with a loan, mortgage interest write off,etc.

Some tax attorneys advocate a member of the family keeping the books so many hours a month to claim real estate professional status. That is a legal question to have with your tax counsel.

Patrisha Leybovich · Answer

This is a better question for @Ben Leybovich. Not that you can depend on him to tell you what to do, but he'll be a good resource for some safety measures in your analysis. Good luck!

Jay Hinrichs · Answer

good luck.. not sure you can get 10 caps in Seattle.. I know you can't in PDX....

but be careful of chasing yield all over the country.. many high yield MF type props can be a bear to manage to the point of losing you $@@ if your not careful

you may want to look at Wenatchee  @Steve Vaughan is the Wenatchee guru and   you may want to look at Spokane.. probably want to stay in state so no state income tax.

1031 into the Seattle market ~ 2.5m in equity, suggestions?

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