I’m new to the boards, and I’m very appreciative of the knowledge and advice shared here. Hoping I can get your thoughts on my “master plan”.
I’m currently in escrow for 2 newly rehabbed investment properties, a 4-plex (220K, 25% down, 6.175% – rents $2540), and duplex (123K, 20% down, 6.325% – rents $1500), both in a stable, steady market. With banks requiring 20%+, downpayment and closing costs, these investments are inhaling my cash. I still have good reserves but this made be nervous but then I thought for one thing, real estate is an insurable investment (stocks not so much – but I’m learning some stuff from you guys about what to do in the bear market :smile). And…
These definitely cash flow well (I’m conservative, and a commercial property accountant & I also checked 50/50 rule)…est. annual net income on 4-plex $7K, on duplex $4,500.
Estimating (reasonable?) 4% appreciation (steady market that did not run up in the boom), after 5 years: 4-plex $44K, duplex $24K for total of $68K projected gain
I’d like to have properties in different markets but I was thinking I could 1031 exchange both properties for the $68K gain + 80K in downpayments = $148K, then just keep doubling my number of investments or expand to more expensive markets (Honolulu is high on my list)
I see a lot of people talking on this board about taking the cash equity out. Does anyone have a 1031 exchange strategy? Rehabbing is just not doable for me right now.
If you 1031 you can’t get cash out. Not sure if you knew that by the way you worded your post.
3. I'd like to have properties in different markets but I was thinking I could 1031 exchange both properties for the $68K gain + 80K in downpayments = $148K, then just keep doubling my number of investments or expand to more expensive markets (Honolulu is high on my list)
I don’t quite understand what you mean by “doubling my number of investments” via a 1031 exchange. If you sell these two properties you’re talking about and the funds are escrowed for a later purchase or automatically rolled into a like-kind property you haven’t doubled your investments. It’s not like you have two properties, you 1031 them into two more and now you have four. The only time you can 1031 is when you sell a property, so once you sell you’re back at zero until you buy more.
2. Estimating (reasonable?) 4% appreciation (steady market that did not run up in the boom), after 5 years: 4-plex $44K, duplex $24K for total of $68K projected gain
This is my two cents on appreciation of multi family properties. There are two forms of appreciation: 1 is passive, the other is forced. Passive GENERALLY is associated with owner-occupied single family homes. However, forced you control. An income producing property is only worth what it’s producing and as the owner you control that. So let’s say that you’re property is producing $10,000/yr in NOI. The following year you raise rents and now you’re at $11,500. You have controlled the appreciation on your property. What I’m getting at is personally I could care less appreciation with regards to my rental properties. I control that, not the market.
jbaldwin, thanks for your response. I’m not wanting to get the cash. So that’s why I was thinking 1031 exchange would work out as a long term plan. I don’t want over extend on loans at this time.
Ok, so you’re clearing my head about my doubling idea, it’s 1 for 1, then? So I couldn’t sell the duplex and roll the gain into 2 apartments, for example? I’ve read other posts on the timelines and how complicated it can get but this is a detail that I’m not familiar with.
From your point of view, it sounds like market conditions for investment properties are secondary to the rent$/management/condition/occupancy of a rental.
This actually got me thinking about something and I think someone else may need to clear this up for the both of us. Let’s assume you sell a piece of property and net 100k. You want to 1031 that into a like-kind property. Can you put 20k (20%) down on five different properties that cost 100k each? Or do you have to roll the entire 100k net proceeds into one single purchase. I think you only have something like 180 days so it would take some strategic planning and timing to have the other deals lined up.
I was of the understanding that you have to roll the proceeds of a sale into another single property of like-kind, but I guess if you had two or more different deals you could use part of your proceeds for each deal, I’m not sure. If that’s true then yes it would be 1 for 1, but someone else will have to answer if you can divide up your proceeds that have been escrowed for a 1031.
On to the second point. Yes, in my humble opinion market conditions take a back seat to the operations/performance of a property with regards to appreciation. Now of course if you purchase a SFH in a nice neighboorhood you stand to enjoy some upward gain. My comment was geared toward duplex, triplexes, quads, etc. In my mind appreciation=speculation, and I like to pay attention to facts. Good luck.