How I turned $17,000 into $30,000 every year using the 1031 Exchange

I had an emotional day a few weeks back when I sold my very first rental. A young man who had just gotten out of jail needed to sell the property, and even though I wasn’t necessarily looking to get into real estate, I agreed to pay $17,000 for it. The property was already occupied by a tenant enrolled in the “section 8” government assistance program. This can be a great deal for landlords because the government always pays and the tenant doesn’t want to lose their voucher. So I notified housing program to start sending the $800 to me every month, and “Great, I was a landlord!”

This was all it took and I was hooked! I knew that real estate was the business that I wanted to be in. During the 8 years or so that I owned the property I increased rents from $800/mo to $1000/mo. My best guess is that I collected over $86,000 in rent over the 8 years that I owed the property and probably cash flowed somewhere around $60,000. So why would a person sell a “paid for” property that prints $12,000 in rent every year? Wouldn’t you have to pay capital gains and pay back all of the depreciation you took? The 1031 exchange is the answer to the question!

A 1031 Exchange allows real estate investors to exchange one property for another without having to pay capital gains. This allowed me to sell my $17,000 property for $65,000 and not have to pay a dollar in tax. Instead, I was able to take that $65,000 check and purchase a bigger property. In this case I bought a 3-Plex near St Croix Falls, WI. The property I purchased was on the market for $160,000, but I was able to purchase it for $110,000. With each unit renting for about $800/mo I’m bringing in around $2400/mo and almost $30,000 per year. If I hold the new property for 8 years I will have collected $230,000 from the new property and a total rent collected amount of $316,400 since the purchase of that original condo in Brooklyn Park, MN.

I feel like this real estate story provides a great demonstration on how to create wealth through real estate. The rent increased from $800/mo to $1000/mo and now $2400/mo since I purchased the original property. The value of the property nearly quadrupled from $17,000 to $65,000 over that time. I was able to take these proceeds TAX FREE, and roll it into a $30,000 annual rental stream (before expenses) with the new property that I purchased. Also, I have been able to enjoy this money now instead of putting it into my SEP IRA and hoping I live long enough to get to spend the money someday. I hope this real life example inspires someone to take a look at real estate as an asset class.