How to grow your rental portfolio using 1031 Exchanges.
Hi, I am Elizabeth Colegrove from Reluctant Landlord. I wanted to share with you how I rapidly grew our net worth over the past 15 months using 1031 Exchanges to differ the capital gain taxes.
Before we get started, a little background: My husband and I are 30 and 32 years old, respectively. For the past eight years we have lived frugally and used the frequent moving required by my husband’s military service to grow our property investment portfolio. At one point we had houses in Virginia, South Carolina, and California. I have an MBA and I love buying houses in depressed areas that have great economic opportunities. This means I seek out properties with potential that others have not realized.
This variety in locale and circumstance has meant adapting to different markets.
When we first got started, this meant buying a foreclosure, fixing it up, then renting it out.
Then we realized that we could find great values in short sales. As the market improved and short sales were less available, we started buying new construction homes.
New construction costs are on the upswing, so now we look for landlords who are looking to get out of the rental business. Often these properties need some work until they are ready to rent out.
As our dreams are to retire young, every dollar has to be stretched to the fullest. I evaluate my portfolio every three to six months to make sure I am not missing any opportunities. When conditions change in the housing market, in the municipality, or even in the structure itself, there are times when holding on to a specific property stops making sense.
That is where a 1031 Exchange has come into play, allowing me to rapidly grow my portfolio
When evaluating your properties, there are so many factors to consider, such as the value of the house, the monthly rent amount, the balance remaining on the mortgage, and the age of the house and its durable components.
If you have realized that the equity in your property could put a nice dent into the price of a higher value property, where you can collect a higher rent amount, you might want to think about upgrading to a new rental. We once upgraded a $230,000 house for a $325, 000 house. Not only were we able to increase our monthly rental income, but we were also able to get a newer house, where less maintenance would be required.
As in the above example, by keeping a close eye on your properties, you can find ways to leverage a property that is performing adequately into a property that performs even better!
Between 2011 and 2016 we bought seven houses. By the end of next year we will have sold five of them as 1031 Exchanges to upgrade those properties. This allowed us to improve our rental portfolio and pull in more income.
Working with an exchange coordinator
If you make a mistake when performing a like-kind exchange, it can cost you real money, as you may disqualify your sale and purchase from the tax deferral benefits. To avoid costly mistakes, we work with an exchange coordinator to help us untangle the red tape. Be sure to do your research to end up with someone whom you can trust. I use Patrick at 1031 Exector (http://exeter1031.com). He is accessible and answers all of our questions and concerns. The company offers a ton of useful resources as well.
When we are executing a 1031 Exchange, we always have our CPA and our real estate agent on board. It is important that you have professionals who understand how this type of transaction works, and how to report it. Attention to detail can make the difference between whether you are successful or not.
Our long-term goal is to build our portfolio in order to produce as much cash as possible. We use the 1031 Exchange to trade in lower producing units for higher producing ones. Eventually we would like to get into commercial property, or sub-divide larger properties into multiple units. The Like-Kind Exchange is helping us to work our way toward all of those goals, bit by bit.
Using a 1031 Exchange is a great way to grow your portfolio. It is very important that you work with a knowledgeable exchange coordinator to ensure you are executing that process properly in order to reap the tax benefits. We use our tax deferred profits to invest in additional and better properties. It is just another tool that landlords should have in their toolbox to enjoy as much success as possible!